This month we’ll take the opportunity to look back at both 2019 and the data as they stand at year end. It will come as no surprise to prior readers of this blog that the data has moderated substantially throughout the year, but in aggregate the current economic situation for the U.S. (and increasingly, abroad) is mostly benign.
The Astor Economic Index® (AEI), our proprietary now-cast of the U.S. economy, began the year indicating growth higher than average. The AEI has moved consistently downward throughout the year and has now cooled to a level roughly consistent with average economic growth. At the end of December 2019, the AEI was near the 0 line.
What’s changed over the course of the year? The biggest detractor has been the global manufacturing slowdown, with PMIs declining into contraction territory across the board. Manufacturing PMIs in the U.S. began the year in the mid-50’s and have printed in the high 40s over the past few months, with December’s reading of 47.2, a cyclical low – indeed, even lower than the “manufacturing recession” in 2015/2016. Increased trade tensions, slowing growth in China and Europe, and declining business fixed investment are the main culprits here. Signs of a rebound in 2020, as geopolitical tensions ease, will be a key watch point.
The U.S. experienced a yield curve inversion (i.e. 10-yr yields below 2-yr yields) for the first time since the GFC. As we argued at the time, there was good reason to think that the additional liquidity sloshing around the financial system was leading to a false signal of impending recession, and so far, that belief looks prescient, with the spread standing at approximately 0.2 as of December 31.
The positive is a U.S. labor market that has proven impervious to any economic headwinds, with non-farm payrolls averaging 180,000 a month over the course of a year. U-3 unemployment began the year at 3.9% and now stands at 3.5%.
Despite the tight labor market, inflation measures have remained subdued, with core CPI printing at 2.2% y/y in December. The Fed’s preferred measure, core PCE, ended the year where it started at around 1.6% y/y. More Importantly, inflation expectations have remained anchored at around the Fed’s target.
This in turn has given the Fed ample space to be patient, with the FOMC essentially indicating they will be on hold for rate adjustments in 2020 until they see the whites of inflation’s eyes. Subdued inflation pressures and concerns about the global outlook allowed the Fed to make a mid-cycle adjustment downwards in the middle of 2019, and the effective Fed Funds Rate now stands at about 1.5%.
Despite the partly cloudy macroeconomic backdrop, financial assets had a banner year – indeed, you would be hard pressed to find an asset class without a positive return. Additional liquidity from the Fed, a (somewhat) successful resolution of the trade deal, and a bottoming out of growth in Europe are the main drivers to thank. The rally has led to valuations that appear a bit stretched, particularly in U.S. fixed income and equities.
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The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points, including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. There is no guarantee the Index will produce the same results in the future. All conclusions are those of Astor and are subject to change.