Jobs, Coronavirus, and the Budget. Taking all of this together, no recession on the horizon and improving news about the coronavirus suggests corporate profits will continue to grow in spite of moderate growth. Stay bullish!
No Need for a Fed Rescue. Last Thursday’s GDP report showed that the economy grew at a 2.1% annual rate in the fourth quarter, in spite of an unusually large slowdown in the pace of inventory accumulation. Real GDP was up 2.3% versus a year ago. This morning, the January ISM manufacturing index rose back into expansionary territory, suggesting that the recovery is on solid footing. Auto sales, too, look healthy, and our early read on Friday’s jobs report is that nonfarm payrolls will be up a respectable 165,000.
Look for Steadiness from the Fed The Federal Reserve is set to make its first policy statement of the year on Wednesday, so this is as good a time as any to reiterate our view that the Fed is likely to keep short-term interest rates steady through 2020 and, while pressures will build, the Fed
Moderate Growth in Q4. Here’s the thing: international trade and inventory figures are likely to have a huge impact on Q4 real GDP, with international trade a positive factor and inventories a negative. Trade relations with China were very volatile until recently, in part explaining a big drop in imports in Q4, which has a temporary positive influence on GDP. But, at the same time, fewer imports also meant less inventory accumulation in Q4.
Blame the Overweight Jockey. In other words, the jockey (size of the government) got fat and weighed down the horse. If they truly want faster growth, policymakers need to focus on slimming down the government, not growing it under the guise of boosting “aggregate demand.” Tax cuts and regulatory relief help. More spending, more bank regulation and negative interest rates have failed to produce results. If we want 3-4% real growth in the future, spending restraint is the answer.