Global investors keep a close eye on US economic prospects, which are critical for the future paths of global central bank policies, trade talks and world economy. US economy remains in good place so far. But is it heading to a soft landing or a steep decline? It largely depends on whether the trade-driven weakness in manufacturing will spread to the broader economy and whether the relative strength of consumption is able to continue. We expect the downshift of US economic growth to persist in the months ahead. Systematic risks are controllable and large-scale economic crisis is out of sight. That said, a short-lived recession is still on the table.
- Employment and wages: mixed signal. US labor market is still quite strong and has not taken a big turn for the worse. We expect continued job growth in the months ahead. However, wage growth remains muted.
- Inflation: weak PPI and flat CPI support more easing. Recent disappointing reading of CPI and PPI will give Fed one more reason to worry about the deteriorating outlook. Cost of Chinese imports fell amid tariff war and US faces little import price pressure.
- Manufacturing: recession matters politically. Manufacturing has officially fallen into recession, which may pose greater threat to Trump’s re-election.
- Retail sales: resilience to be tested. US retail sales are expected to remain solid in 4Q19 thanks to the healthy job market and robust consumer confidence. Behind the decision to delay tariff on some consumer goods from China are many opposition voices which have made Trump undestand how different next 10% tariff would be comparing to the earlier rounds.
- Foreign trade: trade spat takes a toll. US trade with rest of the world is slowing dramatically. Imports from China decreased while its imports from other Asian trading partners increased. US total trade deficit widened, while its goods trade gap with China narrowed.
- Housing market: price stalling, sentiment improving. US housing market is cooling, while lower mortgage rates are giving the industry a boost recently.
- Fiscal, monetary and financial sectors: Tax cuts and massive spending package have further boosted the federal budget deficit. Now, the government debt is on an unsustainable path, leaving little room for more fiscal stimulus to fight economic downturns. Household debt is edging higher, but risks are under control. US dollar is likely to remain solid in 4Q19.
- Outlook: set to slow further. US consumer spending is likely to remain solid over the near term, but US could not immune to trade uncertainties and global slowdown. Therefore, the downshift of growth is likely to continue. The partial trade agreement, paving way for Trump-Xi APEC meeting, could provide short-term boost to business confidence, but uncertainties persist. We expect US economy to grow 1.7% in 3Q19 and 2.2% in 2019.
