 "Dynamic Capital")
The economic outlook for 2019 can be looked at in one of two ways – through the scope of the pessimistic geo-political noise dominating the headlines, or via the time-tested evidence our economy is spitting out indicating continued strength for U.S. markets. We at Dynamic Capital choose the latter, as do many of this nation’s CEOs surveyed by the Business Roundtable CEO Economic Outlook Survey. Jamie Dimon, Chairman and Chief Executive Officer of JPMorgan Chase & Co. and Chairman of Business Roundtable said, “The BRT CEO survey shows that confidence among America’s business leaders remains strong.”
TRADE WITH CHINA
It is easy to get caught up with the daily headlines and tweets about the trade skirmish with China and forget to put our trade with Beijing into context. Sales in China accounted for only a sliver of the revenue reported by the companies in the S&P 500 – 1.7%. So, unless your company is named Apple, retaliatory tariffs from the Chinese should not have much of a bearing on top-line U.S. economic growth.
There is no denying that the tariffs on imports from China have affected numerous businesses across multiple industries. At this point; however, most businesses have been able to factor this into their costs and subsequently pass those costs onto consumers. Those companies that haven’t raised prices, may have found a little pressure put on their margins, but not enough to wipe out the gains realized by the changes to the tax code signed into law by the current administration.
DOMESTIC GROWTH
Nothing speaks to the strength of the U.S. economy like a strong job report from the Fed, and last Friday’s report on December’s numbers spoke enforce. With the U.S. adding 312,000 jobs in December – leaps and bounds over the 180,000 that had been estimated – business owners conveyed their continued belief in the strength of economy for 2019. Even more encouraging was the reported 3.2% increase in annual wage growth coupled with the roughly 2% increase in hours worked by waged employees. We saw the effects of this translate into the strong holiday shopping season as consumers opened their wallets at retails stores across the country.
Even though the unemployment rate increased to 3.9%, this was attributed to an increase in the participation rate. Americans who had long stood on the sidelines are getting back into the workforce – a sign they believe there are opportunities to be had after languishing for years due to the great recession. It is an even better news for businesses, as skilled labor shortages are one of the few items that CEOs cited as a factor that could hamper growth.
Anyone viewing December’s plunge in the stock market as the harbinger of a recession might want to pause to consider that the S&P 500 was trading well above its historical price-to-earnings ratios prior to the recent drop. This recent correction placed most of these companies back into their historical ranges, albeit on the higher end. Many economic analysts continue to use the misnomer of “sugar high” to describe the recent federal stimulus delivered by the tax cuts. Remember, the drop in the corporate tax rate is permanent and the individual tax cuts are locked in till 2025. With this administration showing no signs of rolling those back these changes, regardless of what Congress passes, there is no reason the “candy store” can’t stay open well into the next decade.
America’s emergence as a leading global energy producer has facilitated the waning from foreign sources, allowing U.S. energy prices to become more resilient to regional shocks throughout the world. These lower prices have reverberated through the economy, providing poorer Americans with the greatest savings when viewed as a percentage of income. Coupled with the greater take-home pay courtesy of the aforementioned tax law, and it is easy to see why so many businesses reported better than expected sales over the holiday season.
INTEREST RATES & DOLLAR STRENGTH
Economic headwinds are blowing into the sails of economies around the globe. China’s government-subsidized economy is experiencing a slowdown in its growth rate, while the Eurozone appears to be trending back to neutral after never really getting out of first gear during the recent recovery. Yet America, after leading the globe out the recent recession, appears ready to continue carrying the rest of the world on its back.
When you consider the fact that the Fed is the only leading Central Bank that has been able to raise rates to near their pre-recession levels, you have a recipe that creates strong global demand for greenbacks. We expect this strength to continue during the first half of this year, creating opportunities for U.S. firms using foreign inputs from nations whose currencies depreciate against the dollar. Companies with a large percentage of foreign sales will face some FX risk, but most domestic entities will only continue to benefit from the dollar’s appreciation.
The strength of the dollar is also negating some of the effects of the tariffs on Chinese imports. With it trading almost 8% higher versus the Chinese Yuan compared to March of last year, the magnitude of the current 10% tariffs has been effectively cut to roughly 2%.
Jerome Powell, the Chairman of the Federal Reserve, also allowed markets to take a collective sigh of relief with his recent statements. He indicated the Fed wasn’t adhering to the much-maligned dot-plot schedule of interest rate hikes previously set for 2019. While expectations of a slower path of rate increases tends to weigh on the dollar’s strength, markets seem to have already taken this into account. The yield curve has been inverted for the Fed’s two, three, and five-year securities relative to the one-year T-bill since last December.
With fears of excessive rate hikes quelled, and GDP growth chugging along at 3%, U.S. corporate debt will look even more attractive to international investors seeking safety from the rest of the world’s turmoil. This, in turn, will also help strengthen the dollar as the year progresses.
All these factors are why we are optimistic about the U.S. economy in 2019, particularly for small businesses. The negative noise is just that, noise. The trends, data, and policies in place point to continued domestic growth. So, in other words, when thinking about the economy for 2019, business owners should be thinking less gloom and more boom!
Gregg Mora
Chief Financial Officer
Dynamic Capital
Questions or comments? Email them to gregg@dynamiccap.com