U.S. economy is in a good place with a strong footing for healthy growth this year

From a political standpoint, will 2020 lead to one more year of efforts to remove President Trump from office — or five? To date, the markets have waived off impeachment and trade wars. Most stock indexes have just hit new highs and the U.S. unemployment rate is the lowest in decades, with the highest number of Americans working and the ranks of those on benefits having much declined over the past few years.

The president is adamant that bad trade deals and policies must be reversed — and many have, with new agreements now negotiated with Canada and Mexico, South Korea and Japan. More importantly, the U.S. reached “phase one” of a trade deal with China, our major supplier, just before more tariffs would have kicked in on Dec. 15.

Trump has pledged to withdraw the U.S. from the Paris agreement. I believe that pact seemed destined to cost Americans billions, and countries out of compliance would benefit financially, while most likely making no improvements in their air or water quality. The U.S. already has much-improved water and air quality due to initiatives taken over the past few decades.

Some regions across America have taken the lead for decades.

Don’t mess with Texas!

Texas played a huge role in the nation’s economic growth in 2019. For the first time since records began in 1949, in September the United States was a net exporter of crude and petroleum products. Due to great refining capacity, the U.S. had led at times in the export of oil products, but this was the first time it also led in crude oil!

That’s of huge importance to national defense and energy independence, especially for those of us who can remember those long gas lines in the ’70s and other times OPEC chose to cut production and hold us hostage to higher prices and/or limited supply.  

The driver of this turnaround has been the soaring production gains in the Permian Basin of West Texas and New Mexico. The boom included Odessa and Midland, which are leading the nation in pay growth. They outpaced nearly 400 metro areas in the U.S. with annual wage increases of 14.6% and 17.4%. Midland also led the nation in per capita personal income.

The expectations for increased output show continued improvement through 2020 and beyond. For Texas, the Permian Basin may be the “tide that lifts all boats!”

Interest rates held steady

The Federal Open Market Committee held interest rates steady in December and was also more dovish with their 2020 forecast, showing that a majority of Fed members expect to hold rates steady through the election.

U.S. stocks experienced new highs into the second week of December following the Fed’s statement. After stocks retreated sharply into Christmas Eve of 2018, the Nasdaq rose as much as 32.16% higher for 2019 as of mid-December. The Dow Industrials had added 21.28% and the S&P surged 26.96%.

Bank stocks were up over 33% and at their highest levels since March 2018 — and roughly only 5.5% below their all-time highs of February 2007. However, following their 85.35% drop into March 2009, the ensuing rally of over 544% has been most impressive.

It’s not likely that 2020 can repeat 2019’s performance, but with a steady Fed, improving trade and an election year they might be able to hold gains.

Though starting from a huge selloff into March 2009, the overall gains in U.S. equities for the past decade have been the best going back to the ’50s. Tech stocks were booming into the end of 2019, which is another plus for Texas. Many technology companies have moved to Texas or are maintaining operations in the tax-friendly environment and good worker supply that the state offers.

Industrial giants Germany and China have seen over half a year of slowing growth. Despite trade concerns, the U.S. economy started out strong in 2019 with GDP growth of 3.1% and 2.0% in the first two quarters. The initial estimates for the third quarter (Q3) had been weak but the economy surprised with 1.9% growth, which was recently revised higher to 2.1%.

The early projections for the fourth quarter by the Atlanta Fed’s GDP-Now forecast were as low as .3% in mid-November but were revised as high as 2.1% in the second week of December as U.S. data continued to improve. Though the trade deals slowed growth in 2019, recent progress could serve to boost U.S. growth and global economies in 2020.

At $984.4 billion, the U.S. budget deficit for fiscal 2019 closed in on $1 trillion and represented the largest shortfall since 2012. Congress has been consumed with removing the president, and neither branch is seeking to control spending. Thus, it’s very likely that the budget deficit will surpass $1 trillion in fiscal 2020. Through the first two months of fiscal 2020 (which ends on Sept. 30), the deficit is running 12.5% higher than for 2019.

Deficits aside, a vibrant economy and the lowest unemployment rate in 50 years (at 3.5%) would normally assure reelection of an incumbent president. President Trump has been business-friendly and unapologetic about seeking trade deals that are more in America’s favor, but the political lines are heavily 50%-50% and as divisive as ever.

The U.S. service sector has continued to expand and is the main driver of our economy. Manufacturing did slow and experienced months of contraction but saw enough rebounds to maintain a good outlook. Manufacturing and U.S. payrolls continued to improve in 2020.

The Federal Reserve is centered on U.S. economic data and had been reluctant to cut rates, thinking it unnecessary. It is my opinion that the Fed hiked too aggressively last year and set the benchmark rate well above “neutral.” The Fed hiked four times in 2018, raising their benchmark funds rate 100 bps to a 2.25%-to-2.50% range.

President Trump said the move was too far, too fast, and I agree. The president has also made the case that a healthy U.S. economy shouldn’t have to pay interest rates that are higher than those of countries with weaker economies (and less ability to service their debt).

To Trump’s point, the nations whose sovereign debt was the most challenged during the financial crisis (Portugal, Italy, Greece and Spain), all have lower yields than the U.S. out to 10 years. Without the European Central Bank being still active in quantitative-easing asset purchases from those countries, that would not be possible.

The Fed capitulated in 2019 and lowered their funds rate three times to the 1.50%-to-1.75% range, which we would deem closer to neutral. If that wasn’t the case, why did they drop rates? While they denied that pressure from the president was a factor, it most likely was.

In the second quarter, St. Louis Federal Reserve Bank President James Bullard said, “We just have to face up to the idea it is an extremely low interest rate environment globally and U.S. yields can’t get too out of line from those global yields, even though our economy is somewhat better than some other places in the world.”

A soft landing

For most of 2019, the yield on U.S. five-year notes stood below that of two-year maturities. In August 2019, even 10-year yields fell below the two-year. This inverted yield-curve situation is very often a harbinger of economic recession. To date, that’s been avoided though there has been a slowdown.

Though it’s too early to tell, the robust jobs market and resilience in the economy may indicate that through 2019 a “soft landing” has been achieved rather than a recession. Our view has always been that recessions are a necessary part of economic cycles. Just as we need sleep, economies need to rest before another expansion can happen. Without that order, manias can ensue.

The soft landing may indicate more of a “nap” than good rest. Cyclically, the U.S. economy is due for a pullback. However, the election year may provide a stimulant that holds back a more severe event. Nevertheless, the cycles that we use point to challenges in 2020 with more sideways trading than in 2019. Lows in stocks, which don’t necessarily coincide with economic timing, should occur near mid-June, late August and just after the election.

Fed Chair Jerome Powell made the comment on Dec. 11 that, “both the economy and monetary policy right now are in a good place.” (The markets did well following the meeting, unlike some other Fed meetings in the past.) For now, following the 75 bps in interest-rate cuts made in 2019 and anticipating some cyclic economic challenges in 2020, I agree for the most part with the recent statements made by New York FRB President John Williams.

 “The housing market is actually picking up in the U.S. from where it was a year ago,” Williams said. “Consumer spending is very strong. With the adjustments we’ve already made, lowering interest rates, we’ve got the economy on a very strong footing, sustainable footing, for good growth next year.”

Fed members have said they would need to see evidence of persistent inflation in order to raise rates, which is a tightening method to slow the economy. They’ve also said it would take a “material reassessment” to alter their current views to hold rates steady. The latter seems more likely and inflation more remote given recent data. We would lean to the next move being another cut in 2020.

Doug Ingram is senior economist for Commerce Street Capital. With a wealth of knowledge and expertise in banking and other business sectors, Commerce Street Capital, LLC identifies market opportunities and provides investment alternatives for its clients. Its focus includes mergers and acquisitions, recapitalizations, debt and equity private placement, regulatory advisory, valuations and fairness opinions, bank capital markets services, small business investment company fundraising, corporate and real estate finance.

All views, opinions and estimates included are as of this date and are subject to change without notice. Ingram’s views, opinions and estimates are not necessarily those of CSC and there is no implied endorsement by CSC of any information contained within this article (which may in fact directly conflict with those being published and distributed by CSC whether or not contemporaneous). In the event of such conflict, CSC is not under any obligation to identify to you any such conflicts. This article is for informational purposes only and does not constitute a solicitation or offer to buy or sell any securities, futures, options, foreign exchange or any other financial instrument and/or to provide any investment advice and/or service. Although the information presented has been obtained from sources believed to be reliable, we cannot guarantee or assume any responsibility for the accuracy or completeness of the information shown herein.