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U.S. Economy Expected to Remain Steady in 2020

Despite political divide, leading indicators are strong, and economists see some “green shoots” ahead

Two readings of American consumers’ mood diverged in November, but the consensus was that the public would not curtail its holiday spending and weaken the economy.

The Conference Board’s Consumer Confidence Index fell for the fourth month in a row, to 125.5 from a revised 126.1 in October, largely on labor market fears. However, the University of Michigan’s Consumer Sentiment Index rose to 96.8 from a preliminary November reading of 95.7.

The Consumer Confidence Index reading, which remains historically high, was consistent with a generally upbeat attitude toward the economy.

“Consumer confidence declined for a fourth consecutive month, driven by a softening in consumers’ assessment of current business and employment conditions,” Lynn Franco, senior director of economic indicators at The Conference Board, stated in a press release. “The decline in the Present Situation Index suggests that economic growth in the final quarter of 2019 will remain weak. However, consumers’ short-term expectations improved modestly, and growth in early 2020 is likely to remain at around 2 percent. Overall, confidence levels are still high and should support solid spending during this holiday season.”

Richard Curtin, chief economist of the University of Michigan’s Surveys of Consumers, stated in a press release that “in 30 of the past 35 months the Sentiment Index was 95 or higher, a level of optimism second only to when the Index was above 100 for 34 out of 36 months from January 1998 to December 2000, averaging 106.

“Although [presidential] impeachment proceedings occurred in both time periods, the current period is distinctive for the much sharper partisan divisions in the economic expectations among consumers, as well as the wide gap in optimism between consumers and business firms,” Curtin added. “One side anticipates a recession, while the other side expects an uninterrupted expansion in the year ahead. To be sure, there is ample reason for both optimism as well as pessimism, but not the extreme differences voiced by these groups.”

Curtin also stated that few consumers expect inflation, unemployment and interest rates to continue to decline, but “few consumers anticipate sizable increases in these key economic factors anytime soon. Personal spending will be energized by record favorable evaluations by consumers of their personal financial situation, with gains expected across the entire income distribution, net increases in household wealth, the renewed appeal of price discounting, and reduced mortgage rates.”

Lynn Oien, president of Delta T Systems, says he believes that, overall, the U.S. economy and boating industry are healthy. “There are some areas, such as the workboat market, that have been depressed for three to four years due to the low price of oil,” Oien says. “Related to this, offshore work has ground to a halt. The pleasure boat side is on par from previous years. There appears to be a shift to smaller vessels.”

Delta T Systems, based in Riviera Beach, Fla., designs, engineers and manufactures marine ventilation systems.

When Oien analyzes the boating economy, he says, “I watch the types of vessels being built and monitor job reports. I pay close attention to my customer base and their problems, and create solutions.”

Oien says Delta T Systems had a good 2019, with a modest gain in sales and a dramatic gain in profitability.

Looking ahead to 2020, Oien sees oil prices, taxes and easing regulations as key indicators. President Trump’s tariffs have had little effect on his company’s business, he adds. “The majority of our products are manufactured in the U.S.A.,” he says. “We have always supported ‘Buy American’ and will continue to do so in the future.”

The U.S. Department of Commerce reported that the nation’s third-quarter growth was higher than initial estimates. The government said the GDP rose 2.1 percent for the quarter, up from an initial estimate of 1.9 percent.

The Trump administration had predicted that the economy would grow by 3 percent this year, but that forecast appears to have been overly optimistic. “There isn’t a lot of oomph here to power the economy forward at anywhere near the Trump economics team’s prediction of 3 percent,” Chris Rupkey, chief economist at MUFG in New York, told Reuters. “There are some green shoots, however, that bode well for the economy in the months ahead.”

The Conference Board reported that its Leading Economic Index fell 0.1 percent in October, to 111.7.

Mixed Signals

“The U.S. LEI declined for a third consecutive month, and its six-month growth rate turned negative for the first time since May 2016. The decline was driven by weaknesses in new orders for manufacturing, average weekly hours and unemployment insurance claims,” Ataman Ozyildirim, senior director of economic research at The Conference Board, stated in a press release.

“The major difference this month is the softening in the labor market, whereas conditions in manufacturing remain weak and show no signs of improvement yet,” Ozyildirim added. “Taken together, the LEI suggests that the economy will end the year on a weak note, at just below 2 percent growth.”

The Commerce Department also reported consumer spending rose by 0.3 percent in October, and that inflation remained tame. The Personal Consumption Expenditures Price Index, the Federal Reserve’s preferred gauge, said inflation rose 0.2 percent.

Excluding the volatile food and energy sectors, the PCE index rose just 0.1 percent, lowering the increase in the core PCE price index to 1.6 percent in October from 1.7 percent in September. That kept it below the Fed’s target rate of 2 percent.

Fed chairman Jerome Powell remained upbeat about the direction of the economy.

“At this point in the long expansion, I see the glass as much more than half full. With the right policies, we can fill it further, building on the gains so far and spreading the benefits more broadly to all Americans,” Powell said in a November speech.

The Small Business Optimism Index of the National Federation of Independent Business was up 0.6 points, to 102.4.

“A continued focus on a recession by policy-makers, talking heads and the media clearly caused some consternation among small businesses in previous months, but after shifting their focus to other topics, it’s become clear that owners are not experiencing the predicted turmoil,” NFIB president and CEO Juanita D. Duggan stated in a press release. “Small business owners are continuing to create jobs, raise wages and grow their businesses, thanks to tax cuts and deregulation, and nothing is stopping them except from finding qualified workers.”

NFIB chief economist William Dunkelberg added: “Labor shortages are impacting investment adversely — a new truck or tractor or crane is of no value if operators cannot be hired to operate them. The economy will likely remain steady at its current level of activity for the next 12 months, as Congress will be focused on other matters, and an election cycle will limit action. Any significant change in trade issues will impact financial markets more than the real economy during this period. Adjustments to a new set of ‘prices,’ such as tariffs, will take time.”

In the housing market, builder confidence for newly built single-family homes edged 1 point lower, to 70, in November on the National Association of Home Builders/Wells Fargo Housing Market Index. Any number above 50 indicates that more builders see conditions as good rather than poor.

The HMI index that gauges current sales conditions fell 2 points, to 76, and the measure that charts the traffic of prospective buyers dropped 1 point, to 53. The component that measures sales expectations in the next six months rose 1 point, to 77.

“Single-family builders are currently reporting ongoing positive conditions, spurred in part by low mortgage rates and continued job growth,” NAHB chairman Greg Ugalde, a home builder and developer from Torrington, Conn., stated in a press release. “In a further sign of solid demand, this is the fourth consecutive month where at least half of all builders surveyed have reported positive buyer traffic conditions.”

NAHB chief economist Robert Dietz add­ed: “We have seen substantial year-over-year improvement following the housing affordability crunch of late 2018, when the HMI stood at 60. However, lot shortages remain a serious problem, particularly among custom builders. Builders also continue to grapple with other affordability headwinds, including a lack of labor and regulatory constraints.”

New-home sales fell 0.7 percent in October, to a seasonally adjusted annual rate of 733,000, according to the Commerce Department. That figure, however, was compared with a revised 738,000 in September, an increase from 701,000 and the highest total since July 2007. Sales in October were up 31.6 percent from a year earlier.

Meanwhile, existing-home sales rose 1.9 percent in October to a seasonally adjusted annual rate of 5.46 million, according to the National Association of Realtors. Overall sales were up 4.6 percent from 5.22 million in October of last year.

“Historically low interest rates, continuing job expansion, higher weekly earnings and low mortgage rates are undoubtedly contributing to these higher numbers,” NAR chief economist Lawrence Yun stated in a press release. “We will likely continue to see sales climb as long as potential buyers are presented with an adequate supply of inventory.”

The median existing-home price in October was $270,900, up 6.2 percent from $255,100 a year earlier. Prices rose across the country. October’s price increase marked 92 months of year-over-year gains. 

This article originally appeared in the January 2020 issue.



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