February 22, 2019
US economy is forecasted to increase at a lower pace in 2019 – Which business sectors may outperform?
A recent repot on the prospects of the US economy in 2019 compared to 2018 by the Federal Reserve Bank of St. Louis shows that most probably the US economy will exhibit lower economic growth in 2019.
“Despite some crosscurrents, U.S. economic conditions remain favorable. Real gross domestic product (GDP), the broadest measure of economic activity, is poised to increase by about 3 percent in 2018, which would be its largest increase in more than a decade. More impressively, job growth has been exceptionally strong, and the unemployment rate has dropped to its lowest level in about 50 years. These tailwinds have been offset to some extent by declining activity in the housing sector and an unexpected slowdown in business fixed investment.”, Source: https://www.stlouisfed.org/publications/regional-economist/fourth-quarter-2018/forecasters-gdp-growth-2019
Key drivers of US GDP growth
In our article about the US stock market a few days ago we wrote that one of the key drivers for the economic expansion in 2019 would be a strong labor market. Four other very important fundamental and macroeconomic factors are:
- Exports and imports
- Housing starts
- Business fixed investment
- Consumer spending
According to the prediction of IHS Markit the US GDP growth is expected to stabilize near a growth rate of about 2% in 2019 and 2020. If we compare this forecast to the growth of about 3% in 2018, the biggest growth in a decade, then yes, the US economy will probably exhibit an economic slowdown in 2019.
What Are Professional Forecasters Predicting for 2018-2019?
Percent Change (Q4/Q4) 2017 2018 2019
Real Gross Domestic Product 2.5 3.1 2.4
Personal Consumption Expenditures Price Index 1.8 2.1 2.1
Percent (Average, Q4)
Unemployment Rate 4.1 3.7 3.6
SOURCES: Federal Reserve Bank of Philadelphia and Haver Analytics.
The above table forecasts that in 2019 the real GDP growth in US could be 2.4%, less than the 3.1% expected growth in 2018. If this scenario is to become a reality an important question investor should ask is which is about the current stage of business cycle in the US economy and which business sectors could outperform in 2019.
Four stages of business cycles
Business cycles have four phases:
The US economy is most probably somewhere between the peak and the contraction phases of the business cycles. In the peak phase best sectors in this phase include energy, utilities, healthcare, and consumer staple as the economic growth is slowing. In the contraction phase the economic activity and corporate profits are declining and interest rates are climbing as the Federal Reserve aims to fight inflationary pressures in the economy. But there is a major problem about this economic theory. There are no severe inflationary pressures in the US economy, and corporate profits at least for the fourth quarter of 2018 seem to be very strong, with many companies beating the estimates on both EPS and revenue.
Can economic theory be validated by recent US stock market performance?
If the US economy is indeed in the latest stage of business cycles, in the contraction phase, then energy, utilities, healthcare, and consumer staple business sectors should have performed better than other business sectors. What does the reality tell us about this economic theory?
Stock Sectors 3 Month % Change Communications
Data as of February 8, 2019, Source: https://money.cnn.com/data/us_markets/
From the above table the economic theory is fully validated by the US stock market performance for the time period of last 3-months. Utilities, Health Services and Consumer Non-Durables stock sectors have outperformed compared with other stock sectors. The only sectors that is not fully in accordance with economic theory is Energy. Still three out of four sectors described above are a significant statistical number, hard to ignore.
We cannot be certain that the performance of these stock sectors will continue in 2019. But many times, the stock market tends to discount important changes in the broader economy, several months before official economic data is released. The partial US government shutdown will have a negative impact on the US GDP growth in 2019, and it is too early yet to make any prediction. It is interesting though that the 3-month performance of the stock sectors mentioned above seem to validate the idea that economic slowdown for the US economy could be a reality in 2019.