The US economy grew 2.3% in 2019 after a 2.1% print in the fourth quarter. While nothing to write home about, 2% plus growth in an environment of low inflation, low interest rates, and accelerating productivity are all supportive of continuing the record long expansion. January is off to a roaring start with the US adding 225,000 jobs, initial jobless claims down to a nine-month low, and ISM Manufacturing easing back into growth territory at 50.9%.
Just when growth prospects were improving for the world economy, a potential pandemic has recession fears back in play. Our base case is that the new coronavirus will cause some disruptions to world trade and certain sectors in the short run. Although unlikely, it is still possible that the world economy could see a contraction in the first quarter after 43 quarters of uninterrupted growth. China now represents 16% of global GDP versus 4.26% during the SARS epidemic of 2003 so the impact on growth will likely be more significant. That being said, the second half of the year should see a V-shaped economic recovery as pent up demand is satisfied.
US markets are showing a mixed response to the global growth scare. US equity markets, close to all-time highs, seem to view this as a temporary slowing of economic activity. The US fixed income market, on the other hand, has rallied as international investors pour money into safe-haven assets. We are cautiously optimistic that the Goldilocks economy will continue into 2020 but expect a few bumps along the way.
Bottom Line: The US economy is on solid footing, driven by a strong labor market, healthy consumer balance sheets, and an improving environment for business investment and manufacturing. A few challenges lie ahead including a contentious presidential campaign, recertification of the Boeing 737 Max and disruption to global supply chains from the coronavirus. The first half of the year could be especially volatile as investors weigh these issues. We expect growth to rebound strongly in the second half of the year specifically from the manufacturing sector as they make up for lost production.
