At the beginning of every Chinese New Year AsianInvestor makes 10 predictions relating to economic, geopolitical or investment issues that will affect how investors make their major decisions. Then, at the end of the year, we look back to how accurate these predictions were.
We begin out lookback to our Year of the Pig predictions by considering how reality reflected our prediction when it came to the durability of the US economy.
Will the US economy suffer a major downturn?
Answer: No (At least not in 2019)
Predictions about a US slowdown or even recession have increasingly grown over the past two years. Economists have broadly aligned around a belief that this economic cycle has lasted longer than most others, and that a downturn is increasingly imminent.
And yet, it still hasn't quite arrived. We predicted that 2019 looked unlikely to see a major economic drop, although we felt it looked more likely this year. And, as has been revealed, that was an accurate belief.
In fact economic growth for the US ended up sitting at a comfortable levels. While the end-year figure has yet to be released, the economy grew by an annualised rate of 2.1% in the third quarter, slightly above the 2% rate it registered in the second. Growth of over 2% for the year appears likely.
While that is a drop compared to the 2.9% growth of the US economy in 2018, it's still a healthy level for a late stage economy. The US has enjoyed higher than expected growth in large part because consumer demand has been higher than was anticipated by economists, and unemployment has continued to fall.
In addition, the major corporate tax cuts of 2018 have continued to have a positive, if lessening, impact on the economy. The decision of the US Federal Reserve to reverse its rate tightening stance and cut rates by 25 basis points three times during 2019, moves that helped to prop up the country's gradually slowing GDP growth.
All of this served to support foreign direct investment, as well as the US equity and bond markets. While FDI has been slipping across the past several quarters, this is from the extremely strong highs recorded during 2018. The third quarter of 2019 saw FDI at $50.58 billion, the lowest in six quarters but still higher than any quarter in the 10 years preceding that, according to Trading Economics.
Meanwhile the S&P 500 ended 2019 28.9% higher than it had started the year, its highest annual rise since 2013. US investment grade bonds did well too; the Vanguard Intermediate Term Corporate Bond Index Fund ETF for example, which tracks such bonds, returned roughly 10% over the year until late December.
Despite ongoing unease about the US economy this year, there are relatively few predictions of an outright recession. While many economists feel growth of under 2% is likely, they also predict it to be well above 1% too, as a level of global uncertainty helps drive investments into US assets despite fairly high valuations. Investors will likely need to be more cautious in their allocations to the world's largest economy, but there is likely to still be value to be had.
That said, there are some concerning signs about the economy this year. Business investment dropped by 2.3% in the third quarter, a smaller fall than anticipated by still an indication that companies have started investing less. And if some of the US's outstanding geopolitical issues such as trade wars and increasing belligerence with Iran flare upwards, it could yet have an impact on its economy. As things stand, however, the US continues to enjoy remarkable economic resilience.