December 31, 2019


As the curtain falls on one decade and rises on another, the U.S. economy continues its longest expansion on record.  Even as the economy could be characterized as running at two speeds, the Federal Reserve has hit the pause button on monetary policy after three quarter-point rate cuts, believing that policy and the economy are in a “good place” and recession risks have receded.  However, many economists and market participants believe the economy still faces headwinds and the Fed will stay in play and have to provide further accommodations.


Retail Sales and Targeted Fed Fund Rates



Consumer spending on goods and services and housing have shouldered most, if not all, the burden in keeping the expansion on track.  Solid employment growth and its byproducts of steady wage gains and plentiful savings, plus elevated stock prices, have supported consumer’s outlays.  With those fundamentals still in place, households are overall upbeat about their finances going into 2020, according to the University of Michigan Consumer Sentiment Index.

Housing Market

Solid consumer fundamentals have also strengthened housing demand.  The National Association of Home Builders (NAHB) Housing Market Index has risen to its highest level since 1998.  Lower mortgage rates and demand from younger potential buyers have supported, and are expected to support, the housing sales in the months ahead.  Tight inventories, shortage of labor and lots leading to home price increases appears to be the only restricting factor.

Core Capital Goods Orders GDP

In contrast, the manufacturing sector and business investment are less supportive of the economy, with little sign of a quick recovery in global industrial production.  Risks to business investment remain to the downside with weak foreign demand and elevated economic uncertainty.  Boeing announcing a halt in production of the 737 MAX will have a negative impact on manufacturing output, new orders, and possibly payrolls up and down the supply chain.  Additionally, political uncertainty associated with the 2020 presidential election could hamper plans by businesses to expand capacity until there is some clarity to future policies.

Import Prices and Trade Weighted Dollar

Muted economic growth expects to keep a lid on inflation and long-term inflation expectations near historic lows; the “persistent rise” in price pressure pre-requisite for the Fed to bump rates is not likely to happen for a while.  Also containing inflation is retailers’ reluctance to pass on higher costs to consumers and the strength in the dollar.  Support for the strong dollar is the resilience of the U.S. economy and some of the highest interest rates in the G-10, which results in capital inflows and steady bid for the greenback.  Unfortunately, the strength in the dollar saps the global competitiveness of the U.S. manufacturing sector and reduces pricing power of the U.S. producers for domestic consumption.

FOMC Year End Projections


The agreement to reach a “phase one” U.S.-China trade deal, resilient economic data and a U.K. election that should facilitate a Brexit have combined to dissipate some uncertainty among investors and businesses.  Coupled with Fed policy accommodation these factors helped underpin equity prices and risk-taking behavior overall.  Policy makers feel that both the economy and monetary policy are in the right place and it would take developments and/or events that would “cause a material assessment” of their outlook for growth and/or inflation to shift away for their current “appropriate stance”.  Many investors and economists have expected and are still expecting that any material re-assessment will to be to the downside, potentially triggering another rate cut at some point.  Our base case is consistent with the Fed’s dot plots in that the rate-easing cycle is over.