Economic Update September 2019

By: John E. Silvia

Five economic fundamentals provide a basis for good due diligence when considering the structure of your investment portfolio. These five fundamentals are growth, inflation, interest rates, the dollar and corporate profits.

What are your expectations for growth – recession, slowdown, continued moderate growth? The strength of economic growth tends to be associated with strength in the equity markets and therefore signals to the extent and type of equity investments you are looking for in your portfolio.

How about inflation? For some time now, inflation has remained below 2%, the Federal Reserve Board’s target, and clearly has not accelerated as would be expected given the decline and low level of unemployment. Should we anticipate a pickup in inflation or continued low inflation given the impact of global competitive pressures and even slower global growth in recent months?

A path for interest rates reflects the influence of expectations on Federal Reserve policy at the short end of the yield curve and expectations for growth and inflation at the long end of the curve. For now, the Fed cut its benchmark interest rate another quarter point at its September meeting and are expected to ease again by December. Meanwhile, slower economic global growth and continued low inflation favor continued low long-term interest rates. The global search for yield continues.

Our dollar exchange rate remains strong thereby reducing the price of imports but lowering the price advantage of exports. This pattern results in the relative performance of companies that import relative to exports. Why dollar strength? Relative growth and higher interest rates continue to favor the U.S. dollar versus other currencies.

Finally, the pace of expected profit growth reflects the expected pace of the economy and unit labor costs. In recent quarters, profit growth has slowed and unit costs have risen suggesting caution for investors going forward.

These five fundamentals provide the basis for good due diligence in structuring an economic outlook for investors. Going forward we will focus on these fundamentals and their evolution over time.

John E. Silvia is the Director of Economics for Carolinas Investment Consulting LLC. Click here to learn more about John.

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