On net, our forecast for Q2 growth has been little changed since June, with GDP growth slowing to a 1.8% pace. Although that is a couple tenths weaker than our June estimate, the underlying story is the same: domestic demand rebounded in Q2, while Q1's boost from trade and inventories unwound.
While a further escalation in trade tensions has been avoided for now, the lack of a resolution has prolonged trade-related uncertainty. Capital spending plans among manufacturers reached a two and a half year low in June. As such, we continue to expect a lackluster pace of business investment in the current quarter. The ongoing suspension of shipments of Boeing's bestselling 737 MAX aircraft has also taken a meaningful toll on the near-term outlook for equipment spending and exports.
Employment growth rebounded in June, yet wage growth shows few signs of generating a burst in inflation. The continued run 0f below-target inflation is a key reason why the FOMC will still cut the fed funds rate 25 bps when it wraps up its next meeting on July 31. Although near-term uncertainty around trade has subsided a bit in recent weeks, Fed officials note it continues to weigh on the outlook. The FOMC's limited scope to cut rates this cycle will likely lead it to take a more proactive approach in fending off a slowdown. The FOMC has recently stated its specific intent to sustain the expansion. That leads us to expect an additional "insurance" cut in October, and for the current expansion—now the longest on record—to outlast prior cycles by more than merely a few months
This month the U.S. expansion enters its 11th year to become the longest on record. With the unprecedented duration has come anxiety about another downturn under the premise that all good things must eventually come to an end. While that may be, the U.S. economy remains in fairly good shape.
On net, our forecast for Q2 growth has been little changed since June, with GDP growth slowing to a 1.8% pace. Although that is a couple tenths weaker than our June estimate, the underlying story is the same: domestic demand rebounded in Q2, while Q1's boost from trade and trade and inventories unwound.
Upward revisions to household outlays early in the second quarter put real consumer spending on pace to increase 3.4% in Q2, about half a point higher than our previous estimate. That reflects some catch-up from an unusually weak Q1, so we expect spending will settle down to about a 2% pace in the second half of the year (bottom left chart). Household balance sheets generally remain strong, and real income continues to grow at a decent clip thanks to further job and wage gains, along with low inflation. Consumer confidence, however, has wavered slightly, which will keep spending on a subdued path relative to the past year.
As we assumed in our prior month's forecast, President Trump and Chinese President Xi did not make any breakthroughs on trade when they met at the G 20 summit, but they agreed to keep negotiating. While a further escalation in trade tensions has been avoided for now, the lack of a resolution has prolonged trade-related uncertainty. Capital spending plans among manufacturers reached a two and a half year low in June. As such, we continue to expect a lackluster pace of business investment. Spending on structures is set to decline in the second quarter amid a pullback in energy-related investment. Equipment spending is also poised to contract; nondefense capital goods shipments have fallen sharply over the past few months (bottom right chart).
G20 Trade Truce and a Dovish Trend Continues
While the G20 summit did not result in a comprehensive trade deal, the outcome was certainly something to cheer about. In late June, President Trump and President Xi agreed to resume negotiations towards finalizing a trade deal, while they also agreed to not impose any additional tariffs for the time being. The trade truce may help support China's economy, especially after some weak activity and sentiment data in May and June; however, we maintain our forecast for the Chinese economy to grow 6.1% in 2019 and 6.0% in 2020.
Global monetary policy continues to move in a dovish direction, led by the Fed. Fed Chairman Powell's recent statements are consistent with a July rate cut, while the June Dot Plot indicates several FOMC policymakers expect multiple rate cuts this year. In response to a dovish Fed, we believe many emerging central banks will pursue policy rate cuts before the end of the year, which should provide some support to emerging GDP growth towards the end of 2019 and into 2020. As of now, we forecast developing economies to grow 4.0% in 2019 and to accelerate to 4.3% in 2020.
We expect G10 central banks to pursue easier monetary policy by the end of the year as well. Given deteriorating growth and inflation dynamics in Europe, we now expect the ECB to cut rates in September, while we also expect the Reserve Bank of Australia and the Reserve Bank of New Zealand to continue cutting rates this year.
A significant portion of the weakness in equipment spending can be tied to Boeing suspending shipments of its best-selling 737 MAX model. Ex-aircraft, private capital goods shipments continue to grind higher, although the 1.5% clip over the past three months is less than half the pace of Q1. We now assume 737 MAX shipments will resume in the fourth quarter, with the longer grounding and broader weakness in capital goods orders leading to another negative print for equipment spending in Q3. Boeing's suspension of shipments has also taken a toll on exports. Along with a pickup in imports and broader slowdown in exports as global growth flounders, trade is on track to shave about half a point from topline GDP in Q2. Inventories are also aligned for a steeper correction. We now estimate inventories will lop off nearly a full point from headline growth.
Employment growth rebounded in June, allaying fears of a sharp deterioration in the labor market. While job growth is expected to cool further in the coming months, it should remain strong enough for further tightening in the labor market. Yet wage growth shows few signs of generating a burst in inflation. Core PCE inflation is likely to remain below 2% on a year-ago basis until early next year given solid productivity growth and low inflation expectations.
The continued run 0f below-target inflation is a key reason why the FOMC will still cut the fed funds rate 25 bps when it wraps up its next meeting on July 31. Although near-term uncertainty around trade has subsided a bit in recent weeks, Fed officials note it continues to weigh on the outlook. The FOMC's limited scope to cut rates will likely lead it to take a more proactive approach in fending off a slowdown. Markets are currently pricing in a 100% chance of a cut at the July meeting, risking a visceral reaction a la December if the FOMC holds fire. Moreover, the committee has recently stated its specific intent to sustain the expansion. That leads us to expect an additional "insurance" cut come October, and for the current expansion to outlast prior cycles by more than merely a few months.
Recently, the stock market has experienced high levels of volatility. If you are thinking about participating in fast moving markets, please take the time to read the information below. Wells Fargo Investments, LLC will not be restricting trading on fast moving securities, but you should understand that there can be significant additional risks to trading in a fast market. We've tried to outline the issues so you can better understand the potential risks. If you're unsure about the risks of a fast market and how they may affect a particular trade you've considering, you may want to place your trade through a phone agent at 1-800-TRADERS. The agent can explain the difference between market and limit orders and answer any questions you may have about trading in volatile markets. Higher Margin Maintenance Requirements on Volatile Issues The wide swings in intra-day trading have also necessitated higher margin maintenance requirements for certain stocks, specifically Internet, e-commerce and high-tech issues. Due to their high volatility, some of these stocks will have an initial and a maintenance requirement of up to 70%. Stocks are added to this list daily based on market conditions. Please call 1-800-TRADERS to check whether a particular stock has a higher margin maintenance requirement. Please note: this higher margin requirement applies to both new purchases and current holdings. A change in the margin requirement for a current holding may result in a margin maintenance call on your account. Fast Markets A fast market is characterized by heavy trading and highly volatile prices. These markets are often the result of an imbalance of trade orders, for example: all "buys" and no "sells." Many kinds of events can trigger a fast market, for example a highly anticipated Initial Public Offering (IPO), an important company news announcement or an analyst recommendation. Remember, fast market conditions can affect your trades regardless of whether they are placed with an agent, over the internet or on a touch tone telephone system. In Fast Markets service response and account access times may vary due to market conditions, systems performance, and other factors. Potential Risks in a Fast Market "Real-time" Price Quotes May Not be Accurate Prices and trades move so quickly in a fast market that there can be significant price differences between the quotes you receive one moment and the next. Even "real-time quotes" can be far behind what is currently happening in the market. The size of a quote, meaning the number of shares available at a particular price, may change just as quickly. A real-time quote for a fast moving stock may be more indicative of what has already occurred in the market rather than the price you will receive. Your Execution Price and Orders Ahead In a fast market, orders are submitted to market makers and specialists at such a rapid pace, that a backlog builds up which can create significant delays. Market makers may execute orders manually or reduce size guarantees during periods of volatility. When you place a market order, your order is executed on a first-come first-serve basis. This means if there are orders ahead of yours, those orders will be executed first. The execution of orders ahead of yours can significantly affect your execution price. Your submitted market order cannot be changed or cancelled once the stock begins trading. Initial Public Offerings may be Volatile IPOs for some internet, e-commerce and high tech issues may be particularly volatile as they begin to trade in the secondary market. Customers should be aware that market orders for these new public companies are executed at the current market price, not the initial offering price. Market orders are executed fully and promptly, without regard to price and in a fast market this may result in an execution significantly different from the current price quoted for that security. Using a limit order can limit your risk of receiving an unexpected execution price. Large Orders in Fast Markets Large orders are often filled in smaller blocks. An order for 10,000 shares will sometimes be executed in two blocks of 5,000 shares each. In a fast market, when you place an order for 10,000 shares and the real-time market quote indicates there are 15,000 shares at 5, you would expect your order to execute at 5. In a fast market, with a backlog of orders, a real-time quote may not reflect the state of the market at the time your order is received by the market maker or specialist. Once the order is received, it is executed at the best prices available, depending on how many shares are offered at each price. Volatile markets may cause the market maker to reduce the size of guarantees. This could result in your large order being filled in unexpected smaller blocks and at significantly different prices. For example: an order for 10,000 shares could be filled as 2,500 shares at 5 and 7,500 shares at 10, even though you received a real-time quote indicating that 15,000 shares were available at 5. In this example, the market moved significantly from the time the "real-time" market quote was received and when the order was submitted. Online Trading and Duplicate Orders Because fast markets can cause significant delays in the execution of a trade, you may be tempted to cancel and resubmit your order. Please consider these delays before canceling or changing your market order, and then resubmitting it. There is a chance that your order may have already been executed, but due to delays at the exchange, not yet reported. When you cancel or change and then resubmit a market order in a fast market, you run the risk of having duplicate orders executed. Limit Orders Can Limit Risk A limit order establishes a "buy price" at the maximum you're willing to pay, or a "sell price" at the lowest you are willing to receive. Placing limit orders instead of market orders can reduce your risk of receiving an unexpected execution price. A limit order does not guarantee your order will be executed -" however, it does guarantee you will not pay a higher price than you expected. Telephone and Online Access During Volatile Markets During times of high market volatility, customers may experience delays with the Wells Fargo Online Brokerage web site or longer wait times when calling 1-800-TRADERS. It is possible that losses may be suffered due to difficulty in accessing accounts due to high internet traffic or extended wait times to speak to a telephone agent. Freeriding is Prohibited Freeriding is when you buy a security low and sell it high, during the same trading day, but use the proceeds of its sale to pay for the original purchase of the security. There is no prohibition against day trading, however you must avoid freeriding. To avoid freeriding, the funds for the original purchase of the security must come from a source other than the sale of the security. Freeriding violates Regulation T of the Federal Reserve Board concerning the extension of credit by the broker-dealer (Wells Fargo Investments, LLC) to its customers. The penalty requires that the customer's account be frozen for 90 days. Stop and Stop Limit Orders A stop is an order that becomes a market order once the security has traded through the stop price chosen. You are guaranteed to get an execution. For example, you place an order to buy at a stop of $50 which is above the current price of $45. If the price of the stock moves to or above the $50 stop price, the order becomes a market order and will execute at the current market price. Your trade will be executed above, below or at the $50 stop price. In a fast market, the execution price could be drastically different than the stop price. A "sell stop" is very similar. You own a stock with a current market price of $70 a share. You place a sell stop at $67. If the stock drops to $67 or less, the trade becomes a market order and your trade will be executed above, below or at the $67 stop price. In a fast market, the execution price could be drastically different than the stop price. A stop limit has two major differences from a stop order. With a stop limit, you are not guaranteed to get an execution. If you do get an execution on your trade, you are guaranteed to get your limit price or better. For example, you place an order to sell stock you own at a stop limit of $67. If the stock drops to $67 or less, the trade becomes a limit order and your trade will only be executed at $67 or better. Glossary All or None (AON) A stipulation of a buy or sell order which instructs the broker to either fill the whole order or don't fill it at all; but in the latter case, don't cancel it, as the broker would if the order were filled or killed. Day Order A buy or sell order that automatically expires if it is not executed during that trading session. Fill or Kill An order placed that must immediately be filled in its entirety or, if this is not possible, totally canceled. Good Til Canceled (GTC) An order to buy or sell which remains in effect until it is either executed or canceled (WellsTrade® accounts have set a limit of 60 days, after which we will automatically cancel the order). Immediate or Cancel An order condition that requires all or part of an order to be executed immediately. The part of the order that cannot be executed immediately is canceled. Limit Order An order to buy or sell a stated quantity of a security at a specified price or at a better price (higher for sales or lower for purchases). Maintenance Call A call from a broker demanding the deposit of cash or marginable securities to satisfy Regulation T requirements and/or the House Maintenance Requirement. This may happen when the customer's margin account balance falls below the minimum requirements due to market fluctuations or other activity. Margin Requirement Minimum amount that a client must deposit in the form of cash or eligible securities in a margin account as spelled out in Regulation T of the Federal Reserve Board. Reg. T requires a minimum of $2,000 or 50% of the purchase price of eligible securities bought on margin or 50% of the proceeds of short sales. Market Makers NASD member firms that buy and sell NASDAQ securities, at prices they display in NASDAQ, for their own account. There are currently over 500 firms that act as NASDAQ Market Makers. One of the major differences between the NASDAQ Stock Market and other major markets in the U.S. is NASDAQ's structure of competing Market Makers. Each Market Maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the Market Maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds. Market Order An order to buy or sell a stated amount of a security at the best price available at the time the order is received in the trading marketplace. Specialists Specialist firms are those securities firms which hold seats on national securities exchanges and are charged with maintaining orderly markets in the securities in which they have exclusive franchises. They buy securities from investors who want to sell and sell when investors want to buy. Stop An order that becomes a market order once the security has traded through the designated stop price. Buy stops are entered above the current ask price. If the price moves to or above the stop price, the order becomes a market order and will be executed at the current market price. This price may be higher or lower than the stop price. Sell stops are entered below the current market price. If the price moves to or below the stop price, the order becomes a market order and will be executed at the current market price. Stop Limit An order that becomes a limit order once the security trades at the designated stop price. A stop limit order instructs a broker to buy or sell at a specific price or better, but only after a given stop price has been reached or passed. It is a combination of a stop order and a limit order. These articles are for information and education purposes only. You will need to evaluate the merits and risks associated with relying on any information provided. Although this article may provide information relating to approaches to investing or types of securities and investments you might buy or sell, Wells Fargo and its affiliates are not providing investment recommendations, advice, or endorsements. Data have been obtained from what are considered to be reliable sources; however, their accuracy, completeness, or reliability cannot be guaranteed. Wells Fargo makes no warranties and bears no liability for your use of this information. The information made available to you is not intended, and should not be construed as legal, tax, or investment advice, or a legal opinion.