U.S. Overview

Upward Revision Largely a Boost from Trade

Our January forecast puts the annualized rate of GDP growth for the fourth quarter at 2.3%. That is a material upgrade from our prior forecast of 1.5% and is largely a function of an unexpected narrowing in the trade deficit in November.

The November trade report revealed, that after surging earlier this year, imports have fallen for three straight months. It may be that U.S. businesses rushed to get inventory into the United States ahead of an expected escalation in the trade war with China. But a Phase I trade deal reached just prior to the scheduled increase of tariffs on additional consumer goods took those tariffs off the table, for now, while reducing some of the existing tariffs.

We had previously expected a modest boost from trade, but we now look for net exports to add 1.4 percentage points to the headline figure in Q4. That said, the narrowing comes with some offset. If businesses are importing less, but consumer and business spending remains roughly unchanged, that implies that inventory investment will slow. We now expect inventories to lop off nine tenths of a percentage point from GDP growth during the period.

Elsewhere, the adjustments have been more modest. Business fixed investment is now expected to come in a little softer than we forecasted last month with both equipment spending and nonresidential construction outlays revised lower. Our consumer spending number ticked incrementally higher to a 2.2% pace in Q4 from 2.1% previously.


International Overview

Iran Emerges as a Wild Card

As the calendar turned to 2020, the geopolitical landscape seemed as though it was settling down. The United States and China had agreed to a Phase I trade deal, while the Conservative Party's victory in the U.K. elections helped ensure Boris Johnson's Brexit deal would pass parliament. The killing of Iranian General Qasem Soleimani on January 3 jolted financial markets, and, although tensions have eased a bit since, the events of the past couple weeks serve as a reminder that geopolitical issues can emerge onto the scene at any time.

When turning to the fundamentals, the global economy continues to sputter along. Economic growth in China and the Eurozone appear to have held steady in Q4-2019, neither slowing further nor picking up. Data out of the United Kingdom have been a bit weaker over the past month and indicate economic growth may have been close to zero in the final quarter of 2019.

Our forecast for the European Central Bank (ECB) remains that the ECB will cut rates one more time 10 bps at its March meeting. We also continue to expect the Bank of England (BoE) to keep its main policy rate on hold for the foreseeable future. We view both of these projections as close calls, however, and if in the next few weeks the economic data are a bit better in Europe/weaker in the United Kingdom, it would not surprise us if it is the BoE, rather than the ECB, that cuts rates during the early part of 2020.

After Stronger 2019 Finish, What is in Store for 2020?

If our fourth quarter forecast turns out to be correct—and with no major revision to prior data—full year GDP growth for 2019 would come in at 2.3%, which, as it happens, is also the average annual GDP growth rate during this record long expansion.

The headline growth rate drops noticeably in the first quarter of 2020 before rebounding in the second quarter and eventually settling into a range of 2-2.5% throughout the rest of the forecast period. So what is going on here?

Once again, the inventory dynamic is having a big influence on the top-line figure. Inventories are expected to be a drag on Q1 growth due in large part to the production stoppage of the 737 MAX at Boeing (bottom left chart). The aircraft were previously being produced but not shipped, meaning they were showing up in the inventory component of GDP. But with production of the 737 MAX stopping at the start of January, inventory building and production are set to slow. Reflecting this Boeing effect, we have industrial production declining at a 3.9% annualized rate in Q1-2020, after a scant 0.6% drop in the fourth quarter.

In the second quarter, even if the stoppage continues, inventories will likely boost growth, although if Boeing restarts assemblies (but not shipments), the magnitude of the boost could get larger. We will update our forecast when and if there are formal announcements from the manufacturer.

than that, fundamentals suggest slow but steady growth ahead, with consumer spending growing at about a two percent pace throughout the forecast period and equipment spending gradually climbing out of its present slump before resuming a 3-4% pace of growth (bottom right chart). Another factor in the steady rise in equipment spending is that the 737 MAX should eventually be cleared to fly again, and once those aircraft ship, equipment outlays will rise.

What About the Fed's Dual Mandate?

Employers continue to add new jobs throughout our forecast period, despite some Census-induced volatility in the 2020 quarterly hiring estimates. Still, the pace of hiring is simply not sufficient to match the expected growth of the labor force so the jobless rate is expected to tick modestly higher in 2021.

Real disposable income growth remains positive over our forecast horizon. That said, we expect it to moderate slightly, reflecting slightly slower growth in the jobs market and somewhat higher inflation compared to 2019. Headline inflation is expected to rise near the Fed's 2.0% target in coming quarters after increasing just 1.4% last year.

Still, we expect only modest price pressure over the next two years. Inflation expectations remain broadly anchored around 2%. The University of Michigan's measure of year-ahead price expectations fell to its lowest rate since 2016 in December, and longer-term expectations notched their lowest rate on record. With low price expectations, muted wage growth and unit labor costs only around 2%, an overshoot in core inflation remains unlikely.

As such, the core PCE deflator, which informs Fed policy, is expected to remain close to, but just below, 2.0%. On that basis, upcoming FOMC meetings will be less about what will happen with the fed funds rate and more about some of the more esoteric topics of Fed policy—like the rate it pays on excess reserves, the size of its balance sheet and the composition of asset purchases. Early this year, we may finally get details on a long-anticipated standing repo facility to help smooth some of the recent flare-ups in the short-term funding market, while mid-year, attention will likely turn to the results of the Fed's policy review of its tools and communication.

The bottom line for the U.S. economy is that aside from some noisy headline figures and inventory swings, slow growth is expected to continue over the next few months, which should keep the Fed on hold.


Download The Full Monthly Economic Outlook

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.

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