Strong consumer spending is expected to continue propping up the U.S. economy in 2020, even in a tumultuous election year that’s likely to rattle the financial markets.
Despite the U.S.-China trade war, political uncertainty in Europe and sluggish growth abroad, a global slowdown in industrial output and business investment is unlikely to spread to the U.S. economy, according to a report published by Capital Ideas, an online group backed by investment management firm Capital Group.
That’s because consumer spending, which accounts for more than two-thirds of the country’s GDP, has remained solid, even in the face of an increasingly stormy outlook. (Manufacturing and export activity, meanwhile, make up just 12 percent of GDP).
In December, consumer confidence dipped unexpectedly to 126.5 from 126.8 in November. Still, a majority of consumers -- 38.7 percent -- continued to judge business conditions as “good,” while the percent who viewed conditions as “bad” fell.
The labor market, however, remains strong: Unemployment, at 3.5 percent, is at a half-century low and wages are beginning to gradually increase.
“We are seeing a tale of two economies," Capital Group economist Darrell Spence said in a statement. “While manufacturing has been weak, solid employment and wage gains are providing support for growth in purchasing power. If this consumer strength continues, I believe it can offset weakness elsewhere in the economy."
Another factor that will help to sustain the record-long economic expansion through this year is easier monetary policy, according to the report. In 2019, the Federal Reserve made three modest interest rate cuts, setting the benchmark federal funds rate to a range between 1.5 percent and 1.75 percent.
Those changes to monetary policy will help insulate the economy from a recession, according to Spence.
"It takes a while for interest rate cuts to have an impact," he said. "The central bank actions we've seen this year won't really kick in until the first half of 2020.”
That’s not to mention the significant strides the U.S. and China have made toward potentially ending the bitter trade war, which has culminated in hundreds of billions of dollars in tariffs.
In December, the world’s two largest economies announced a preliminary deal, which President Trump said will be signed on Jan. 15 at the White House. Any progress in the trade war, however, will likely boost near-term growth and send markets higher, the report found.
"Even if trade issues put further pressure on the economy, investors should remember that smart companies are fluid and can adapt to changing circumstances,” equity portfolio manager Alan Berro said. “Many companies have already begun reconfiguring their supply chains, for example."