By: Russ Colbert
Winter 2020 (Vol. 37, No. 4)
We are looking for the economy to continue to grow at a healthy pace this year. It will continue to benefit from the lower tax rates, less regulation on corporations, and improved trade agreements with our trading partners. We believe that GDP for this year will come in around 2.5 to 3.0%. We see moderate economic growth and continued corporate profit growth through the year. Corporate America is still adapting to a more favorable tax environment and trade policy with our trade partners and it should continue to improve going forward, rather than get worse.
On inflation, it looks to be reasonably low for 2020. We believe it will average around 2.5%. The Federal Reserve will be reluctant to raise interest rates with low inflation and the Presidential election coming up later this year.
The unemployment rate is around 3.6%, the lowest since 1969. Average hourly earnings are up 3.0% from a year ago. The benefit of earnings growth has been increasing. During the past year, median weekly earnings for workers age 25 and older with less than a high school diploma are up 9%. This is faster wage growth than those with college and graduate degrees. These plentiful jobs are the best way to raise the living standards for most people.
The advances in energy production have improved benefits to the consumer. The average price of a barrel of oil 10 years ago was $78.00 a barrel and the jobless rate was 10%. Currently a barrel of oil is around $ 58.00, and the jobless rate is around 3.6%. Natural gas was around $ 3.75 per mmbtu and now around $2.67 mmbtu. Americans can heat and cool their homes and businesses and travel for a lot less than they used to. Consumers have more purchasing power from wage growth and low financial obligations.
We feel entrepreneurship and public policy have contributed to a lot of the changes over the past few decades. The U.S. entrepreneurs and the innovations that many of them have brought us over the past 15 years has greatly changed the world and our daily lives. The U.S. has gone from the world’s biggest importer of oil products to be a net exporter. Cancer death rates have dropped substantially. The technology we can now hold in our hand is so much better than the best Desktop computer of 10 years ago. Many of these improved innovations continue to make life better for the consumer. Public policy has improved growth rather than holding it back with lower interest rates, less regulation, lower taxes, trade conflicts negotiated for improvement, etc.
The U.S. is not the only stock market to rally over the past year. Some of the European stocks and Japan stocks had strong positive moves during 2019. We believe these gains may reflect investors looking ahead and expecting better policies ahead. The U.S. has become more competitive by cutting taxes and regulations. Eventually, the political pressure on other countries may follow. Back in the 1980s when Reagan and Thatcher cut tax rates many other countries did the same and it led to a global boom. It is not a high probability at this time, but there could be a problem with another scenario affecting this positive economic growth we are experiencing. It would be if we had a shift in voters toward less growth-oriented policies of more government spending, expanded entitlements, and higher taxes. This would require a sweep of the House, Senate and White House and the politicians willing to vote in those changes. We believe the odds of that happening are very low. We know many people are concerned about it, but it is to early to adjust investment strategies. Again we feel it is very unlikely it will happen. Currently the economy and the stock market still look very good.
If you have any questions or need a free portfolio review to keep you on track with your investments or retirement plan, please call me.
Senior Portfolio Manager
Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.