US Economic Outlook – 4 Oct 2019
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We maintain our baseline outlook of a slowdown in US GDP growth to 2.3% in 2019 and 1.6% in 2020. Trade tensions remain elevated despite the scheduling of the next edition of high-level US-China talks on Oct 10-11 in Washington, DC. Even if the Administration were to reach a "paper deal" this month to soothe market worries, we remain skeptical that a meaningful agreement that would roll back existing tariffs and eliminate the risk of further planned tariffs can be reached before the 2020 election. Overall political risk is high more generally. For the fiscal year that started Oct 1, the federal government is only temporarily funded through Nov 21 and the appropriations process is likely to be increasingly contentious due to the start of the impeachment proceedings in the House.
A full government shut-down is not our base case, but the risks are rising. External headwinds have already pushed the manufacturing segment into a contraction, and forward-looking capex indicators remain soft. Meanwhile, consumer confidence remains high by historical standards, but consumption growth continues to slow. To provide a floor to the downside risks, the Federal Reserve cut the Fed Funds rate again last month, and we foresee two more cuts by January 2020. Due to the stress seen in the repo markets in mid-September, we also expect organic balance sheet growth to resume in 4Q. All in, we keep our subjective probability of a US recession in 2020 at about 35%.