The U.S. economy is at a critical juncture. Since slowing since late-2018, the economy is showing signs of bottoming and may be ready to accelerate to higher growth levels. Importantly, the slowdown was mostly concentrated in the industrial and agricultural sectors. Other parts of the economy like housing, jobs, and consumer spending saw continued growth albeit at a slower rate.
Now, there's increasing evidence that the headwind from slowing parts of the economy is set to become a tailwind over the coming months. In fact, stocks are already acting as if this outcome is certain. It's evident from the broad-based S&P 500
Recent Data Positive for Most Part
Other than the trade deal, economic data in the coming months will be closely watched. If the economy fails to regain momentum, stocks are primed to give up recent gains. The two most important narratives to follow are whether manufacturing data starts to show improvement from negative to positive and the continued resilience of the domestic-facing sectors.
Over the past week, a number of reports were released pertaining to housing, consumer spending, manufacturing, durable goods, and household income. All of these came in at or above expectations. These figures continue to be consistent with an economy going from a lull to acceleration rather than a recession. Given the upside surprise, Q4 GDP estimates were raised from 0.3% to 1.7%. This also follows Q3 GDP being upgraded from 1.9% to 2.1%.
The upgrades to GDP come as the data shows that household income, consumer spending, and business investment are doing better than anticipated. These strong results will flow into other parts of the economy like employment and housing.
Looking Forward
Although early signs are positive, the recovery remains fragile. One acute risk is a failure to reach a trade deal. This could actually result in the trade war intensifying, leading to another round of risk-off trades and weakness in cyclical industries. Further, the freeze in long-term business spending is likely to continue longer. On the other hand, a trade deal would likely unleash a wave of pent-up spending and investment, specifically in the industrial and agricultural sectors. It would certainly affirm the stock market's current bullish frenzy.