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BLOG: End of the US economic cycle? The signals to watch

Written by: Nandini Ramakrishnan
Current US growth is booming. Both the consumer and the business side of the economy are thriving. But can it continue?

In June, data from the US revealed consumer spending is still astoundingly strong. Retail sales posted the highest growth rate in five years. Business investment is on the rise and intentions surveys from companies are holding on well.

While the average length of a US expansion is 47 months, the length of this expansion has been longer than most at 109 months. With this in mind, some might argue this has been going on for too long, and that a slowdown is due.

But it’s important to remember that length of time isn’t the only measure; cumulative growth is a way to gauge if an economy has overheated. Cumulative growth over the past 10 years is far lower than other expansions, which means that while this expansion has been long, it hasn’t been particularly strong over the years.

So if current data looks so staggeringly positive, when will the party stop? Are there things we should be looking out for?

These are the three key areas we’re monitoring:

Fiscal stimulus

The US government has put into place a few measures to stimulate the US economy. One of the key measures was the reduction of US corporate tax rate from 35% to 21%. These fiscal tailwinds have boosted 2018 GDP growth expectations to nearly 3% and equity earnings per share (EPS) forecasts to above 20%. The fiscal stimulus is a considerable tailwind to US growth at present but is scheduled to tighten in 2020.

Wage growth

As unemployment falls, wages tend to rise…or so they should, according to the law of supply and demand of workers. In the past several years, even though the unemployment rate has been falling dramatically, wage growth has been subdued. Only recently have wages started to rise moderately, but we expect them to increase further. While this is good news for the workers, companies that will have to pay higher wages may not fare as well if they can’t cut other costs or increase revenues. The risk to company profits may outweigh the benefit to consumers.

Fed policy

While the path of fiscal stimulus and the speed of rising wages are harder to predict, we know what the Fed is planning to do via its ‘dot plot’ projections. Four more rate hikes over the next twelve months will increase the base rate to 3%. US companies must manage these rising costs of interest payments and salaries that may erode profits. They can normally cope with short term rates below 3.5%, but some sectors and specific companies may fair better than others.

Nandini Ramakrishnan is global market strategist at J.P. Morgan Asset Management

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