KEMPNER CAPITAL MANAGEMENT, INC.
January 9, 2019

By: Harris L. Kempner, Jr.
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Despite some considerable difficulties for the U.S. and the world economy, we do not expect a U.S. recession in 2019. However, due to those many difficulties, we expect a general slow-down in U.S. growth for this year. In 2018, we enjoyed 3%+ real GDP growth.  In 2019, we expect about 2% real GDP growth, with growth gradually slowing through the year.The reason for this relatively optimistic forecast rests on the U.S. consumer. I want to remind you that 70% of the U.S. economy is consumer based. At this point, more people are working, and fewer are unemployed than has been true for the last 10 years.  There have been wage increases averaging 3+%, which are the highest in 15 years. It looks like this will continue on balance through 2019. In addition, 2.64 million jobs were created in 2018, which is quite substantial. Further, income tax refunds for individuals, if we believe they can be paid, will also give a substantial positive jolt to the U.S. consumer in the early months of 2019.  So, the largest part of the U.S. economy is the strongest.  We believe it’s enough to overcome the negatives in other areas.

And there are negatives.  Worldwide, there is a slowing in the economy of both Europe and China. China, in particular is paying the price of the Trump trade wars because the tariffs are starting to cut into their ability to export, causing business to slow.  Unless resolved by March 1st, the tariffs will become much worse, rising from 10% on many items to 25%, with the possibility of being expanded by another $250 billion.  Under those circumstances, China could have zero growth next year and the world economy would suffer.

Corporate America has also shown a gradual slow-down.  We believe the primary cause to be reductions in capital investments.  The tax boost occurred in 2018 and will have much less effect in 2019.  Again, the trade war is beginning to affect investment and production in the United States due to the increasing price of imported goods, which are needed as inputs to manufacturing.  As a result, toward the end of 2018, six different U.S. manufacturing indexes dropped substantially – a statistical sign of industrial weakness which has rarely been seen in the United States.  Corporate, industrial America is likely to stagnate until trade issues are fully resolved, not just with promises, but with signed treaties, etc.

The Federal Reserve is currently somewhat tight, though the most recent speech by Chairman Powell holds some hope out that they’re not on autopilot as far as rate increases in 2019.  We will see how this works out but they seem to be somewhat more responsive than feared as far as the economy is concerned.

And, once more, we’re facing possible debt ceiling violations in September 2019.  That would be a disaster for the U.S. economy as we have stated before. Hopefully, even this divided Congress and Administration will be sensible enough to avoid that problem.

However, we think that the strength of the consumer, which is 70% of the U.S. economy, is enough to overcome government shut-downs, weakness in China and Europe, corporate difficulties and any other fiscal matters that slow down the U.S. economy.  We believe a recession will be avoided in 2019.  However, we are definitely keeping our eye cocked on 2020.