January 22, 2020

By: Harris L. Kempner, Jr. President

At Kempner Capital Management, we are qualifiedly optimistic about the U.S. economy in 2020. Even though the economy is in the record 11th year of an expansion, we believe that there is most likely to be 2% GDP growth in 2020. However, there are significant risks to the downside.

There are reasons for our optimism. One reason is the trade truce between the U.S. and China, which was signed January 15, 2020. This, in itself, is not such a big economic boost. The U.S. is just abstaining from some tariffs they have been threatening and cutting a few others in half, but many tariffs still remain. And China is primarily committing to buy an increased amount of agricultural goods. This does not move the overall economic needle much, but it does begin to remove a major psychological barrier to economic activity and confidence. That is a good thing. In addition, there are new trade deals with Mexico and Canada, as well as a near deal with Japan. All of which will help clear the decks for our economy in 2020. However, a building trade feud with the EU needs to be kept in mind.

Of course, the largest contributor to the economy continues to be the U.S. consumer – 68% in fact according to U.S. government statistics. Despite some relatively pallid sales figures for Christmas, steady job growth continues, consumer confidence/comfort is high, and unemployment at the end of December 2019 is 3.5% – near historical lows. Importantly for 2020, 21 states and 23 cities have raised their minimum wage this January, with 6 more states to follow soon. This alone will provide lower deciles of earners greater wherewithal with which to spend, and this group tends to spend the greatest portion of their income.

In addition, consumer net worth was 11% higher at the end of 2019 than it was at the end of 2018. This typically has a tendency to substantially increase economic growth. We think the consumer can stay solid this year, without geopolitical blowups.

In addition to the consumer, overall government spending which is only about 18% of the economy, looks to increase about 5% this year, which will help.

However, there are certain weaknesses in the business side of the economy. Manufacturing output is lower than at the beginning of 2019, and the most recent purchasing manager ISM statistics indicate that is likely to stay stagnant. In our opinion, capital spending is not growing at best, and is not expected to be a real growth factor overall. Earnings per share this year is currently projected to be about 9% positive instead of double digits. Basically, the overall business sector is possibly going to be neutral for growth, rather than additional to it. We are truly a consumer-based economy.

There are risks, as we are all aware. The most obvious one is geopolitical. The recent close shave with Iran had everyone on edge, and we believe it may not be entirely over. In our opinion, if this bursts into conflagration, obviously economic activity will be severely impacted worldwide by increased energy prices, leaving aside the cost of material and humans. Note that, at the least, just an increased threat of such a factor can cut U.S. consumer confidence and willingness to spend. As we have observed, this would undermine the major growth factor of the U.S. economy.

This sort of geopolitical risk is hard to measure but is definitely there and is the primary reason why we are only qualifiedly optimistic about the U.S. economy.

On the other hand, we do not think, as some do, that the U.S. political scene will actually dampen the economy this year. However, depending on who is elected and how it happens, there could be serious questions about various areas of the economy in 2021.

So, with all this, the U.S. economy looks to us, most likely, to have growth for the 11th straight year in a row, in 2020, at a level of about 2%, but with heightened risks to the downside.