Strong U.S. Growth to Fade as 2020 Comes Around: Nordea

Image © M. Jorwa, Adobe Stock

- U.S. Growth to slow in 2020 as global slowdown spreads

- ISM indicator showing risk of recession

The U.S. economy continues humming along nicely but strategists at Nordea Markets are sceptical the growth will persist in the coming year.

Economic growth (GDP) in the U.S. in the third quarter of 2019 easily beat expectations when the data was released on Monday, surprising investors who had expected a more subdued figure, however, this is likely a temporary reprieve before a deeper slowdown takes hold in 2020, say analysts at the Scandinavian lender.

The size of the economy increased by 1.9% on a quarterly annualised basis, which was well above economist’s estimates of 1.5%.

The better-than-expected growth in Q3 was put down to the resilience of the U.S. consumer and a still-strong housing market. These helped offset weaknesses in non-residential investment and slowdown in the manufacturing sector caused by global trade uncertainty.

The U.S. Dollar gained a bump as a result of the better-than-expected data, rising to 1.2845 versus Sterling and 1.1103 versus the Euro.

Whilst the result would normally be expected to set the U.S. up for a stronger 2020, Nordea sees a “slowdown ahead” despite the better data, which would have similar negative consequences for the U.S. Dollar.

“Growth should slow in the coming quarters, although a recession is avoided,” says Morten Lund, an analyst at Nordea Bank. “Looking ahead, our base case is that growth will be around 2.3% y/y in 2019 and 1.5% y/y in 2020.”

After 2020, however, the analyst predicts a rebound “towards potential” of 1.9% in 2021.

The main reason for the pessimistic growth outlook is the weakness in the manufacturing sector, as well as “leading indicators on business investments and exports” which are also “worrying.”

Nordea sees a trigger or catalyst is a necessary prerequisite for a recession however. “That trigger could be a re-escalation of the trade war or the Fed tightening financial conditions too much,” says Lund.

The economist notes that the ISM Manufacturing PMI gauge is at levels that would normally predict a mild recession scenario.

Using a composite of the ISM manufacturing and non-manufacturing PMI indicators, Nordea has modelled out three different scenarios, including their base case of a slower 2020.

The first, the red line, models a downside risk scenario and a mild recession and shows their composite gauge falling to a trough of just below 51 over the next 2 years.

The second, the green line shows the optimistic growth scenario in which the indicator bases at around 53.6 and then rises to 55.

Nordea’s baseline scenario is represented by the light blue line which models the indicator bottoming at 53 and then rising to about 54.1.

The ISM Manufacturing PMI is not the only indicator showing a recession could be on the cards.

The NY Fed’s recession indicator remains close to its highest at around 35%, says Nordea. “As such, we deem the risk of a recession relatively high, but as mentioned above we still think a trigger is needed for a recession to happen.”

The step down in growth will begin as soon as Q4 2019 when GDP is forecast to slow to 1.5% on a quarterly annualised basis.

It’s not all doom and gloom, however, and there are risks to the forecast.

The Fed’s recent interest rate cuts have helped stave off a recession and they may save the day.

The Fed has cut interest rates three times in 2019, by 0.25% on each occasion, reducing borrowing costs by 0.75%.

This means Fed funds rates - which measures the cost of borrowing for banks and major financial institutions - has fallen from a higher bound rate of 2.5% to 1.75% as a consequence.

Other factors supporting a more positive outlook includes the resilience labour and housing markets, and, “US consumers, which account for ≈68% of the economy, are still in a good position to underpin economic growth,” says Lund.