A tale of two economies: manufacturing vs. services

Sept 11, 2019 – In this month’s update, we extend our forecast horizon through the end of 2021. Thematically, growth is expected to begin downshifting but remain positive heading into 2020 and beyond. Ongoing trade tensions will likely remain unresolved over the forecast horizon and thus weigh on global growth. Soft global growth could have three main effects on the U.S. economy. First, continued pressure on export activity along with modest domestic demand, translating into slower growth from net exports. Second, weakness in the manufacturing sector for the foreseeable future that holds back business fixed investment. Finally, foreign capital inflows into the U.S., likely keeping longer-term interest rates lower and the dollar stable over the coming quarters.

The result will be a continuation of the tale of two economies, with manufacturing struggling while the services side of the economy continues to expand. Overall, the slow global growth and trade-related headwinds combine to push growth below 2 percent in 2020, with a further deceleration in 2021. The U.S. consumer will be the key support to growth over the next couple of years as fundamentals such as job growth and wage gains still support modest real consumption growth between 2.0-2.5 percent.

Highlights:

• Confidence is key
• The future path of interest rates
• Key risks to the outlook

Source: Visa Business and Economic Insights, U.S. Department of Commerce and Federal Reserve Board

*  SA: seasonally adjusted, CAGR: compound annual growth rate, YoY: year-over-year, ISM: Institute for Supply Management

Confidence is key

The number of jobs created last month was disappointing, but August’s employment report was not surprising given that the U.S. is simply running out of individuals to hire. Fundamentals behind consumer spending remain solid. While job gains have slowed, the trend in average hours worked (a leading indicator) remains positive and suggests further momentum behind wage growth. Real spending is expected to rise 3.5 percent in the third quarter before downshifting to 2.5 percent in Q4. Waning confidence and slower income growth in 2020 will likely keep real spending within the range of 2.3-2.4 percent on a quarterly basis in 2020. Nominal spending is likely to pick up in 2020 due to higher inflation rates.

The future path of interest rates

The Fed is likely to cut rates once again during its meeting later this month and thereafter leave rates unchanged for the foreseeable future unless economic conditions begin to deteriorate beyond the general slower growth we are projecting. The outlook for other interest rates is the subject of considerable uncertainty. With the next rate cut from the Fed, we suspect that the yield curve will begin to steepen a bit, which will likely elevate concerns about tighter credit conditions. That said, longer-term interest rates are driven more by global factors and thus could swing wildly depending on economic data and central bank actions from abroad.

Key risks to the outlook

With consumer spending serving as the only solid support to economic growth (and most important at roughly 70 percent of Gross Domestic Product (GDP) growth as of Q2), the U.S. economy remains vulnerable to any shock to consumer confidence. It just takes a few days of an equity market sell-off or negative headlines for consumer confidence—and, in turn real consumer spending—to falter. The other key area of concern is the manufacturing sector, which is on the cusp of its own recession. While hiring activity in the sector remains positive, further escalations in trade tensions and/or slower global economic growth conditions could combine to create even more downside risk to those parts of the country dependent on manufacturing. In addition, it is also possible that consumer prices will begin to climb as a result of the recent round of tariffs on China (some starting this month, with another round scheduled in December). Finally, should a resolution to the ongoing trade tensions occur, there would likely be some upward revisions to our growth outlook and downside risk to our inflation forecast.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements are generally identified by words such as “outlook,” “forecast,” “projected,” “could,” “expects,” “will” and other similar expressions. Examples of such forward-looking statements include, but are not limited to, statements we make about Visa’s business, economic outlooks, population expansion and analyses.  All statements other than statements of historical fact could be forward-looking statements, which speak only as of the date they are made, are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, many of which are beyond our control and are difficult to predict. We describe risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, any of these forward-looking statements in our filings with the U.S. Securities and Exchange Commission (SEC). Except as required by law, we do not intend to update or revise any forward-looking statements as a result of new information, future events or otherwise.

Disclaimer

Studies, survey results, research, recommendations, opportunity assessments, claims, etc. (the ‘Statements’) should be considered directional only. The Statements should not be relied upon for marketing, legal, regulatory or other advice. The Statements should be independently evaluated in light of your specific business needs and any applicable laws and regulations. Visa is not responsible for your use of the Statements, including errors of any kind, or any assumptions or conclusions you might draw from their use.