Making the yield curve steep again

Signs that economic growth should stabilize in the fourth quarter.

Nov. 13, 2019 — Following a string of disappointing economic data last month, there are signs that economic growth should stabilize in the fourth quarter after decelerating from the second to the third quarter of this year. The pace of job growth slowed to just 128,000 in October, but was weighed down due to a strike in the automobile sector. Forward-looking components of the employment report showed that wage growth and workers’ hours were still holding up, suggesting firming consumer economic conditions to start the fourth quarter. In addition, the yield curve is beginning to steepen once again, which should translate into a bit more momentum in consumer lending. 

We now know that third quarter gross domestic product (GDP) growth expanded at a 1.9 percent pace, consistent with our forecast of 1.8 percent. Consumer spending and a rebound in the housing sector offset the contraction in business investment. We expect solid consumer spending to drive fourth quarter GDP growth, rising 1.8 percent once again. The forecast is not without risks. As we enter the busy holiday shopping season, the chance of a government shutdown looms large, which could put some downside pressure on Q4 growth.

Real gross domestic product (SA, CAGR, and YoY* percent change) 

Real GDP CAGR: 2.5% in Mar 2018 to 1.8% forecast in Dec 2021, with line overlay for real GDP YoY % change: 2.86% in Mar 2018 to 1.82% in Dec 2021(f).

U.S. 10-year Treasury less three-month Treasury bill (Percent)

Line chart showing percent change in the yield curve from 1.15% in Jan 2018 to .015% in October 2019.

* Seasonally adjusted (SA), compound annual growth rate (CAGR), year-over-year (YoY).

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

Expect consumer spending to downshift in Q4

Consumer spending has played a key role in boosting U.S. economic growth and offsetting the pronounced slowdown in manufacturing activity and business investment. Key factors supporting consumer spending remain solid, with growth of 4.4 percent in nominal consumer spending expected this quarter. The latest employment report showed that average hourly earnings continued to grow at 3 percent YoY. The one headwind facing consumers this fall is themselves. Consumer confidence slid again in October, with consumers feeling more uncertain about future economic conditions. Confidence should begin to stabilize barring an unforeseen shock. Real consumer spending should remain solid over the next few quarters, averaging 2.4 percent.

Interest rates beginning to support credit market

The Federal Open Market Committee (FOMC) of the Federal Reserve once again cut the federal funds rate by 25 basis points at the end of October. In addition, the Fed continues to provide ongoing liquidity to the short-term lending market. The yield curve (as measured by the difference between the 10-year U.S. Treasury note and the 3-month T-bill rate) has grown steeper as a result. Over the past few months, data from the Fed indicated that banks were tightening lending standards, likely in part due to the ongoing inverted yield curve, which makes some loans unprofitable for lenders. Now that the yield curve has begun to steepen once again, there could be a pick up in the extension of credit. This would help to support further economic growth, which could easily extend the current business cycle.

Key risks to the outlook

The key risk to our outlook for the fourth quarter remains the rising probability of a federal government shutdown on November 22nd, right in the middle of the busy holiday shopping season. Our forecast assumes that Congress will provide a short-term funding bill to avoid a shutdown. If a shutdown did occur, we suspect consumer confidence and consumer spending would be adversely affected, similar to what happened last December. Additionally, we will be watching for other factors, such as escalating trade tensions. This could result in an equity market sell-off, which could also reduce confidence and weigh on overall economic growth. 

Beyond the consumer sector, we remain concerned about the sluggish pace of global economic growth and its adverse effects on the U.S. manufacturing sector. While we expect business investment to return to a positive growth rate in the fourth quarter, the risk remains that soft global growth could result in yet another pullback in business investment, slowing overall economic activity. 

Visa’s U.S. Economic Forecast 

November 2019 U.S. forecast table, with key economic indicators from 2017 through forecast 2021. Described in detail below.

Table Summary: A table depicts the compound annual growth rate of the Gross Domestic Product (GDP) from 2019 to forecast 2021. The rows in the table cover the subcategories of data that are included in the GDP—from personal consumption and business fixed investments, to government purchases. Additional economic indicators are provided, such as retail sales excluding autos, nominal personal consumption and the Consumer Price Index. The forecast was created on November 7, 2019. Note: annual numbers represent year-over-year percent changes and annual averages. Interest rates presented are end of quarter rates.

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 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.

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