Markets and Economy

A Look Back at 2019 and the Economy's New Normal

Inside the year’s biggest anxieties—from trade tensions to the inverted yield curve—and a glimpse of the future as the economy steadies.


Key points:

  • The year’s biggest purported hazards turned out to be busts.
  • Despite relatively slow growth, the economies of the US, Europe and Japan are operating close to their full potential.
  • Equity investors haven’t been discouraged by pessimism; stock prices are rising on a tide of profits.

Looking back: After a year of fruitless economic worries, the expansion still has momentum. If a recession hits in 2020, it will be the result of overheating or asset bubbles rather than the transient—and largely resolved—setbacks that have sparked fears in recent months.

The new normal: The top of this business cycle has been confusing. Past expansions saw much faster growth, but the aging workforce has changed the rules of economic prosperity.

  • The last recession masked America’s demographic transformation—for a full decade, slack in the labor market hid the impact of baby-boomer retirements.
  • But now that the US is back to full employment, the aging workforce may only be able to sustain a 2 percent pace of GDP growth.
  • The same is even more true for Europe and Japan, where labor force growth is even slower—unemployment is at a record low and productivity at a record high, but the EU will likely struggle to maintain a real growth rate above 1.1 percent. Japan is expected to average a 0.6 percent pace of expansion.
  • Slowing growth isn’t a sign of weakness: What matters more than GDP is how close the economy is to its full potential.

Equities climb on durable profits: Technology has increased both productivity and profits, and equity markets are seeing the benefits.

  • The stock market’s capitalization has reached a record-high multiple of 1.5 times GDP. That may seem unsustainable, but equities are climbing in response to record corporate profits.
  • As globalization and automation make businesses more efficient, profits have risen from a 6 percent share of GDP in the early 1990s to a 9 percent share today.
  • The shift has been underway for decades. Higher profits—and the stock valuations that come with them—are likely a new structural feature of the economy.

The Fed’s path to neutral: With tame inflation, balanced financial risks and a tight labor market, the Fed should be moving interest rates toward their natural equilibrium—but other factors are complicating monetary policy.

  • Treasury yields have been distorted by quantitative easing. Today’s flat yield curve likely masks an accommodative monetary stance.
  • The federal funds rate is slightly below inflation expectations, and a negative real interest rate raises inflation risks.
  • The Fed has signaled it may keep interest rates low and allow inflation to briefly overshoot its 2 percent target, helping balance out years of below-target price growth.
  • But aggregate demand is strong at the top of the business cycle; it wouldn’t be surprising if the Fed has to raise interest rates before unsustainable inflationary pressure builds.

Jim Glassman, Head Economist, Commercial Banking

Jim Glassman

Jim Glassman, Head Economist, Commercial Banking

Jim Glassman is the Managing Director and Head Economist for Commercial Banking. From regulations and technology to globalization and consumer habits, Jim's insights are used by companies and industries to help them better understand the changing economy and its impact on their businesses.

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