2019 GDP Growth - China Expects Between 6% and 6.5%

2019 GDP Growth - Slight Tuesday Decline

Before getting into 2019 GDP Growth, let's review the stock market. The stock market fell again on Tuesday. S&P 500 fell 0.11%, Nasdaq fell 2 basis points, and Russell 2000 fell 0.45%. 

Bears are always quick to jump on any move lower after a long winning streak. They tend to get overly excited for what usually ends up being a modest correction. 

This time the stock market was met with positive economic news from the ISM, but it still fell. These small moves are occurring because the market is very overbought, not because there has been a big change in how most investors view the economy.

As you can see from the chart below, the McClellan summation shows the stock market has excessive optimism. 

In the next 1 month, the S&P 500 falls 1.62% with a 39% win rate on average. I could see a modest correction in March considering how far stocks have rallied. If stocks fall modestly and the economic data follows the ISM report, I will switch to being bullish.

It wasn’t a risk off day as utilities and consumer staples fell. Biggest winners were communication services and real estate which increased 0.73% and 0.24%. The biggest losers were the industrials and materials which fell 0.64% and 0.51%.

2019 GDP Growth - Great Target Earnings

Target final reported its Q4 2018 earnings. They were very good. With both Wal-Mart and Target doing well, it’s fair to say the consumer is healthy. 

This supports the solid 2.8% personal consumption growth in Q4. Target reported $1.53 in EPS which beat estimates by a penny. It had $22.98 billion in revenue which beat estimates by $20 million. Same store sales growth was a fantastic 5.3% which beat estimates for 5.1%.

Sales at physical stores were up 2.9% and online sales were up 31%. E-commerce added 2.4% to same store sales growth. In 2018, same store sales growth was 5% and e-commerce was up 36%. That was the fastest same store sales growth since 2005. 

It justifies the CEO’s statement last year that it was the greatest economic environment he had ever seen. Unlike Wal-Mart’s sales growth, Target’s was driven by traffic. It was up 4.5% and average transactions were up 0.8%.

These great results pushed Target’s stock up 4.58%. It is up 24.33% since December 21st. It’s still down 14.86% from its peak last September which is around when the CEO said how great the environment was. 

At the time, I had predicted the 2019 holiday shopping season wouldn’t be as strong as the 2018 one (lower sales growth, not declines).

2019 GDP Growth - China Slowdown To Continue

The Chinese government expects between 6% and 6.5% GDP growth in 2019 which is below the 2018 growth of 6.6%. That’s another year of slowing. 

Even though the government is usually optimistic, it might not be this time around because the global economy and China have had a weak start to the year despite the huge rally in the Shanghai Composite. That being said, the cyclical economy could worsen. 

The good news is a trade deal is coming soon, so trade growth with America should rebound.

The IMF expects China to grow between 5% and 6% in the next decade. I don’t think that projection has much rigor. The IMF looked at the recent slowing growth trend and put an optimistic spin on it. Since the financial crisis, 

China has been the straw that stirs the drink of economic growth. That role will probably switch to India over the next 10 years.

Capital Economics is very bearish on Chinese growth as it expects GDP growth to fall to 2% in the next 10 years. It’s very difficult to predict GDP growth for the next 10 years, but it’s also very difficult to indefinitely have extremely high GDP growth. 

Economists that called China a modern marvel 10 years ago will be proven incorrect. A slow growing emerging market economy which still has a low GDP per capita isn’t the ideal situation.

2019 GDP Growth - Capital Economics is bearish on China because of its excessive debt load and poor demographics. 

Corporate and household debt is elevated. The shrinking labor force will cause a 0.5% GDP growth decline by 2030. 

China’s working age population fell 0.2% in 2018. There were 15 million babies born in 2018 which is a 12% decline from the previous year. That signals the economy is currently weak as China eliminated its 1 child policy in 2015 allowing couples to have 2 kids. The 2018 birth rate was almost a third below government estimates made 3 years ago. 

China’s population will start shrinking somewhere in between 2030 and 2035.

China needs to rely more on its domestic economy and less on exports. It can’t use exports to grow worker productivity because exports are already high. The government has invested in and built infrastructure. Now it needs to open its economy to new technology to allow workers to improve their productivity.

2019 GDP Growth - Late Cycle Fiscal Stimulus

American fiscal stimulus’ effects ended in 2018. The stimulus will still push growth up in 2019. 

As you can see from the chart below, instead of the usual stimulus after a recession starts, the economy received a stimulus near the end of the expansion. It probably will serve to extend this business cycle which will already be the longest since the 1800s in 4 months. 

That might explain why the American economy is outperforming Europe. If America was weak, the global manufacturing PMI would be negative.

2019 GDP Growth - Conclusion

The stock market has sold off very slightly this week. Probably because it was extremely overbought heading into the week. 

Target reported amazing same store sales growth which supports the notion that the 2018 holiday shopping season was solid. 

China’s GDP growth will likely continue its long term downtrend in 2019. I can’t be certain about where it will end up 10 years from now. But I’m sure it will be below the 6.6% growth rate in 2018. 

The American economy is probably outperforming in 2018 and Q1 2019 because of the fiscal stimulus. That stimulus will still help the economy for the rest of the year. 

Spread the love