Principal Global Investors

Economic Insights: Is the worst over?
Monthly update: February 2019
Commentary by Bob Baur, Robin Anderson, and the Economic Committee
U.S. recession worries of late last year cameto naught. Yes, retail sales and housing starts
collapsed in December as the stock market
swooned and part of the government shut
down. Pundits worried that fourth quarter
growth would plunge but it didn’t. Growth
did moderate from the super-strong summer
pace, though it was solid at 2.6% annualized
over the prior quarter. Capital spending kept
up its terrific pace of 6.2%, where businessspending on intellectual property—including
software and research development—soared
13.1% for the third double-digit gain in four
quarters. Consumer spending growth stayed
at a healthy 2.8% pace. Since the holidays,
business and consumer sentiment improved
with a monster stock market rally.
More cooling. Still, U.S. economic growth
may fade more in the first quarter as global
slowing drags industrial activity lower.
Manufacturing output contracted in January,
and a key business survey fell to the lowest
level in two years. Investment may soften,
too, as core capital goods orders, a leading
indicator, declined four of the last fivemonths. Survey-based capital spending plans
weakened. Inventories surged the last twoquarters and may detract from growth thisquarter.
Vigorous growth in 2019. Still, for this year,
growth will likely stay in the 2.5% range.
Household fundamentals remain extremely
healthy—wage growth is accelerating, andrecord job openings suggest job gains will
stay robust. Consumer spending growth
should remain around 3% or more. We lookfor housing to pick back up after the fadeof a one-time hit from the change in stateand local tax deductibility in certain states.

Interest rate outlook: historic policy change?
The Fed may be opening the door to what could be its biggest policy change since Paul
Volker moved focus to the money supply from interest rates in 1978. Fed members are
considering changing from a simple 2% inflation target to aiming for average inflationof 2% indefinitely. That would be a massive change, as the Fed could allow inflation
to run above target for a long time to make up for whatever period it stayed below
target. In other words, the Fed might relax while the economy runs hot and wages
surge to make up for the last decade or so when inflation stayed well below target. Fed
academics suggest this strategy might make sense and their policy review will continue
throughout most of this year.
Tame expectations. We look for the Fed to keep its funds rate on hold at least throughmid-year. Fed Chair Jerome Powell and others emphasize patience in normalizing
policy—that’s a big reversal from December’s hawkishness. Besides, even with U.S.
wages accelerating, we expect inflation to be tame this year. The Fed may indeed stayon hold in 2019 as the fed funds rate is likely near neutral, which neither slows norboosts economic growth. And without further signs of too much exuberance, distress, or
inflation, there’s little reason for the Fed to stray from neutral.
Whither long rates? Before the last few days, the bond market hadn’t exhibited thesame enthusiasm as investors in the monster stock market rally that kicked in after
Christmas. Yields on 10-year U.S. treasury bonds collapsed to 2.55% early this year andstayed weak until pushing up to 2.75% on March 1. Yields on 10-year German bunds andJapanese government bonds (JGB) behaved similarly, moving up the last of February
from super-low levels. While this may only be a bounce from severely oversold levels(JGB yields were - 0.04% at the recent low), it could be the bond market signaling an end
to the global growth scare. If long yields continue to rise faster than short yields (i.e., asteeper yield curve), that would suggest that better growth is on the way.
We’d thought there would be another downdraft in long-term interest rates by midsecond quarter as earnings guidance and reports get downgraded from slower world
growth. Recent higher yields may only mean that bond investors are getting caught up
in the exuberance of the colossal post-Christmas stock market surge. We’d still position
for lower yields until May, after which we think long yields will move higher into yearend.
Downdraft or no, long-term safe-haven yields must surely push higher as central banks
continue to bring policy rates toward normal. Nominal U.S. growth is currently in the 4%
to 5% range and expected to stay there, absent recession. That should ultimately propel
10-year U.S. treasury bond yields up to that zip code sometime after 2020.

当資料中の意見および予測等は作成時における判断であり、予告なく変更されることがあります。
また将来起こりうる事実や見通しを保証するものではなく、実際の実績等はここに記述されるものと大きく異なる場合があります。

Mortgage rates are down. Household formation is looking up. Job growth for twenty-somethings is strong. Wage gains have been
the best in lower wage occupations. Some housing data is perking up, too—pending home sales, homebuilder confidence, building
permits, and mortgage applications. Investment may lighten a bit from its fast 7.0% pace of 2018. But decent revenue growth, 100%
deductibility of capital spending, and faster wage gains should promote healthy investment growth.
All systems go. If this good growth continues through July, it will be the longest economic expansion in U.S. history. After that? Whoknows, but signs of trouble from our proprietary Recession Dashboard are limited. Household debt as a portion of U.S. output is far
below the highs of the last decade. Profit growth is healthy and inventories aren’t a problem. The Federal Reserve (Fed) is no longer
aggressive with rate hikes, and inflation is quiescent. We’re not seeing gross overvaluation in the stock market. No surge in interest rates.
More people are coming back into the labor force from the sidelines. Faster wage growth, along with more hours worked, means total
household income is on the rise—near a robust 5.5% pace. The imbalances or forces that typically bring on a recession just aren’t there.
This economic expansion could last longer than anyone thinks possible.

Market outlook: Is the monster rally over?
Last month, this analyst suggested the odds favored another market downdraft, something approaching December’s lows. Didn’t
happen; stocks kept roaring higher. The S&P 500 Index soared 6.6% in December, 7.9% in January, and 3.0% in February, for a total
18.4% compound gain since Christmas. That’s an amazing run. Of the 46 world equity indices we track, none—not even one—had anegative return since Christmas. Well over half had double-digit returns.
Can it continue? Is this the beginning of another long bull market? Doubtful. Central banks want to unwind the decade of suppressedinterest rates and financial repression they oversaw. Stock and bond markets got used to that low-interest subsidy from central banks
and the volatility in 2018 was the initial adjustment to that new monetary environment. In addition, world growth slowed in 2018 andthe weakness persisted early this year. Markets are likely reflecting too much earnings optimism. Further, it often takes 12 to 18 months
for the full impact of central bank tightening to become apparent. So, the 2018 Fed rate hikes and bond sales have not completely
worked their way through the financial system.
We’d stay cautious a while longer. If the global slowdown really is over, then long-term yields should push higher and central banks
become more aggressive. On the other hand, if growth continues to slow, then the renewed optimism in the stock market is misplaced.
Either way, there’s likely more downside risk and limited upside in the stock market. For bond investors, we continue to suggest shortmaturity, high-quality corporate bonds. For stock investors, defensive sectors like utilities, consumer staples, and healthcare would be
the safest. With U.S. equities and the U.S. dollar likely over-owned after the dramatic outperformance of the last near-decade, non-U.S.
equities and perhaps those in selected emerging markets would perform best.
Long-term: We may be close to the start of a radically new investment environment, one where real estate, value stocks, andcommodities return to the fore after a decade of underperformance. It depends on wage growth. Notice the similarity of improving
labor markets and a pickup in wage growth across major developed economies—U.S., U.K., Eurozone, and Japan. If this trend continues,
central bank worries of deflation will evaporate, and inflation edges toward most countries’ targets. Long-term interest rates will reflect
a little more inflation premium, which is good for financials. Businesses may find some pricing power, which is good for value stocks.
Developed-country stock markets may stay bound within a range for some time as interest rates gradually work their way to morenormal levels. We’ll discuss this more as time goes on.

Economic update: lowdown on the slowdown
We think it’s winding down. Yes, global growth slowed in 2018 and it’s still braking a bit. China decelerated sharply but may pick up
by mid-year. Idiosyncratic problems ranging from natural disasters and protests, to changing auto emission standards, dragged down
activity in Europe and Japan. The U.S. economy resisted the weaknesses elsewhere, but first quarter growth is hiccupping. If official
stimulus in China kicks in, world growth could pick up in the second half. Our forecasts for U.S. economic growth are in the tables at theend of the commentary. The 2020 forecasts assume no recession and a kind of steady state equilibrium of 2.25% to 2.5% growth.
Europe, a trough in the slowdown: European manufacturing activity remains weak as industrial output declined three of the last fourmonths. Surveys signal contraction. The services side of the Eurozone economy, however, is better. Since the peak of last year, surveys
of service sector businesses declined, but not as dramatically as in manufacturing. Consumer confidence fell but remains mostly solid,
likely because the labor market is holding up well. The jobless rate keeps dropping, now at 7.8%, down 0.8% from early 2018 and the

当資料中の意見および予測等は作成時における判断であり、予告なく変更されることがあります。
また将来起こりうる事実や見通しを保証するものではなく、実際の実績等はここに記述されるものと大きく異なる場合があります。

lowest in a decade. This good job news is broad-based throughout the Euro area. That’s why wage gains are picking up and household
consumption is driving growth. Retail sales in Germany rebounded sharply in January.
Is the weakness ending? It may be about over, as we expect Europe to rebound modestly the rest of the year. The European Central
Bank will stay accommodative, likely changing its guidance to no rate hikes this year and restarting its bank lending program. China’s
fiscal stimulus may boost global trade in the second half, supporting Eurozone exports and manufacturing. A healthy labor market andbetter wage growth will boost consumer spending nicely. We look for 1% to 1.5% growth in 2019.
Japan, the expansion continues: Activity stays weak as exports plunged and industrial production contracted for a third straight month.
Corporate profits declined in the fourth quarter as manufacturing companies feel the Chinese slowdown. Further, Japan is part of the
global supply chain that’s being disrupted by the trade dispute between the U.S. and China. U.S. auto tariffs loom for Japan and Europe
as well. The labor market remains a bright spot with an incredibly low jobless rate of 2.5%. The ratio of job openings to the number ofapplicants is 1.63, around the highest since 1974, so there are plenty jobs for workers. However, the growth risk is likely on the downside;
retail sales are struggling and a drop in profits may impact capital spending. Still, we look for 1% growth in 2019.
China, a pause in the structural deceleration: Activity in China may be stabilizing. Our proprietary growth indicator, based on broad
range of hard data, improved somewhat. Total social financing accelerated sharply in January, although there may be some noise
associated with the Chinese New Year. Exports rose significantly but may be biased by the holiday. Business surveys were mixed; theofficial manufacturing index fell further while the private Caixin survey rose a bit. Both still show contraction. Surveys of service sectorbusinesses rose handily, suggesting stimulus has started to stabilize growth already. We look for activity to pick up modestly in thesecond half of 2019.
India, other emerging markets: Easier financial conditions, a pickup in Chinese growth, and a weaker U.S. dollar should translate intoless risk for emerging markets this year versus 2018. Emerging market currencies did weaken in February after surging the prior month.
The Fed will stay on hold at least through mid-year and a pickup in global growth should advance the currencies. Stable to higher
commodity prices should help, too. Risks will vary by country. For example, Fitch downgraded Pemex, the state-owned Mexican oil
company, at the end of January, and bonds from South Africa may be in peril of a downgrade, too. Growth slowed in India in the fourth
quarter to 6.6%. With the manufacturing survey index picking up to a nice 54.3, and the central bank liable to cut rates more, growth
should move up above 7% as 2019 progresses.

当資料中の意見および予測等は作成時における判断であり、予告なく変更されることがあります。
また将来起こりうる事実や見通しを保証するものではなく、実際の実績等はここに記述されるものと大きく異なる場合があります。

Baseline Economic Forecasts for 2019-2020
A. Growth in Real GDP - Qtr-Qtr (% Change, Annualized):

Real GDP

1st Quarter 19
2nd Quarter 19
3rd Quarter 19
4th Quarter 19
Forecast
Forecast
Forecast
Forecast
18,869.8
1.8% 18,987.0
2.5% 19,104.7
2.5% 19,215.7
2.3%2017 Actual2018 Actual
18,050.7
2.2% 18,571.3
2.9%

Personal Consumption Expenditures
Durable Goods
Non-Durables
Services
Gross Private Domestic Invest.
Bus. Fixed Invest.
Structures
Equipment
Intellectual Property Products
Residential Invest.
Change in Inventory
Net Exports
Exports
Imports
Gov't Purchases of Goods & Services
FederalNational Defense
Non-DefenseState & Local
Final Sales of Dom. Product
Final Sales to Dom. Purchasers

13,152.2
1,718.4
2,965.1
8,494.7
3,458.1
2,788.9543.8
1,299.6
950.1
606.8
40.0
-968.62,570.9
3,539.6
3,205.5
1,244.1
757.4
486.1
1,959.9
18,810.8
19,752.8

3.4% 13,248.9
4.0% 1,735.3
3.5% 2,994.3
2.4% 8,545.2-1.9% 3,475.2
3.1% 2,806.5
2.0%
546.5
1.0% 1,302.9
5.0%
961.8
3.0%
611.3
35.0
-974.1
3.0% 2,590.0
2.8% 3,564.1
1.3% 3,214.4
1.5% 1,248.2
1.5%
760.2
1.0%
487.3
1.0% 1,964.8
2.9% 18,933.0
3.2% 19,880.5

3.0% 13,336.4
4.0% 1,750.3
4.0% 3,020.1
2.4% 8,591.8
2.0% 3,500.9
2.5% 2,827.7
2.0%
550.5
1.0% 1,309.3
5.0%
972.4
3.0%
615.8
35.0
-978.4
3.0% 2,608.6
2.8% 3,587.0
1.1% 3,223.4
1.3% 1,252.2
1.5%
763.1
1.0%
488.5
1.0% 1,969.6
2.6% 19,050.8
2.6% 20,002.6

2.7% 13,418.6
3.5% 1,763.3
3.5% 3,042.5
2.2% 8,638.7
3.0% 3,525.0
3.1% 2,852.2
3.0%
554.6
2.0% 1,319.0
4.5%
983.2
3.0%
620.4
30.0
-981.92.9% 2,624.7
2.6% 3,606.6
1.1% 3,231.4
1.3% 1,255.3
1.5%
765.0
1.0%
489.7
1.0% 1,974.6
2.5% 19,166.7
2.5% 20,122.0

12,558.7
1,577.9
2,822.0
8,184.5
3,196.6
2,538.1
517.5
1,183.7
841.1
611.1
22.5
-858.72,450.1
3,308.7
3,130.4
1,196.4
713.8
481.9
1,932.3
17,769.1
18,550.0

3.0%

2.6%

2.4%

2.3%

year-over-year

2.5%
3.0%
3.0%
2.2%
2.8%
3.5%
3.0%
3.0%
4.5%
3.0%
2.5%
2.2%
1.0%
1.0%
1.0%
1.0%
1.0%
2.5%
2.4%

2.5% 12,890.6
6.8% 1,667.4
2.1% 2,901.0
2.0% 8,359.3
4.8% 3,387.2
5.3% 2,714.8
4.6%
543.2
6.1% 1,271.9
4.6%
905.6
3.3%
609.6
45.1
-914.1
3.0% 2,546.6
4.6% 3,460.6-0.1% 3,177.8
0.7% 1,227.8
0.7%
738.2
0.8%
489.1
-0.5% 1,948.9
0.9% 18,507.1
0.9% 19,385.4

2.6%
5.7%
2.8%
2.1%
6.0%
7.0%
5.0%
7.5%
7.7%
-0.2%
3.9%
4.6%
1.5%
2.6%
3.4%
1.5%
0.9%
4.2%
4.5%

Real GDP

1st Quarter 20
2nd Quarter 20
3rd Quarter 20
4th Quarter 20
Forecast
Forecast
Forecast
Forecast
19,326.2
2.3% 19,437.4
2.3% 19,549.3
2.3% 19,662.0
2.3%

2019 Forecast
2020 Forecast
19,044.3
2.5% 19,493.7
2.4%

Personal Consumption Expenditures
Durable Goods
Non-Durables
Services
Gross Private Domestic Invest.
Bus. Fixed Invest.
Structures
Equipment
Intellectual Property Products
Residential Invest.
Change in Inventory
Net Exports
Exports
Imports
Gov't Purchases of Goods & Services
FederalNational Defense
Non-DefenseState & Local
Final Sales of Dom. Product
Final Sales to Dom. Purchasers

13,503.5
1,778.5
3,065.1
8,685.8
3,556.2
2,880.4
560.1
1,332.0
992.9
623.4
30.0
-995.6
2,637.8
3,633.3
3,239.5
1,258.4
766.9
491.0
1,979.5
19,277.2
20,246.2

13,289.0
1,741.8
3,005.5
8,567.6
3,489.8
2,818.8548.9
1,307.7
966.9
613.6
35.0
-975.82,598.6
3,574.3
3,218.7
1,249.9761.4
487.9
1,967.2
18,990.3
19,939.5

2.6% 13,589.0
3.5% 1,793.9
3.0% 3,087.8
2.2% 8,733.2
3.6% 3,587.7
4.0% 2,908.8
4.0%
565.6
4.0% 1,345.2
4.0% 1,002.7
2.0%
626.5
30.0
- -1,009.4
2.0% 2,650.8
3.0% 3,660.3
1.0% 3,247.5
1.0% 1,261.6
1.0%
768.8
1.0%
492.2
1.0% 1,984.4
2.3% 19,388.4
2.5% 20,371.3

2.6% 13,675.1
3.5% 1,809.4
3.0% 3,110.7
2.2% 8,780.9
3.6% 3,619.6
4.0% 2,937.5
4.0%
571.2
4.0% 1,358.4
4.0% 1,012.5
2.0%
629.7
30.0
- -1,023.4
2.0% 2,664.0
3.0% 3,687.4
1.0% 3,255.6
1.0% 1,264.7
1.0%
770.7
1.0%
493.4
1.0% 1,989.3
2.3% 19,500.4
2.5% 20,497.2

year-over-year
2.4%
2.4%
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis; Principal Global Investors

2.3%

2.6% 13,761.7
3.5% 1,825.0
3.0% 3,133.8
2.2% 8,828.8
3.6% 3,651.7
4.0% 2,966.5
4.0%
576.8
4.0% 1,371.8
4.0% 1,022.5
2.0%
632.8
30.0
- -1,037.6
2.0% 2,677.2
3.0% 3,714.8
1.0% 3,263.7
1.0% 1,267.9
1.0%
772.6
1.0%
494.6
1.0% 1,994.3
2.3% 19,613.1
2.5% 20,624.0
2.3%

2.6%
3.5%
3.0%
2.2%
3.6%
4.0%
4.0%
4.0%
4.0%
2.0%
2.0%
3.0%
1.0%
1.0%
1.0%
1.0%
1.0%
2.3%
2.5%

3.1% 13,632.3
4.5% 1,801.7
3.6% 3,099.4
2.5% 8,757.2
3.0% 3,603.8
3.8% 2,923.3
1.0%
568.4
2.8% 1,351.9
6.8% 1,007.6
0.6%
628.1
30.0
- -1,016.5
2.0% 2,657.5
3.3% 3,674.0
1.3% 3,251.6
1.8% 1,263.2
3.1%
769.7
-0.2%
492.8
0.9% 1,986.9
2.6% 19,444.8
2.9% 20,434.7

2.6%
3.4%
3.1%
2.2%
3.3%
3.7%
3.6%
3.4%
4.2%
2.4%
2.3%
2.8%
1.0%
1.1%
1.1%
1.0%
1.0%
2.4%
2.5%

Disclosures
Unless otherwise noted, the information in this document has been derived from sources believed to be accurate as of April 2017.
Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do
not independently verify or guarantee its accuracy or validity. Past performance is not necessarily indicative or a guarantee of
future performance and should not be relied upon to make an investment decision.
The information in this document contains general information only on investment matters. It does not take account of any
investor’s investment objectives, particular needs or financial situation and should not be construed as specific investment advice,an opinion or recommendation or be relied on in any way as a guarantee, promise, forecast or prediction of future events
regarding a particular investment or the markets in general. All expressions of opinion and predictions in this document are
subject to change without notice. Any reference to a specific investment or security does not constitute a recommendation tobuy, sell, or hold such investment or security, nor an indication that Principal Global Investors or its affiliates has recommended a
specific security for any client account.
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warranty of reliability or accuracy (including by reason of negligence) arising out of any for error or omission in this document orin the information or data provided in this document.
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herein.
All figures shown in this document are in U.S. dollars unless otherwise noted.
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