The US Economy Is Giving Mixed Signals

Commentary

For those of us that try to keep up with current economic activity, it seems like it is getting more difficult trying to figure out where this economy is going. There are both positive and negative factors as we get current readings on the overall health of the economy. I will try to address some of the more significant issues on both sides of the ledger and end on a positive note.

The positives are led by the labor market and the consumer. Let's look at some of the recent findings:

* The labor market remains quite strong. The most recent jobs report for the month of September showed that the economy created 136,000 jobs in September and the months of July and August were revised upward by 45,000 jobs showing an average job creation this year of 161,000. For an economy that is well into its tenth year of expansion, those are still healthy numbers despite the fact they are lower than the 2018 average of 223,000. Last year's numbers were positively impacted by the tax cuts and the deregulation promulgated by the current administration. Further, the unemployment rate dropped to 3.5%, the lowest rate in half a century. Another silver lining is the new job seekers include those that are usually hard to employ. The jobless rate for those without a high school degree fell by .6% to 4.8%. The rate for Hispanic Americans fell by .3% to 3.9%.

* Wage gains were up by 2.9% which is still strong despite being down from the 3.2% in August. The gains for non-supervisory and production workers were up more than those for supervisors.

* The University of Michigan consumer sentiment reading for the U.S. rose to 96.0 from 93.2 reading in the month of September. That was the highest reading since July, amid an improvement in both consumer expectations and current economic conditions.

* As a reminder, the U.S. consumer accounts for 2/3 of the GDP, so as long as their unemployment rate is low, their wages are increasing and their sentiment is positive, it bodes well for the health of the economy.

* The stock market continues to be within reach of all-time highs. As I type, the S & P 500 and the Dow are within 2% of their all-time highs and the Nasdaq is within 3%.

Some of the negatives are as follows:

* The Institute of Supply Management does a monthly survey and the September report jolted the markets when it came in with a reading of 47.8, down from a reading of 51.2 in August. Readings above 50 indicate an expansion of the sector, while those below indicate a contraction. The manufacturing reading was the lowest since January of 2016 and was the first sign of contraction since July of 2016.

* A similar index for the non-manufacturing sector or Services sector showed a sharp decline from 56.4 in August to 52.6 in September. While still expanding, the rate of expansion slowed considerably.

* The manufacturing decline matched those in other industrial countries in the world which can be partially blamed on the trade tensions between China and the U.S. As supply chains are disrupted and manufacturing in some cases is being moved from China to other countries, manufacturing activity is being impacted.

* Global growth in general has been slowing for some time. Places like Germany have actually seen GDP growth decline and may be nearing recession.

So, where are we headed with all of the mixed signals? Honestly, it is hard to tell. I continue to believe the U.S. economy is on fairly sound footing as long as the consumer continues to spend and feel confident about the future. Earlier this year, there was lots of talk about an inverted yield curve, and this phenomenon is often a precursor to a recession. That inverted yield curve has returned to a normal relationship, albeit marginally.

Perhaps the most important thing to happen in recent months is the change of policy at the Federal Reserve. They have once again adopted a more accommodative monetary policy be lowering interest rates. They also stopped decreasing the size of their balance sheet by letting bonds mature. Finally, in recent days they have announced that they are going to buy $60 billion of Treasuries monthly. This will certainly increase liquidity in the system. Maybe more importantly, the change of policy to more accommodative monetary policy should increase the probability that recession can be avoided.

Jeff MacLellan is retired from Landmark Bank. He spent 37 years in banking, and has been tracking local economic indicators since he came to Columbia in 1987.