It can’t get a whole lot better in the U.S. job market (or can it?). The employment situation continues blast through expectations. The number of Americans losing their jobs and applying for unemployment benefits each week remained near a 49-year low in mid-October, suggesting no visible deterioration in the U.S. labor market.
Initial jobless claims, on measure of layoffs, dropped by 5,000 to 210,000 in the seven days ended Oct. 13th. While new jobless claims edged up by 2,000 to 211,750, they have been below 220,00 since early July, a remarkable stretch last duplicated almost a half-century ago. The number of people collecting unemployment benefits, meanwhile, fell by 13,000 to 1.64 million. These “continuing” claims touched the lowest level since Aug 1973.
Additionally, Job Openings just hit a record high and the U.S. Unemployment rate has fallen to a 48-year low while hiring remains robust. The demand for labor is so strong it’s pushing up the cost of worker compensation and giving an economic growth cycle that’s now more than nine years old the staying power to become the longest expansion ever.
Last quarter we noted the possibility the economy would slow down because of the potential impact of the trade war and we have been proven correct. Businesses are taking a wait-and-see approach to capital spending. There were other factors at work as well. Specifically, the residential housing market has cooled off considerably. Rising interest rates and housing values have taken a bite out of consumers appetite to purchase new homes.
Having said that, the Fed recently announced inflation and interest rates were close to being at their stated target of 2% which implies they are now going to take a more measured approach to raising rates further. As mortgage rates stabilize and a new norm establishes itself in the housing market, we should see consumers come back into the market and construction spending will resume its upward trend.
Global economic growth continues are a slow but steady rate. There are lingering risks, however. The trade war between the U.S. and other countries continues. How that plays out remains to be seen. Geopolitical concerns continue in Europe. The eventual outcome of the United Kingdom’s exit from the European Union is an unknown. Additionally, Italy is amid a potential financial crisis with its high level of debt, weak banks, erratic government and sizable economy.
Here is a summary of some important economic indicators, showing historical information and areas of potential risk that could threaten the economic recovery in the U.S.A.
Retail Sales – Sunny. Retail Sales continue to show growth but at a slower rate than in previous quarters. Retail Sales are up 5.9% from year ago levels. 10 of the 13 major retail categories show month-over-month increases which bodes well as we move into the holiday season.
All-in-all, with the consumer representing 75% of GDP, we believe they will steadily propel economic growth through 2018 and into 2019.
Wholesale Trade – Partly Sunny. US Wholesale Trade is growing at an accelerating rate for both Durable and Non-durable Goods aided by the corporate tax cut. Wholesale Inventories rose 5.1% YOY in September. Historically, this metric has averaged just 0.39%.
Key risks include government policies (i.e. the trade war, global trade agreements) disrupting global economies. While we continue to expect growth in this metric into 2019, we expect to be much slower than previously thought.
Manufacturing – Sunny. Total manufacturing production during the 12 months through August is up 2.3% YOY. Activity has been above the year-ago level through much of the manufacturing sector. Continued growth in new orders, albeit slowing, drove increases in business investment.
We expect continued growth through 2018 assuming the trade war does not escalate.
Interest Rates – Sunny. In September, the Fed raised interest rates by 25 basis points to the current level, the highest recorded since April 2008. The economy is strong and but not at levels that would indicate it is overheating.
While the Fed will continue to raise short term rates, we anticipate the rate of change will now slow to a more moderate pace.
Capital Goods New Orders – Sunny. New orders during the 12 months through August were up 8.3% on a year-over-year basis. Overall new orders for durable goods, those items ranging from toasters to aircraft (items meant to last more than 3 years) surged 4.5% in August. Business spending on equipment has steadily risen since the fourth quarter of 2016.
Leading indicators continue to suggest a potential slow down later in the year, but that has yet to materialize. Assuming the tariff tiff abates, we anticipate this metric will continue to improve through the end of 2018 and into 2019.
Construction – Partly Sunny. The housing market is slowing down. Permits for New Construction fell 5.7% YOY and Existing Home Sales are down 4.1%. On the other hand, Non-Residential Construction is up 1.9% from year-ago levels with Warehouse Building Construction up 21.6% YOY.
The headwinds include rising interest rates and material prices, rising home values and continued weakness in the supply of new homes. Tailwinds include a very strong economy, still favorable market fundamentals for commercial real estate and greater federal and state funding for public works.
Even with these headwinds, we anticipate construction will recover into 2019.
International – Partly Sunny. The world economy, while strong, is showing signs it may have peaked. The World Economic Outlook (WEO) maintained its’ 2018 global growth projection at 3.9%.
In the Eurozone, growth projections have been revised downward due to negative surprises to economic activity. Employment growth, however, has been running at the highest rates seen in the last 20 years, a positive indicator for potential 2019 economic growth.
In the Asia/Pacific region, China reported 6.8% growth showing remarkable stability. However, any escalation in the trade war may reverse this very quickly. In fact, the trade war appears to be harming the Chinese economy more that the U.S. economy.
Emerging Markets continued to see better than expected growth mainly due to solid domestic demand and strong labor markets.
Global economic growth continues at a steady rate despite lingering trade policy uncertainties, pockets of political instability and tighter financial conditions.
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