We checked in with our friends at Strategas and thought it would be helpful to pass on their mid-month update.
We look to have passed the point where economic pain is starting to force (global) policy changes. It’s the chain of: global trade => mfg => profits => future biz spending (including jobs) that we remain focused on. Stall-speed economic growth & weak earnings are consistent with restrained investment & investment plans. The “I” part of the GDP=C+I+G equation is likely to remain tepid. That limits the upside for the economy. Central bankers have noticed over the course of 2019. Now politicians seem to have noticed.
The U.S. economic data continued to show evidence of a slowdown last week. The U.S. leading economic indicator (LEI) declined -0.1% month-over-month in September. After a strong 2Q, consumer spending is slowing. U.S. retail sales fell -0.3% month-over-month in September. Industrial production fell -0.4% m/m (partly due to the GM strike). Housing starts fell -9.4% month-over-month in September Initial jobless claims ticked slightly higher to 214,000 last week.
A U.S. recession is still not our base case, however. The Philadelphia Fed index declined to 5.6 in October, from 12.0 the prior month. But unfilled orders in the Philadelphia survey moved higher (not consistent with recession), and the New York Fed survey rose slightly month-over-month in October. The NAHB housing market index rose +3 points to 71 in October. Mtg apps for purchase have been trending higher. Single-unit housing starts rose (despite the decline in overall starts) in the last report.
There are numerous global events where investors are still jumping headline to headline (Brexit, U.S./China trade, oil supply disruptions). But for what it’s worth, against a backdrop of stalling global economic readings (e.g., China GDP slowing to 6% last week) the ability to avoid additional shocks continues to help the muddle-thru growth (i.e., no recession) case.
Last week there was again some modest hope, even though Brexit may require another extension. There was optimism on the U.S./China trade “mini”-deal. The GM strike also may be close to ending. The U.S./Turkey sanction discussion ended quickly. True, geopolitics have not de-escalated in all geographies (e.g., oil price volatility due to Middle East tensions). But expectations have already been reduced in many cases.
With inflation still low, there’s room for monetary policy to get a bit more accommodative. The University of Michigan 5-year forward inflation expectations survey hit a new cycle low in early October. Market-based measures of forward inflation expectations also have trended lower. We continue to believe an October cut in the fed funds rate of -25 basis points would make sense, though there will be some pushback from the hawks (so it’s not a done deal).
With interest rates lower, U.S. M2 has accelerated. We have a liquidity-driven market. As we noted last week, the U.S. consumer is running in part on asset price gains. Asset price gains are supported by 1) tax cuts and 2) low interest rates. Until that changes, our view on the U.S. consumer should stay slower, but positive The U.S. consumer can likely continue to grow moderately as long as: a) firings don’t pick up; b) the stock market doesn’t crash; and c) home prices trend up. Wealth effects remain a key swing factor.
Please call me with any questions or comments at 804-774-2087 or send an email to Jesse.Ellington@MiddleburgFinancial.com.
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