Happy fall! For those of us that enjoy college football, this is one of our favorite times of the year, while I know others are wanting summer to stick around longer. Now that the third quarter of 2019 is over, I thought I would recap some of the economic information that we have witnessed so far this year.
There is (almost) always a confusing set of economic data coming out, some indicating economic expansion, while others pointing to a contracting economy. When picked up by news or other market commentators such data is often spun into convenient 40 second sound-bites that fit into a narrative or time slot that the media business is looking to fill. I say “media business” intentionally as we do need to remember that whether one consumes news and information from Facebook or social media, or more traditional television or print media, nearly every outlet is a for-profit model looking to grow their audience, place ads and keep their audience tuned-in. None are fiduciaries tasked with the legal responsibility to act in your best interest, mitigate/eliminate any potential conflicts of interest, or disclose their compensation arrangements. (Recall that all those fiduciary duties DO APPLY to us.)
I am mostly optimistic about the future. While this optimism could be considered a bias, I feel the news media spends an inordinate amount of time on the negative side of stories. Even though generally optimistic, below I have started off with some economic challenges we face, as well as some bright spots in the economy, to give you a sense of how we are viewing our current economy and investment landscape. As investors, we don’t just want to look for news or data points that confirm our existing views, but rather be open to all sources and weigh the relative merits/importance of each piece when making decisions.
Economic Challenges:
- Global trade wars continue unabated, with rhetoric high, amid a slowdown in Europe and China and ongoing political turmoil in the US. Britain is set to exit the European Union with no plan and Germany may officially enter a recession this year, according to their central bank.
- The European Central Bank (ECB) recently announced a new round of Quantitative Easing, purchasing bonds to inject funds into their banking system to spur growth.
- Profit margins of US companies have slowed in the first quarter, as many US firms experienced rising costs.
- US Rail Shipment volumes are down about 3.2% through August 2019, reflecting uncertainty across many industries with the ISM Manufacturing Index declining to 47.8 in September (levels below 50 indicate contraction).
- The yield curve has become “inverted” at times, meaning short-term interest rates were higher than certain longer-term interest rates. This inverted yield curve is often a pre-cursor to recession. Gold has also rallied this year, often a place investors flock to during uncertainty.
- The dollar remains high, making exports difficult for US firms.
- Among US corporations, debt levels of the lowest investment grade firms have mushroomed and are now higher than before the last recession, a troubling sign.
Economic Positive Signs:
- The US job machine continues, with 136K non-farm jobs filled in September, and an unemployment rate of 3.5%.
- With strong employment, consumer spending has remained robust, and GDP overall expanded at a 2% annual rate during second quarter.
- Inflation remains muted, mostly sub-2%, while interest rates have declined. This has precipitated a 7.1% gain in new home sales for August 2019; existing homes were +2.5%.
- Corporate profits increased 3.8% in the second quarter of 2019, rebounding strongly after the first quarter’s decline.
Many of the challenges are real, however some are perceptions based on surveys, and not in and of themselves actual data points. Economics is an inexact science, but we believe the data above illustrates that our “economic glass” is at least half-full. The economy won’t grow forever, but with low unemployment and other factors we believe the most likely scenario is for continued growth.