As the current record-setting expansion extends into its tenth year, financial pundits continue to search for signs that the US economy is headed for recession. The drumbeat grew louder in the second quarter of this year as the yield curve, measured by the difference in yield between the 3 month T-Bill and 10 year Treasury, inverted for the first time in the current expansion. While this got our attention, it is important to remember that yield curve inversions have given false positives in the past. It is dangerous thinking to assume this time is different, but negative interest rates in much of the developed world are almost certainly causing displacements in the US.
The November jobs report should go a long way to assuage fears of a slowdown. The US added 266,000 jobs in November, and October employment was revised up from 128,000 to 156,000. The unemployment rate now stands at 3.5%, a rate not seen since 1969. Wage gains were up .2% from last month and 3.1% over the past 12 months. The underemployment rate, the percentage of employees working part-time for economic reasons, fell to 6.9% which is close to the all-time series low from the 2000s. We could see the unemployment rate fall further to the 1950’s lows of 2.5% if the trend continues.
The one damper in the employment report was a downtick in the labor participation rate from 63.3% to 63.2%. Labor force participation could be range-bound for some years to come as Baby Boomers continue to retire. We would argue that the participation rate of the prime working-age demographic, 25-54-year-olds, gives a better picture of the health of the workforce. That rate has steadily trended up since 2015 with 82.8% of the cohort currently employed. For comparison, the high in the series was in the 2000s at 84.6%.
Manufacturing continues to be the weak point in economic data. November ISM Manufacturing came in at 48.1%, the fourth month in contraction territory. There was broad-based weakness across industries, with business sentiment being a key detractor. Uncertainty in US trade policy was the most commonly cited reason businesses gave to delay investments. Total US trade was down 1.5% during October after a -1.6% print in September.
ISM Services pointed to continued expansion in November, coming in at 53.9%. The print came in slightly below expectations of 54.5%, with business activity falling to 50% from 72% in October. This trend bears watching as the numbers have gotten progressively weaker throughout the year. We believe greater trade policy certainty in the coming months will shore up both the manufacturing and services sectors of the economy. Recent strong employment and services sector performance should give the US leverage in negotiating with trade partners in the near term.
Bottom line: The US economy continues to be driven primarily by a healthy consumer. Low unemployment, rising wages, a moderate savings rate coupled with low inflation all point to strong domestic spending. Weakness in business activity and sentiment are likely to shore up in the coming months with greater trade policy certainty. Other developments to watch are weakening European growth, escalation of tensions in the Middle East, societal instability in China and 2020 US elections.
