Monthly Insights: May 2019

It is easy to get wrapped up in the daily up and down minutia of the never-ending news cycle. However, examining the economy with the bigger picture in mind, not much has really changed. This economic expansion has consisted of very slow, somewhat anemic, growth. Stronger economic growth in 2018 was the exception, not the rule. However, it appears last year’s strength was only a pulling forward of economic activity, rather than a real expansion of demand. The current slowdown of activity is proof positive that the economy has not fundamentally shifted toward stronger growth. 

At initial glance the first quarter GPD report released this month showed higher than expected growth at 3.2%. However, much of this was due to an unsustainable, and easily reversible, expansion of inventory levels, due to future trade tariffs. (Click here for a more detailed breakdown of first quarter GDP in a recent Feature on our website.) Higher than normal government expenditures at the state and local level also fueled growth. Finally, the largest boost came from net exports, as imports declined and exports grew. None of these are sustainable, and the impacts will most likely unwind over the coming quarters. In fact, excluding these items, the growth in business and consumer expenditures was the weakest in a while. Once again, this appears to be a case of the headline number not telling the true story of the underlying economy. 

AllegiantPA Economic Dashboard Portrait May 2019Our big concern from a couple months ago - the inverted yield curve - appears abated, at least in the immediate-term. The Federal Reserve’s about-face provided the confidence boost markets needed. However, with the Federal Reserve essentially on pause for the remainder of the year, the health of the yield curve will depend solely on long-term rates. Any rising concern, whether it be the health of the economy, trade negotiations, or corporate earnings, could easily re-invert the yield curve. For now though, we remain on watch knowing how quickly the tides can turn. The yield curve indicator remains yellow on Allegiant’s Economic Dashboard. 

The other yellow indicator on the Economic Dashboard, the year-over-year change in consumer confidence, remains an area of weakness, statistically speaking. While the absolute level of confidence remains high, a decline in confidence, whether from a position of strength or weakness, can have ominous effects on the economy. In many respects we are starting to see a reversal of the trend from 2018. Last year’s soft economic data (expectations-based) registered very strong, while hard economic data (real economic data) did not support the euphoric attitude. This year the soft economic data has weakened more than the hard economic data, meaning the economy may not be as bad as it feels, at least not yet. 

In the end, not much has changed. Most signs point to the economy being in the latter innings of an economic expansion. Economic growth is slowing, corporate earnings growth is slowing, and markets are once again looking more expensive. There are important issues to resolve, none bigger and more immediate than trade negotiations. The final outcome of the negotiations with China has the potential to extend this expansion a few years or be a catalyst for the next recession. As I wrote at the beginning of negotiations, tensions will most likely rise before they get better, but odds are they do get better. The real question is, how much damage is done to the economy in the interim and is U.S. economic growth strong enough to endure? For now, the signs are pointing to slower growth in 2019, but not zero growth. 

If you would like to see more data and charts about the economy and various financial markets, please see our Monthly Insights book.

Benjamin W. Jones, CFP®, AIF®
President, Chief Investment Officer, Principal