Monthly Insights: October 2019

Month after month, year after year, the economy keeps chugging along. The longest economic expansion in U.S. history continues to astound many doubters. There are certainly reasons to doubt this expansion. On any given day there is an abundance of dissenters avowing why the current state of affairs is really different than what our experience is telling us. Up until now it has been hard to give much credit to the ever-present doubters. But, one day the doubters will be right. Even a blind squirrel finds a nut sometimes.

If We Are Not There Yet, Where Are We?
In many respects the U.S. economy is now fighting an uphill battle, giving more credence to the doubters. It’s like we are running the last mile of a marathon, but we now have five-pound weights around our ankles. The Federal Reserve is in the process of removing some of the weight by lowering interest rates, but the largest weight emanates from the escalating trade war between the U.S. and China. This is a self-inflicted problem. We put the weights around our ankles, and it is causing a near-term economic slowdown. In the end it could make us stronger. However, there comes a point when the weight becomes too much to bear and unless removed, we cannot move forward any longer. That is when a recession may become inevitable.

Recession Watch
We have not crossed that line yet, but the line gets closer every month. The manufacturing and agriculture sectors have absorbed most of the trade burden up until now. In fact, the latest Institute for Supply Management (ISM) report on Manufacturing PMI showed the manufacturing sector in contraction, the first time since 2016. Make no mistake, the sustained (and escalating) trade war is having real impacts on the economy.

While not encouraging, manufacturing is only a small part of the U.S. economy. If isolated it is probably not enough to bring down the whole economy. The key is whether or not it spreads to other parts of the economy. The strongest economic readings – the service sector, consumer confidence, and the employment environment – all remain strong, but not as strong as last year. Cracks in employment are surfacing, confidence is waning, and the service sector is cautious, meaning these are all areas to focus on going forward, but they are not yet flashing red.

Economic Dashboard Remains Positively Tilted
Three reds on the Economic Dashboard will be our warning that a recession may be inevitable, and we’ll want to buckle up for bumpy roads ahead. For now, we have only posted one red and three yellow indicators, meaning it is not time yet.

Allegiant Private Advisors Economic Dashboard Portrait October 2019

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