Recent data indicate that the manufacturing sector is slowing, the service sector is growing slowly, the stock market tanked, interest rates are falling and unemployment is at an historical low. So what’s ahead for the economy?
Last week’s data indicated that economic activity is slowing. The fear is that if growth continues to slow, the U.S. could enter into a recession. That seems like the natural progression, since the last recession ended more than 10 years ago. That’s much longer the average time between recessions. With the manufacturing sector indicating contraction and growth slowing in the service sector, a recession seems inevitable.
Fortunately we are at least two years away from recession.
According to the Institute for Supply Management’s manufacturing index for September, the reading of 47.8, which is below 50, indicates the sector is contracting. However, there was a quirk due to Labor Day falling so early in the month and the GM strike which is entering its fourth week. Most economists forecast the index to rise above 50 by next month.
More worrisome is the service sector which accounts for about 70% of GDP. That index slipped to 52.6, down from 56.4 in August. While the above 50 figure indicates growth, the number is falling and the worry is that it could slip below 50 shortly. Add in the slowing of foreign markets as well as the negative impact of tariffs and it is easy to conclude a recession is coming.
The stock market reacted very negatively to this news. The Dow Jones Industrial Average fell more than 800 points in the two days following the initial release of this data. Many times a drop of this magnitude indicates investors believe that future corporate profits will fall, usually because an economic slowdown or recession is coming shortly.
Even considering all of that, the fundamentals are strong. Consumers purchase more than two thirds of the output produced. Although the confidence index slipped last month, consumers remain very optimistic and confident, which means they are likely to keep spending. And why shouldn’t they?
Wages are rising faster than they have in decades, increasing by more than 3% annually. Inflation remains below 2%, so the wage increases exceed inflation which gives consumers more real purchasing power. In addition, there are more job openings than there are unemployed Americans, so that makes job mobility increase adding to consumer confidence.
Recently released job data indicates that the economy added 136,000 jobs last month. While that’s below the monthly average for 2019, the numbers for both July and August were revised significantly upward. More importantly, the unemployment rate fell to a 50 year low at 3.5%.
Business investment is falling and that’s usually a sign that the economy is slowing. Business reduces investment when corporate profits are low, capital is expensive and/or their expectations for the future are pessimistic. In this case, it is uncertainty about the future that is causing business to be overly cautious.
Corporate profits are strong, after a poor first quarter in 2019. Interest rates are falling meaning that debt will be less expensive. The Federal Reserve realized they made big mistakes in 2017 and 2018 by raising interest 8 times during those two years. Last July the Fed reduced rates by ¼% and then reduced them again in September by another ¼%. Most likely they will drop rates another ¼% before the end of the year.
All of this means that the economy was set to grow by more than 3% this year, but after the Fed raised rates, and pulled nearly half a trillion dollars out of the money supply by reversing quantitative easing, growth slowed. Economic growth exceeded 3% in the first quarter of this year but then slowed to 2% in the second quarter. Preliminary data for the third quarter indicates growth will be in the 2% range.
The presidential impeachment process puts a drag on growth and adds to the overall uncertainty. But consumers are earning more and remaining confident, mostly because their wages and job opportunities are increasing. Business is just waiting for some signs of stability which would come if the trade war with China came to a conclusion. That could happen by year end if the talks scheduled for later this month are fruitful.
The economy is not heading for recession anytime soon. If the impeachment nonsense would end and if the Fed drops the interest rate again, economic growth could easily exceed 3%. If a trade deal is signed with China and free trade grows, the U.S. economy could see 4% growth, which is true prosperity. We haven’t seen that since 2000.
Dr. Michael Busler, Ph.D., is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.
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