Q4 2019 economic commentary: The sky didn’t fall after all
During the latter half of the year, there was so much talk about an impending recession. Now that 2019 is nearly over we can say, in fact, the sky didn’t fall.
“The U.S. economy remains resilient and has been doing just fine, thank you,” says Bob Baur, Ph.D., our chief global economist. “The labor market has been robust. The payroll report for November was way above expectations, with a decent level of new jobs and a huge upward revision of the prior two months’ numbers.”
The U.S. economy remains resilient and is doing just fine, thank you.”
Bob Baur, Ph.D., chief global economist
Even the much-talked-about inverted yield curve—a fairly reliable recession signal—is no longer negative. (More on that later.)
Recession didn’t come knocking at our doors in the last few months of the year, and we don’t think it’s on its way anytime through 2020.
The good news: wages, jobs, consumer confidence
There are some positives centered around a healthy United States job market, which is a stabilizing factor for the economy.
- We continued to add jobs. The unemployment rate is at a 50-year low and jobless claims remain ultra-low at 3.5% (the lowest since 1969). The broadest measure of unemployment includes discouraged and part-time workers who want full-time jobs, and that’s dropped to 6.9%, the lowest level since 2000.
- Hourly wages are up more than 3%. The continued fall in unemployment suggests there could be more wage gains in the pipeline.
- Job growth and wage gains have been the fastest among the lowest wage-earners. This ultra-long period of job growth has benefitted lower-skilled workers. The unemployment rate is at a record low (4.8%) for people without a high school degree—down from a recessionary peak of nearly 16%.
- As new workers enter the labor force, another positive is the number of workers on disability falling after a continuous climb for nearly 3 decades.
- Consumer spending remained robust due to the strong wage gains and an excellent job market. Americans have kept things humming along by opening their wallets for durable goods (cars, appliances, etc.). With solid income growth, people can more likely make purchases without pulling from their savings.
Households are generally in good shape and consumer confidence remains high. If layoffs stay low and the labor market stays healthy, consumers will likely keep the U.S. economy percolating.
There were other positive signs, too, in the last few months of 2019.
- Housing activity is flourishing, with new housing construction and building permits trending up as consumers take advantage of low mortgage rates. Home builder confidence also moved to the highest level in 20 years, which is a good measure of the health of the housing market. Likewise, when housing is doing well, homeowners tend to feel more optimistic because the value of their home is increasing. They feel wealthier and are more likely to spend money—which helps the economy along.
Q4 2019 economic signals
Student loan debt
Seven-year auto loans
Trending down:Unemployment rates
Workers on disability
- Bank loans are expanding nicely. Consumer and business borrowers with good credit are generally able to get loans.
- The household savings rate is elevated to levels not seen since the early 1990s. Of course, wealthier households save the most, by far. When you have more savings, it can be easier to absorb a job loss, if that occurs.
- Household debt isn’t out of control. In the last economic expansion, consumers built up a lot of debt. Once again, people have been borrowing for things like houses, cars, and degrees.1 But today, what consumers earn has grown faster than the loans they’re taking out.
More concerning: auto and student loans
Not all consumer debt-related news is sunshine and roses: Student and auto loans are increasing as overall shares of household debt. Both have increased relative to income since the financial crisis.
Seven-year auto loans have been steadily rising throughout this expansion and are 31.5% of all auto loans.2 Longer-term loans are a way people can afford pricier cars with lower monthly payments. Just know that the longer the loan term, the higher the risk of default. (One bit of good news: The share of subprime auto loans is down from its 2015 peak.)
While auto loans are at a mid-2000s level of share of household debt, student loans are at a near-record share,3 which means young people may delay home ownership as they pay off student loan debt. If you have a teen headed to college, make sure you understand student loan debt and how much you can afford to spend.
Why is it a concern? People may be more likely to be delinquent (or in default) on student and auto loans when the U.S. economy contracts again. Bottom line: It may be hard to get a loan if you don’t have great credit. Banks are already making it a bit harder to get auto loans and credit cards.
About that worrisome inverted yield curve a few months ago …
You may have seen the term “inverted yield curve” in headlines (a lot) this year. It’s when short-term bonds have a higher yield compared to longer-term bonds. Economists typically think of it as a predictor of an upcoming recession—usually within 6 months to 2 years.
The curve did “invert” for 4 months, but now it’s more normal again. Investors breathed a sigh of relief. While it might not happen soon, the risk for a recession may be higher when we move into 2021.
“The fly in this so-far sweet-smelling ointment is corporate profits,” Baur says.
Surprisingly, U.S. profits have been mostly flat since 2014.3 As employee compensation rose (up 28% due to wage and benefits growth), it outstripped the 16.5% rise in revenue.
The fall in profit margins better explains the 2019 plunge in business leader confidence rather than trade uncertainty. To capitalize on low interest rates, corporations have built up a lot of debt. As a percentage of Gross Domestic Product (GDP), total corporate debt has reached record highs.
Baur says the trend in corporate profits is a little worrisome. If companies don’t feel confident about their bottom line, they may pull back on investments (like new buildings, software, computers, etc.), slow their hiring, or even lay off workers. So far, layoffs remain extremely low, but we’re watching corporate profits carefully.
Looking ahead to 2020
- We’re anticipating a pickup in world growth in mid-2020 or beyond. That bump in growth could mean a modest but erratic upside for the U.S. stock markets. Meaning, 401(k)s may do OK next year, but volatility isn’t going away. (After the banner year we’ve had in 2019, don’t assume the same strong returns in 2020.)
- In the U.S., we think we’ll see 2–2.5% growth through mid-2020, with a mild slow-down possibly in the second half of the year.
- In the markets, large cap U.S. stocks may outperform smaller companies, which can be more vulnerable to margin pressures.
- The U.S. Federal Reserve (Fed) will likely allow inflation to run above target for a while.
- On October 31, the Fed cut interest rates for the third time since July. “We expect fed funds to stay on hold through 2020 and certainly no rate hikes until pigs fly or after the next recession, whichever comes first,” Baur says. Mortgage rates may increase slightly, but not much.
What can you do?
Make sure this year’s market volatility hasn’t bumped your portfolio out of balance.
When markets move up and down, your balance between stocks, bonds, and other investments may get out of whack. It could be time to make sure your mix of investments still matches your long-term financial goals. Log in to look at your latest statement to see if the mix of investments is still right for your risk tolerance. If not, you could “rebalance” by moving some money around to align with your original mix.
Get help from a financial advisor.
When the markets get bumpy, call your advisor with questions or get their recommendation on how you should handle your money. If you don’t have a financial advisor, find one near you.
An alternative is to work with a robo-advisor, which helps take the emotion out of investing by auto rebalancing your portfolio.
1 Household debt statistics are from the Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit, Q3 2019.
2 NPR, compiling Experian data on car loans, October 2019.
3 The Wall Street Journal compared National Income and Product Accounts (NIPA) and S&P profits, October 2019.
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