U.S. Economy: Full Speed Ahead, So Far

Written by: Global Thought Leadership | September 14, 2018

Source: Bloomberg, September 13, 2018. Please see Footnote 1 for other data sources. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

THE BOTTOM LINE

  • Growth in the U.S. looks robust coming up on the 10th year since the end of the Great Recession of 2007-2009; the Federal Reserve’s confidence in the economy has grown as well, prompting seven benchmark rate hikes since Dec. 2015, with another two or more hikes likely this year.
  • Yet investors are starting to worry about when it might end, especially given the flattening of the U.S. yield curve which began in mid-to-late 2017.
  • However, some key economic statistics surrounding the last two U.S. recessions, the signs of a slowdown in progress are largely absent.
  • Personal income, non-farm payrolls, and manufacturing and trade sales are all trending upward along with the overall economy as measured by Gross Domestic Product (GDP).1
  • The only exception, industrial production, slowed its growth in 2014-2015 because it includes energy prices; West Texas Intermediate (WTI) crude oil prices fell about 75% between mid-2014 and early 2016 – from $106.30 to $26.50 – before recovering to its current level of $68.87.2
  • All this is good for stocks, supporting the continuing earnings growth that have underpinned equity markets since the March 2009 beginning of the current bull market.
  • That’s not to say trees grow to the sky; any of these measures could turn as a result of outside forces, such as a global trade slowdown, international political trouble or so-called “unknown unknowns”. But so far, the wind is at the back of the U.S. economy.
  • What explains the difference between the curve and the other data? First, it’s important to note that the curve signal has not actually been sent.  It’s the actual inversion of the curve – when short rates are above long rates – that’s the definitive signal. With Fed Funds at 2.0% and the 30-year at about 3%, it would take several more Fed hikes, a rapid rise in demand for 30-year Treasuries, or both to bring that about.
  • Second, even when the curve actually inverts, history suggests – but doesn’t require – that recession would be another 12 to 18 months ahead.
  • The bottom line: economic growth, and its support of future earnings for stocks, continues strong, and shows little sign of faltering – with the much-discussed yield curve signal still quite a ways away.
  • For more on current economic signals[, explore ClearBridge Investments Recession Indicators Update: Money Supply.

1 Sources: Personal Income: National Bureau of Economic Research; Nonfarm payrolls: Bureau of Labor Statistics; Industrial Production: Federal Reserve; Manufacturing and Trade Sales: U.S. Census Bureau; GDP: Bureau of Economic Analysis.

2 All prices Source: Bloomberg, September 14, 2018, 7:30 AM – 12:00 PM ET, or on their respective indicated dates.

 

[1] All prices Source: Bloomberg, September 14, 2018, 7:30 AM – 12:00 PM ET, or on their respective indicated dates.

 

[1] All prices Source: Bloomberg, September 14, 2018, 7:30 AM – 12:00 PM ET, or on their respective indicated dates.

 
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