Bullish Factor #2: Services and the U.S. Consumer matter most, not Manufacturing Markets got rattled in early October when the Institute for Supply Management released manufacturing data for September. The numbers showed manufacturing contracting on all levels, employment, factory activity, exports, and new orders. In short, the U.S. manufacturing sector is in recession. While that sounds like a big deal, folks should note that manufacturing only accounts for 10% of U.S. GDP. If the rest of the economy is expanding, weak manufacturing numbers may not actually spell doom-and-gloom. Services are what make up a majority of the U.S. economy, accounting for around 70% of total output. The U.S. consumer falls within the services realm. It follows that if manufacturing is contracting but services and consumption are expanding at a healthy clip then the U.S. economy is probably on reasonably firm footing. The Institute for Supply Management’s Non-Manufacturing Index (Services) for September showed the U.S. services sector firmly in expansion mode. Any reading over 50% signals expansion, and we saw the Business Activity Index at 55.2%, the New Orders Index at 53.7%, and the Employment Index at 50.4%. As you can see in the graphic below, the output indices (green bars) for the major services sectors in the U.S. economy—Consumer Services, Consumer Goods, Financials, Technology, Materials, and Healthcare—are all comfortably in expansion mode (readings above 50). The firm that compiles this research, IHS Markit, also noted in September that there was a strong expansion in consumer services business activity and that the rate of production growth for consumer goods surged to a seven-month high. From our standpoint, this data does not substantiate the view that the U.S. economy is on the brink of recession. The Engines of the U.S. Economy are Still in Expansion Mode 
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Blackrock recently put it, “for the umpteenth time this recovery, the U.S. household sector appears to be keeping the global economy out of the abyss. The good news: this is likely to continue.” Indeed, the U.S. consumer has been spending at a consistent pace, supported by a strong labor market and modestly rising wages (+3.2% year-over-year). Job growth as measured by non-farm payrolls showed that the U.S. added 136,000 jobs in September, bringing the unemployment rate to 3.5% which is its lowest level in 50 years. The bottom line as Blackrock points out, is that “it is probably a mistake to bet against the U.S. consumer.” We agree. Bullish Factor #3: Small Businesses are desperate to hire more workers Small businesses, which are often considered a key growth engine for the U.S. economy, have been increasingly reporting labor shortages, where 57% of owners have said they’re hiring or trying to hire. A majority of these business owners have reported finding few, if any, qualified applicants for open positions. This points to strength in economic activity, and also points to a skilled labor shortage in the U.S. (a good problem to have, in our view). A key takeaway from the NFIB Small Business Jobs Report says it all: “hiring has slowed down, but it’s due to the inability to find qualified workers, not because of a lack of customers.” Does this really sound like an economy that is on the brink of recession? “We think not.” |
Bottom Line for Investors The negative news and noise is only likely to continue in the fourth quarter, and we would expect short-term market volatility to persist. It’s always important for investors to remember to “look under the hood” from time to time. See past the headlines and take a look at what the real underlying fundamentals are saying. In our view, they’re saying more growth ahead. |
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