U.S. equities and the economy are “up to the job”        

Brian Nick

The last week’s market highlights:

Quote of the week:

“The end of daylight savings time: a week of waking up an hour early because kids and pets can’t tell time.” — Unknown   
Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s 4Q 2019 Outlook :
  • U.S. economy: Still seeing signs of growth
  • Global economy: Downward pressure but no recession.    
  • Policy watch: Markets expect more easing  
  • Fixed income: Opt for high quality, longer maturity  
  • Equities: Get defensive, stay invested  
  • Asset allocation: While cautious, still prefer emerging-market bonds    

Wednesday, October 30: Not your average “hump” day 

Fed meetings, which often take place on Wednesdays, rarely share the spotlight with other major central bank gatherings or with U.S. data releases. But last Wednesday was an exception. About five hours before the Fed announced its October policy decision, the U.S. government reported that, according to its “advance” estimate, the economy grew at an annualized 1.9% rate in the third quarter, down slightly from 2.0% in the second.
The headline figure topped forecasts for about 1.6%, largely due to stronger household spending. Housing provided a small, yet welcome, boost. In contrast, key GDP drivers such as trade and investment continued to detract from the overall growth picture, as a weak global economy and rising business uncertainty remained headwinds. Moreover, the effects of the 2018 U.S. fiscal stimulus have nearly vanished.  
So the economy keeps on keepin’ on, extending its longest-ever expansion, even if it seems to be balancing on a one-legged stool propped up by consumers. Of course, such stools are inherently unstable. Without a pickup in business investment to meaningfully increase workers’ productivity, GDP is likely to decelerate further—and we’re already seeing signs of a slowdown. The economy has expanded at a 2% annualized rate over the past four quarters, down from 3.1% during the prior four.5 And with only the consumer segment of the economy currently firing on all cylinders, the U.S. is susceptible to a sudden drop in consumer confidence—a distinct possibility should tariffs increase unexpectedly in the next few months. 
Despite this somewhat cautious outlook, we don’t expect the U.S. to fall into recession in the near term. In fact, looking ahead, we expect modest, 1%-2% GDP growth over at least the next few quarters. Here’s why:
  • Folks are upbeat. The Conference Board’s index of consumer confidence remained at historically high levels in October.
  • Consumers are still opening their wallets. Real personal spending rose 0.2% in September, its seventh straight monthly increase.6 
  • The labor market continues to hum, evidenced by October’s better-than-expected monthly payrolls.
With the GDP report out of the way last Wednesday, all eyes turned to the Fed. As expected, the central bank lowered its target range for the federal funds rate by 25 basis points, to 1.50%-1.75%—the Fed’s third interest-rate cut since July. This decision was considered a fait accompli given worsening U.S. manufacturing data and weaker job creation in recent months.
The path from here is less certain, however. Coming into the meeting, markets were pricing in a 27% chance of a December rate reduction and a 51% likelihood of a further cut by the end of March 2020. Those odds stood at 16% and 52%, respectively, as of Friday afternoon.7
The policy statement accompanying the rate decision reduced expectations of more easing. This statement did not include an oft-repeated reference to the Fed’s acting “as appropriate to sustain the expansion”—a phrase previously seen as tacit assurance that additional easing was forthcoming. Its absence indicates that the Fed may be ready to stop lowering rates. Fed Chair Jerome Powell reinforced this impression in his press conference, saying that monetary policy “is in a good place” and that the current level of interest rates is “likely to remain appropriate” if conditions unfold as the Fed expects.
Our base case was that an October cut would be the Fed’s last—at least for a while. Barring a significant deterioration of economic data, an unexpected increase in tariffs or other escalating trade tensions, we maintain that view.

U.S. economy: An “A-” for October’s job report

Despite concerns that a strike at General Motors and a reduction in temporary workers hired to collect 2020 census data would weigh on the labor market, the U.S. economy cranked out a better-than-expected 128,000 new jobs in October.8 The good news didn’t stop there, though:
  • August (+51,000) and September (+44,000) payrolls were revised upward by a combined 95,000, raising average monthly job gains to 176,000 over the last three months and 167,000 for the year to date. These more-than-respectable totals at this late stage of the economic cycle suggest that the overall pace of job creation slowed considerably less toward the end of summer than we had previously thought.

  • The overall labor force participation rate (63.3%) matched its best level since 2013. Among those 25-54 years old, the rate touched 82.8%, a 10-year peak.9 These improvements should help offset October’s slight increase in both headline (U-3) unemployment, which remained near a multi decade low, and U-6 underemployment.10 (The U-6 rate encompasses both unemployed workers looking for jobs and part-time employees seeking full-time work.)

  • Average hourly earnings for nonsupervisory workers rose at 3.5% year over year, near their strongest pace of growth in the current economic cycle. Wage growth for all employees continued to track at 3%, a decent rise considering low levels of inflation.11  
All told, we’re encouraged by this jobs report. The current pace of hiring is strong enough to support continued slow, steady economic growth, in our view. But it’s also apparent that the fastest pace of hiring for the cycle has passed. Last year’s business tax cuts gave a large, yet temporary, boost to the labor market, which reversed the deceleration in monthly job creation that had been underway since 2014. The extra “juice” initially provided by those cuts has evaporated with time.      
  1. Haver
  2. Haver
  3. Haver (STOXX 600), Eurostat (GDP)
  4. Haver
  5. Bloomberg
  6. Haver, BEA
  7. Bloomberg
  8. BLS
  9. Haver
  10. Haver
  11. Bloomberg
This material is prepared by and represents the views of Brian Nick, and does not necessarily represent the views of Nuveen LLC, its affiliates or other Nuveen staff.
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