Paraphrasing an old adage, the economic expansions do not die of old-age and the current expansion, even though it has become the longest in the U.S history, is in no danger of ending anytime soon. Another old adage is that the stock market is not the economy and the economy is not the stock market, however, they usually track each other quite well, which means that the U.S. stock market can continue to make more all time highs.
The U.S. Economy Is Showing Signs of Fatigue
The U.S. economy is still expanding but the rate of expansion has slowed down. At the end of June 2019, the five major economic indicators of the U.S. – employment, industrial production, retail sales, real disposable income and real per capita GDP are still trending higher (Figure 1). However, their year-over-year rate of change is slightly diverging from the trend 9-10 months ago.
The real disposable personal income (purple line in Figure 1) has regained its baseline trend following a dip in 2012-2013. The retail sales (green line) are up trending since the end of last recession in 2009 though it hasn’t achieved the baseline trend. The same is true for non-farm employment (maroon line) and real GDP per capita (turquoise line) and they have more to catch up with the baseline compared to the retail sales. Industrial production trended up for few years after the end of the recession and then faltered in 2014 before resuming the uptrend.
The Figure 2 shows that all is not that well for these major indicators. Their year-over-year growth rate has been slowing down since September 2018 and is below the 10-year average. The YoY rate for the retail sales even dipped below zero in December 2018.
The industrial production growth (blue line in Figure 2) peaked in September 2018 and since then it is declining. The YoY growth is still positive but the monthly growth has been negative for three out of last four months. The same is true for the retail sales (purple line). It’s YoY growth rate peaked in January 2015 and has been mostly declining since. It’s monthly growth rate declined three times over last five months.
Status: Big Five Are Healthy But Slowing
- Per Capita GDP: Rising since 2009 but hasn’t attained the pre-recession baseline trend
- All Employees: Increasing since 2009 but not yet at the baseline level; YoY growth slowing since January 2019
- Industrial Production: Healthy but much below the baseline and YoY growth slowing since September 2018
- Retail Sales: YoY growth lower than August 2018 levels but rising since December 2018
- Real Disposable Income: Approaching pre-recession baseline level but YoY growth is declining since December 2018
Employment Remains Healthy But Only Barely
The employment level is still increasing. The Civilian Employment is 15.0% higher from January 2000 levels (See Figure 3). However, almost all of that gain continue to come from 55-64 year old group, which has increased by 92.9% by Q1 of 2019 as compared to 2.5% increase for 25-54 year old group.
The Labor Force Participation Rete (LFPR) has fallen from 66.9% in Q3 2000 to 62.8% in May 2019 which is equal to that of Q2 2018 but higher than that of Q3 2015, when it was 62.5%.
The Weekly Unemployment Claims continue to fall (Figure 4) and are at historically low levels. The 4-Week Moving Average remains near 215K zone and indicates that the trend is not in any danger of breaking. The Unemployment Rate is at 3.6% and below the short-term Natural Rate of Unemployment, which is at 4.6% for Q2 2019.
The Average Hourly Earnings are also rising on year-over-year basis. It was 3.6% in April 2019 compared to 2.77% in June 2018 (see Figure 5). The average hourly earnings growth is getting in its historical range commensurate with the unemployment rate. In April 2000 the unemployment rate was 3.8% and the earnings increased by 3.88%. In June 2000 the unemployment rate was 4.0% and the earning growth was 3.86%.
Non-Farm Employment Remains Tight Despite Hiccups
The Non-Farm Employment increased in June 2019 by +224K, which was higher than the consensus expectation of +162K and prior months +72K. The unemployment rate ticked up to 3.7% after staying at 3.6% for the past two months.
The employment count for May was revised down to +72K from +75K. The count for April was revised down to +216K from +224K, which was earlier revised down +263K. The count for March was revised down to +153K from original +196K
The three-month average jobs-gain is 171K compared to six-month average gain of 174K and nine-month average gain of 182K, indicating a deceleration of employment gains, which was also the case last month.
The 3-month average employment change is in its lower range since October 2012 (see Figure 6). The 12-month Total Employment change has fallen to 2.18 million from 2.21 million, it slowest level since February 2018 (see Figure 7).
The non-farm payroll numbers are from employer survey and as Betsey Stevenson, a former member of the President’s Council of Economic Advisers and an academic economist at University of Michigan, noted in one of her tweets, that the household survey shows that the employment increased by only 64K since January 2019.
The industries with greater unemployed persons in June 2019 than in June 2018 are Mining, quarrying, and oil and gas extraction (24K vs. 23K), Durable Goods Manufacturing (285K vs. 268K), Transportation and utilities (272K vs. 232K), Professional and business services (650K vs. 562K), Government workers (707k vs. 685K).
Employment Status: Slack Remains
The U.S. employment remains healthy with very low unemployment. The LFPR is increasing but still much below the 2000 level. The slack remains as the earning and wages are not rising at a level that is, historically, commensurate with the unemployment rate
Inflation is Benign and Wage Growth is Stalled
In June, average hourly earnings for all employees on private non-farm
payrolls rose by 6-cents to $27.90, following a 9-cent gain in May. Over the past 12 months, average hourly earnings have increased by 3.1% and the average hourly earnings of private-sector production and
non-supervisory employees increased by 4 cents to $23.43 in June. The average workweek for all employees on private non-farm payrolls
was unchanged at 34.4 hours in June.
The inflation is benign too (see Figure 8). The CPI has been below or near Fed’s 2.0% target for an extended period. The PCE. Fed’s preferred inflation gauge, is within its past 10 years average range. The real earnings are rising but are still marginally higher than CPI.
The CPI increased by 0.1% in June 2019 and 1.6% YoY, which is less than 1.8% YoY increase in May. The Core CPI (all items less food and energy) increased by 0.3% in June, its largest since January 2018, and 2.1% YoY.
- The small increase in prices (inflation) in shelter, apparel and used cars and trucks was offset by price decline in the energy prices
- The food index shows no inflation though dining out increased
- The food index increased by 1.9% YoY; energy index declined by -3.4% YoY
- The biggest YoY increase was in shelter (3.5%0 followed by dining out (3.1%), medical care services (2.8%0 and services (2.8%)
- The biggest YoY decline was in Fuel oil (-5.6%), gasoline (-5.4%), energy commodities (-5.4%) and utility gas (-2.1%)
Status: Inflation is Benign
- CPI: Still lower than Fed’s target of 2%; YoY increase is falling since July 2018
- PCE: Falling since July 2018
- Weekly Earnings: Rising since October 2017 but still less than inflation
The Yield Curve is inverting. The curve on July 8 is inverted. The yield curve effectively inverted nearly six-month ago (see Figure 9). The spread between the 10-year and 3-month treasury bill has turned negative (see Figure 10), which is usually a harbinger of recession. However, the 10-year and 2-year treasury spread hasn’t yet turned negative (see Figure 11), which means that the recession is not near. The 10-year ills of Germany and Japan are yielding negative returns (See Figure 12). U.K.’s 10-year gilts are yielding less than U.S. 10-year treasury bonds.
Status: Yield Curve Started to Invert
- The yield curve has started to invert
- 10-year and 3-month Treasury yield spread has turned negative
- 10-year and 2-year Treasury yield spread is still positive
The U.S. economy is still expanding and although the pace of expansion has slowed down the signs of imminent recession are not clearly visible on the horizon. The bottom line is that the U.S. economy is doing well but not as well as it was few months ago and the longest expansion in the U.S. history is still not about to end anytime soon.