With the mid-term elections approaching, an ongoing tariff war with China, and an apparent soft patch in Europe, we continue to ask ourselves the question of whether we’re on track for the longest expansion in U.S. History or at the end of the road.
To help answer this question, we look at various economic data points to understand the US economy’s trajectory. During the month of June, we saw robust employment gains in the US with 213,000 new jobs. Coupled with the growth in jobs, US wages increased at 2.7% in the last twelve months. Following employment and wage gains, we’ve observed impressive retail sales, indicating that the US consumers are alive and well.
Consumer confidence also continues to sit near its highs, indicating that the strength in consumption is likely to continue. Interestingly, consumer confidence and consumption remain strong while the Bureau of Economic Analysis reports that the U.S. savings rate is higher than expected. We view this a positive for the US economy and its continued expansion. In some instances, we view an increase in the savings rate as a bearish indicator. However, in an environment where we see consumer confidence high, wages outpacing inflation, consumption increasing, and an increased savings rate, we believe the increased savings rate indicates that the U.S. consumer is being more financially responsible. Further, we believe this can help provide a buffer to future economic shocks.
We also continue to see Small Business Optimism near the highest levels it’s been at in the last 20 years. High levels of business optimism should be good for capital expenditures, which should in turn be good for economic growth, employment, and further wage growth. Also supporting our view on expected increases in capital expenditures are the rise in shipments of durable goods and the increase in new orders. Corporate America has amassed significant capital over the last decade, and the deployment of this capital can help support continued expansion in the US economy.
Another positive is that inflation continues to be contained. One of the Federal Reserve’s key measures of inflation, the Core PCE Index, is up 1.9% year over year. This is in line with the Federal Reserve’s target, and more importantly to us, it is below the 2.7% wage growth we’ve seen here in the US. Disposable incomes and consumption should remain stable and even increase moderately as long as wage growth continues to outpace inflation.
And lastly, while the talk of trade war has been significant, the actual policies enacted thus far have had little negative impact on the U.S. and global economy. Further, there is talk of a compromise between the U.S. and Europe, as well as between the U.S., Canada, and Mexico. China will take longer, but we ultimately expect these two nations will also find a mutually acceptable compromise.
Categories: Monthly Market Commentary