There is an old Chinese saying, “May you live in interesting times.” We have low interest rates, low commodity prices, low unemployment, and low inflation, all of which are generally helpful inputs for economic growth. Instead, the U.S. economy is gradually slowing.
Interesting times, indeed.
Recession talk has dominated the headlines of late. And while we are less certain of a near-term recession than some others, we do see an increasing amount of conflicting data that informs our decisions. For some time we’ve noted that the U.S. consumer has been the primary driver of the U.S. Economy. That is still the case and should continue to be for the near future given such low unemployment and low inflation. The other side of that coin is that a long period of very low unemployment has reduced incentives for companies to invest, so we are likely on the backside of job growth. Further, manufacturing and shipping numbers have been soft, and inventories are increasing relative to sales.
It's important to note that we saw some of these same data levels in the last half of 2015 and 2016. What’s the backdrop now? China’s economy continues to slow, which has negative impacts on Australia and Germany, among others. Europe is faced with high regulation and high corporate taxation, ineffective Central Bank Policy, and national governments that won’t inject fiscal stimulus. In simpler terms, the U.S. economy is by far the cleanest dirty shirt in the laundry.
Currently we see the U.S. as a “plow horse economy”, moving along at about 2%. While we certainly can’t predict the future, we can continue to make sound decisions based on what we see. Last December you saw us reduce International Stocks in favor of U.S. Stocks, and in early Spring of this year, you saw us shift from medium quality bonds to very high quality bonds. You should expect to see us maintain our trend towards quality as we continue to manage risk in your portfolio.
Source: Factset Research Systems (data as of 10/15/2019)