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Economy still in Goldilocks Mode

  • by Dave Crouch
  • Aug 17, 2018
  • 4 min read

ECONOMY STILL IN GOLDILOCKS MODE

Each month we eagerly wait for the “Employment Report”, arguably the most important of the U.S. economic reports, that is released on the first Friday of each month. If you study the long-term history of the employment report, it is unlikely that we could have a recession as long as job growth stays robust. This is important, because recessions have caused the most severe volatility in the stock markets over the years.

Although the headline number for new jobs added (157,000) was slightly less than what was expected, the details told a story of a “Goldilocks” economy. Our economy is still generating plenty of new employment opportunities, but it is apparently not strong enough to ignite inflation and cause the Fed to aggressively raise rates.

THE NO SPIN FORECAST

My favorite analysis of the monthly employment numbers is called the “No Spin Forecast”. It is the best in-depth evaluation of the report and its implications on the economy I have seen. No Spin digs into the details of the Employment Report and gives it a letter grade each month based on the strength of many of its different components.

Dr. Diehl, the author commented:

“When we look at the components, the report is strong. Just like it is supposed to be. We applied a fiscal stimulus to the economy a few months ago. This is when we were expecting to see the results. They are here. They are good. Just like they were supposed to be.”

Two of the more interesting components in the July report were the increase in manufacturing jobs and the jobs added by the temporary help services segment. Improving the employment situation in the manufacturing sector has been one of the highest priorities of the Trump administration, and the July report suggests that they are succeeding in those efforts, showing a 32,000 person gain in that sector alone.

Dr. Diehl calls the temporary help sector the “Canary in the Coal Mine” of the economy. For those of you who may not have heard the expression, he goes on to explain that “in the old days miners used birds as gas detectors. When the birds dropped, it was time to get out of the mine.” Similar to the canaries, the temporary help sector gives us signals if the economy is beginning to slow down. In February 2007, temporary employment began to report month-to-month declines on a consistent basis, almost a year prior to the disastrous slowdown in 2008. So far in 2018, the temporary help segment has added almost 60,000 jobs, including 28,000 in July alone…indicating that the economy is very healthy.

He goes on to provide almost 50 pages of detailed analysis. He concludes by giving the July Employment Report an A-. Coupled with the report last week that the GDP (Gross Domestic Product) grew at a robust annualized pace of 4.1% in the second quarter, the strongest quarterly growth rate in nearly four years, it all indicates the economy is very healthy.

WHAT ABOUT THE ELEPHANT IN THE ROOM?

Unfortunately, the financial markets have not been focused on a healthy economy. The headlines instead, have been more about President Trump’s slow-motion tariff battle. While the U.S. and the European Union declared a truce last week and there were signs that negotiations with Mexico were going much better, all eyes in recent days have been focused on the trade battle with China.

The trade battle could eventually impact corporate earnings if the stakes continue to be raised. The effect on consumer sentiment and, by extension, consumer spending, are also important factors we are keeping a very close eye on. The question now is how much pressure President Trump is willing to take before backing off of an election promise that he has long espoused.

We believe that Trump wants to be re-elected in 2020 and that he wants the Republicans to win the mid-term elections this Fall. Add the fact that his approval ratings are the highest of his Presidency and the highest-ever for a Republican since World War II (except for Bush’s post-9/11 bounce), we believe he will most likely continue to ramp up the pressure on the Chinese.

Since China desperately needs our business to continue to feed its manufacturing-driven economy, we believe there will be a resolution before we see a significant impact on the economy and on corporate earnings.

Corporate earnings, so far, have been very strong. According to FactSet, the earnings growth for companies in the S&P 500 (the market’s 500 largest companies) for the 2nd quarter of 2018 has been 24.0% year-over-year, and they are expected to be up 20% in the upcoming 3rd quarter…no sign of any problems there. All this bodes well for the financial markets.

WRAP UP

The markets continue to remind us of the 1990s with strong innovation-driven growth offsetting constant headwinds from the news media about troubling geo-political events around the world. We continue to believe the market is climbing the “wall of worry” that so many bull markets have faced over and over again. We believe optimism will continue to be rewarded.

Until next month, we continue to enjoy your calls and questions. Please let us know if there is any way we can assist you.

Sincerely,

Registered Principal

Branch Operations Manager

Financial Advisor

“American business - and consequently a basket of stocks - is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.”

Warren Buffett

Any opinions are those of Dave Crouch and not necessarily those of RJFS or Raymond James. The information contained in this report does not

purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

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