NFIB Small Business Optimism
Small business optimism remains relatively strong, but it has been losing strength over the past year, falling 1.3 points to 101.8 in September. The primary cause is uncertainty over trade policy and tariffs, which should come as no surprise. This is negatively impacting capital spending plans.
None of the index components rose last month!
In what should be good news for consumer spending, the University of Michigan Consumer Sentiment Index rose sharply in October to 96.0 from 93.2 in September. In this survey, consumers see their real incomes rising at the fastest pace in twenty years. This is largely due to the decline in interest rates.
The JOLTS Report
The Job Openings and Labor Turnover Survey for August showed job openings declined 123,000 to 7.051 million, which was the third consecutive monthly decline in job openings. That hasn’t happened since November 2008, although we remain at healthy levels. Still, it marks a significant change in momentum over the past decade.
As a percentage of the labor force, 7.051 million openings are 4.3% of the labor force, which is down from the peak of 4.68% in November 2018. In the previous expansion, job opening only reached 3.26% of the labor force and bottomed at 1.53% in August 2009. We clearly remain in a good spot, but it is a red flag that employers are starting to withdraw listings. If growth continues to slow, then employers will start laying off workers.
The number of hires was 3.53% of the labor force in August, which is down from the peak of 3.69% in April for this expansion. We reached a peak of 3.68% in the previous expansion.
This report still reflects a healthy labor market, but it also shows that momentum is slowing. If this continues in the months ahead, it would be an important leading indicator to a further deceleration in the rate of economic growth and consumer spending.
Produce Price Index
The Producer Price Index (PPI) declined 0.3% in September and is up 1.4% over the past year, which is down from 1.8% last month. The core rate, which excludes food and energy, is still at 2.0% year-over-year. The decline in producer prices came as a surprise given that we have seen three consecutive months of 0.3% increases in consumer prices. The decline in the overall price index was driven by lower energy prices.
Consumer Price Index
Consumer prices were flat in September and up 1.7% over the past year, which is unchanged from last month. The core rate increased 0.1%, which follows three consecutive monthly increase of 0.3%. The core rate remained up 2.4% on a year-over-year basis, which is an expansion high. The CPI is well above the Fed’s target of 2%. Price increases for healthcare and housing continue to put upward pressure on the core and overall rate.
Real (inflation-adjusted) average hourly earnings for production and non-supervisory employees rose 0.2% in September, while hours worked were unchanged. This resulted in real average weekly earnings rising 1.6% year-over-year. The improvement in annual real-income growth was all due to a lower rate of inflation. Regardless, that is good news for real consumer spending growth, which is the primary driver of the rate of economic growth.
There was nothing jarring in the economic data last week to raise the kind of recessionary concerns we had the week before from the purchasing manager surveys for the service and manufacturing sectors. Still, we are starting to see consumer and business confidence soften, and while the labor market remains healthy, there are signs that it is also starting to weaken.
The impetus for the cracks in the foundation of this expansion are the ongoing trade war with China and the tariffs already in place. I didn’t see much to celebrate in the “first phase” of the trade deal agreed upon by the Chinese and Trump administration. The fact that tariffs will not be increased further does nothing to address the existing ones that are already slowing our rate of economic growth. I also find it hard to get excited about the purchase of agricultural products that most likely would have been purchased anyway. I doubt that investors will be as enthusiastic about this deal in the coming week as they were in the days leading up to the announcement.
I also think investors are not appreciating the significance of Trump’s foreign policy decision to withdraw troops from Syria. This is eroding support from his Republican base as he faces impeachment by the House of Representatives. As political uncertainty mounts both domestically and abroad, it should lead to heightened market volatility and weigh on economic growth.
Additionally, we should recognize that the 2% rate of economic growth is partially dependent on what are now $1 trillion deficits for as long as the eye can see. The point at which we decide to return to fiscal responsibility, either through tax increases or spending cuts, it will further slow the rate of economic growth dramatically.
I continue to see a rate of economic growth closer to 1.5% for 2019, while the rate of inflation remains well above the Fed’s target of 2%.
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Additional disclosure: Lawrence Fuller is the Managing Director of Fuller Asset Management, a Registered Investment Adviser. This post is for informational purposes only. There are risks involved with investing including loss of principal. Lawrence Fuller makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by him or Fuller Asset Management. There is no guarantee that the goals of the strategies discussed by will be met. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any particular security.