Economic data has been relatively positive. The economy added 128,000
jobs in October, which is impressive considering upward revisions to
prior months, as well as the striking of 46,000 GM workers that reduced
monthly job gains. As of October, the trailing six-month average of
payroll gains stands at a healthy 156,000, and the unemployment rate, at
3.6%, is just 0.1% above its recent low. The last time the unemployment
rate dropped this low was in the late 1960s. Beyond just payroll gains,
wages have been climbing at a healthy clip as well, helping to drive
growth in personal incomes. Heading into the fourth quarter, the
year-over-year increase in average hourly earnings has been at or above
3.0% for 15 months.
In addition to employment figures, GDP growth
was more positive than expected with the economy growing at a 1.9%
annual clip in the third quarter vs. an expectation of 1.6%. In line
with the positive data on employment and wages, GDP growth in the prior
two quarters has been almost entirely driven by personal consumption.
Personal consumption, which we believe is a more durable form of growth
than investment, net exports or government expenditures, contributed
3.0% to GDP in the second quarter and 1.9% in the third quarter.
the economy appears on solid footing overall, the manufacturing sector
is under more stress. The ISM Manufacturing PMI rebounded slightly from a
decade low of 47.8 in September to 48.3 in October. However, the ISM is
a diffusion index and levels below 50 are consistent with contraction
in the manufacturing sector. The weakness in the manufacturing sector is
consistent with weak global growth and lingering trade uncertainty.
discussed in the third quarter of 2019, we believe that the Conference
Board’s index of 10 Leading Indicators (LEI) provides the most balanced,
forward-looking gauge of economic activity. While many economic
indicators display more noise than signal, the LEI’s 10 components
(shown in the nearby table) have proven to be a valuable forecasting
tool over multiple economic cycles. In the past three recessions that
began in 1990, 2001 and 2007, the LEI began declining between 12 and 22
months prior to the start of the recession. As of September 2019, the
LEI has been relatively flat, up 0.4% year over year. There is no
guarantee the LEI will prove to be as good a forward-looking indicator
this time around, but given its history and the broad base of data it
includes, we still believe this index is worth consulting.