Steady as She Goes

Heading into the holiday season, the economy shows no signs of a major slowdown
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“Product innovation will guide our success for model year 2021.” 
— Josh Berry, 
Prospec Electronics

“Product innovation will guide our success for model year 2021.” — Josh Berry, Prospec Electronics

A key measure of American consumer confidence fell slightly in October, but the economy created 128,000 jobs during the month, and the Federal Reserve cut interest rates for the third time this year in an effort to keep the economy growing.

The Conference Board reported that its Consumer Confidence Index slipped 0.4 points, to 125.9, from a revised 126.3 reading in September. “Consumer confidence was relatively flat in October, following a decrease in September,” Lynn Franco, senior director of economic indicators at The Conference Board, stated in a press release. “The Present Situation Index improved, but [the] Expectations [Index] weakened slightly as consumers expressed some concerns about business conditions and job prospects. However, confidence levels remain high, and there are no indications that consumers will curtail their holiday spending.”

The Conference Board reported that consumers’ assessments of current conditions improved in October. Those who say business conditions are good increased from 37.4 percent to 39.2 percent; those who say business conditions are bad decreased from 12.2 percent to 11.2 percent.

Another important measure of consumer moods was also slightly lower at the end of October. The University of Michigan’s Consumer Sentiment Index finished the month at 95.5, down from 96 at mid-month. Richard Curtin, chief economist for the university’s Surveys of Consumers, wrote that the small loss was “spread over most components of the index. The overall level of consumer confidence has remained quite favorable and largely unchanged during the past few years. The October level was nearly identical to the 2019 average (95.6) and only a few index points below the average since the start of 2017 (97).

“The focus of consumers has been on income and job growth, while largely ignoring other news,” he added. “The most spontaneous references were to the negative impact of tariffs, which fell to 27 percent in October from last month’s 36 percent; the impeachment inquiry totaled just 2 percent in October, less than the 5 percent who mentioned a negative impact from the GM strike.”

The job gains in October exceeded analysts’ expectations during a month in which 46,000 General Motors workers were on strike, and the October employment report pointed to a resilient economy. “For now, we can take solace that there are sufficient job and wage gains to support the economy and keep it miles away from any recession,” Joseph Brusuelas, chief economist at the tax and consulting firm RSM, told The Washington Post.

Steve Rick, chief economist at CUNA Mutual Group, told CNBC: “This report is yet another sign that the economy is still strong right now and adds to a list of indicators that are looking optimistic of late. The vigor of this labor market, along with a more positive housing market and solid Q3 GDP, should offer some welcome reassurance.”

The U.S. Department of Labor reported that the unemployment rate edged up to 3.6 percent from 3.5 percent in September but remained near a 50-year low. What the government referred to as notable job gains occurred in food services and drinking places (48,000), professional and business services (22,000), social assistance (20,000) and financial activities (16,000).

Employment in the motor vehicles and parts category fell by 36,000, reflecting the GM strike, and federal government employment was down by 17,000 as 20,000 temporary workers who had been doing work for the 2020 Census completed their tasks.

The department reported that American workers’ average hourly earnings rose 6 cents, to $28.18, in October and that during the past 12 months, average hourly earnings increased by 3 percent. (Economists have bemoaned the modest gains in income that continue despite the country’s long recovery from the Great Recession.)

The government also revised its August job numbers upward by 51,000, to 219,000, and its September figures by 44,000, to 180,000, for a total of 95,000 additional jobs in the economy. Job gains have averaged a solid 176,000 during the past three months.

Third-quarter growth, as measured by gross domestic product, did slow, though not as much as economists expected. Buttressed by consumer spending, GDP rose at a 1.9 percent annualized rate in the quarter, down from 2 percent in the second quarter. Business investment appeared to have slumped.

The Federal Reserve, as expected, cut interest rates by a quarter-point at the end of October, dropping its benchmark federal funds rate to a range of 1.5 to 1.75 percent. At a press conference, Fed chairman Jerome Powell said further rate cuts are unlikely anytime soon unless conditions change within the economy.

“We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the state of the economy remains broadly consistent with our outlook,” he said.

Josh Berry, vice president of sales and marketing at marine audio systems company Prospec Electronics, says he thinks the economy is healthy. “All indication is that the GDP will be staying at a favorable level for the foreseeable future,” Berry says. “Despite the shenanigans in Washington, and in no way do I want to make this about politics, the economy is still doing quite well. Should the U.S. economy continue to stay as is, yes, it will continue to create opportunities for success at our company.”

For example, Berry says, Prospec is a technology-driven audio company, and “when the economy is thriving, manufacturers are willing to invest more in the sophistication of their audio systems. Manufacturers are also willing to make tooling changes to their dashes — for example, to accommodate new source units. Back in 2008, model year tooling changes were few and far between, and entry-level audio was the norm.”

Berry says sales have increased at South Carolina-based Prospec this year from 2018. The economic indicators he watches most closely are unemployment, housing and manufacturing activity.

“Product innovation will guide our success for model year 2021, as this will help us increase market share,” he says. “We talk with our OEM customers on a consistent basis. We will hear quickly on whether or not they are seeing things slow down with their dealers. The good news is that dealers are becoming vigilant about inventory lately, and I think that helps the boating industry in the long run.”

Berry says President Trump’s tariffs “result in more upfront money, which does have a negative impact on company cash flow.”

Consumer spending, which accounts for more than two-thirds of all U.S. economic activity, rose in September for the seventh consecutive month. The U.S. Department of Commerce reported that consumer spending rose by a moderate 0.2 percent.

Meanwhile, inflation was tame. The Personal Consumption Expenditures Price Index, which is the Fed’s preferred inflation gauge, was unchanged for the month. The core PCE Price Index, which strips out the volatile food and energy components, also was unchanged.

The Conference Board reported that its Leading Economic Index declined 0.1 percent in September, to 111.9, after a 0.2 percent drop in August and a 0.4 percent increase in July.

“The U.S. LEI declined in September because of weaknesses in the manufacturing sector and the interest rate spread, which were only partially offset by rising stock prices and a positive contribution from the Leading Credit Index,” Ataman Ozyildirim, senior director of economic research at The Conference Board, stated in a press release. “The LEI reflects uncertainty in the outlook and falling business expectations, brought on by the downturn in the industrial sector and trade disputes. Looking ahead, the LEI is consistent with an economy that is still growing, albeit more slowly, through the end of the year and into 2020.”

Confidence among small businesses declined in September, although it remained at a historically solid reading. The Small Business Optimism Index of the National Federation of Independent Business fell 1.3 points, to 101.8.

The NFIB reported that its survey showed no sign of a recession and indicated continued job creation, capital spending and inventory investment, all consistent with solid but slower growth.

“As small business owners continue to invest, expand and try to hire, they’re doing so with less gusto than they did earlier in the year, thanks to the mixed signals they’re receiving from policymakers and politicians,” NFIB president and CEO Juanita D. Duggan stated in a press release. “All indications are that owners are eager to do more, but they’re uncertain about what the future holds and can’t find workers to fill the jobs they have open.”

The NFIB reported that Trump’s tariffs are affecting small businesses; 30 percent reported negative effects in the September survey. The NFIB also reported that its Uncertainty Index rose 6 points during the past three months; business owners find themselves unable to identify the direction of the economy with confidence.

“As more owners become unsure, caution will seep into business decisions. In addition to tariff concerns, the Fed’s decision to cut interest rates raised uncertainty,” NFIB chief economist William Dunkelberg stated in a press release. “Perhaps the country will, indeed, talk itself into a recession, but not anytime soon. The persistence of unfilled job openings and reports of a deficiency of job applicants indicate that there is still substantial economic optimism about the economy on Main Street.”

In the housing market, builder confidence in the market for newly built single-family homes rose 3 points, to 71, in October on the National Association of Home Builders/Wells Fargo Housing Market Index, marking a 20-month high. “The housing rebound that began in the spring continues, supported by low mortgage rates, solid job growth and a reduction in new home inventory,” NAHB chairman Greg Ugalde, a home builder and developer from Torrington, Conn., stated in a press release.

NAHB chief economist Robert Dietz added: “The second half of 2019 has seen steady gains in single-family construction, and this is mirrored by the gradual uptick in builder sentiment over the past few months. However, builders continue to remain cautious due to ongoing supply-side constraints and concerns about a slowing economy.”

All of the HMI indices rose in October. The index that gauges current sales conditions increased 3 points, to 78; the component that measures sales expectations in the next six months was up 6 points, at 76; and the measure that charts traffic of prospective buyers rose 4 points, to 54.

Any index number above 50 indicates that more builders see conditions as good rather than poor.

New-home sales fell 0.7 percent in September, to a seasonally adjusted annual rate of 701,000, from a downward-revised 706,000 in August. Nonetheless, it was the first time since 2007 that new-home sales exceeded a 700,000 annual pace for two months in a row.

Existing-home sales declined in September after two months of increases. The National Association of Realtors reported that sales fell 2.2 percent from August, to a seasonally adjusted annual rate of 5.38 million.

Lawrence Yun, the NAR’s chief economist, wrote that despite low interest rates, sales have not increased because of a low level of new housing options. “We must continue to beat the drum for more inventory,” Yun stated in a press release. “Home prices are rising too rapidly because of the housing shortage, and this lack of inventory is preventing home sales growth potential.”

The national median existing-home price rose to $272,100 in September, up 5.9 percent from the same month a year earlier and marking the 91st consecutive month of year-over-year gains. 

This article originally appeared in the December 2019 issue.

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