Uncertainty, Volatility Create a Murky Picture

Mixed data and talk of a looming recession leave the economy difficult to read
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Builders are enjoying attractive mortgage rates and “solid demand,” according to the National Association of Home Builders.

Builders are enjoying attractive mortgage rates and “solid demand,” according to the National Association of Home Builders.

The U.S. economy added 136,000 jobs in September, fewer than economists expected, and a key measure of consumer confidence declined, offsetting positive news that the unemployment rate fell to a nearly 50-year low of 3.5 percent.

The Conference Board reported that its Consumer Confidence Index fell from 134.2 in August to 125.1 in September. “Consumer confidence declined in September following a moderate decrease in August,” Lynn Franco, senior director of economic indicators at The Conference Board, stated in a press release. “Consumers were less positive in their assessment of current conditions, and their expectations regarding the short-term outlook also weakened. The escalation in trade and tariff tensions in late August appears to have rattled consumers.

“However, this pattern of uncertainty and volatility has persisted for much of the year, and it appears confidence is plateauing,” Franco continued. “While confidence could continue hovering around current levels for months to come, at some point this continued uncertainty will begin to diminish consumers’ confidence in the expansion.”

Separately, another important measure of the consumer’s mood moved higher in September. The University of Michigan’s Consumer Sentiment Index rose to 93.2 from 89.8 in August. “Consumer sentiment continued to post small increases throughout September due to more favorable income trends, especially among middle-income households,” Richard Curtin, chief economist for the university’s Surveys of Consumers, stated in a press release. “The overall trends in the Sentiment Index remain quite favorable but show signs of a slow erosion.

“Despite the high levels of confidence, consumers have also expressed rising levels of economic uncertainty,” Curtin added. “Some of these concerns are rooted in partisanship, some due to conditions in the global economy — Brexit, Iran, Saudi Arabia, China — and some are tied to domestic economic policies. Trade policies have had the greatest negative impact on consumers, with a near record one-third of all consumers negatively mentioning trade policies in September when asked to explain in their own words the factors underlying their economic expectations. These and other policy concerns have so far been held in check by positive finances, although fewer consumers now anticipate higher wages or lower rates of unemployment in the year ahead.”

Although job growth was below expectations in September, the U.S. Department of Labor revised the two previous months’ totals higher. The August figure was revised up by 38,000, to 168,000, and the July figwure rose by 7,000, to 166,000, for a total of 45,000 additional jobs created. The Labor Department also reported that the health care sector added 39,000 jobs in September, and that professional and business services added 34,000. Employment in transportation and warehousing added 16,000 jobs. The manufacturing sector lost 2,000 jobs, and the retail lost 11,000.

David Wollard, senior director 
of marine and RV, Webasto 
Thermo and Comfort North America

David Wollard, senior director of marine and RV, Webasto Thermo and Comfort North America

Average hourly earnings rose 2.9 percent in September from a year earlier, marking continuing sluggish growth in pay despite the nation’s long recovery from the Great Recession.

The moderate job growth, combined with the drop in the unemployment rate, made the data difficult for economists to read.

“It’s kind of a mixed picture,” Douglas Kruse, an economist at Rutgers University and a former White House adviser to President Obama, told The Washington Post. “The job growth was less than what Wall Street and economists were expecting, but the drop in the unemployment rate was unexpected.”

Eric Winograd, senior U.S. economist at AllianceBernstein, told CNBC that the September data does not change the fundamental economic picture. “The labor market is still strong, adding more than enough jobs each month to absorb new entrants to the labor force. But even with a strong labor market, wage growth remains muted, limiting the risk that labor market tightness will push inflation meaningfully higher. The question that matters most for the economy is how long the labor market can stay strong, given the ongoing slowdown in growth.”

David Wollard, of Webasto Thermo and Comfort North America, says the U.S. economy “appears to be healthy,” but adds, “I suspect there’s a leveling off of the economy, and I think this is through 2020, but I think that’s all it is.”

Wollard, who is senior director of RV and marine for the company’s leisure division, watches consumer confidence, housing and the job market in addition to following the marine and RV industries. He says he has “seen some filling of the pipelines” in the marine industry and that although he doesn’t see it as a serious problem, “I think it’s enough to pay attention to.”

His division, which is based in Fenton, Mich., makes marine heating and air-conditioning systems, sunroofs and roof shades. Wollard says the division enjoyed double-digit growth from 2010 to ’18. He expects 8 percent growth from the division this year in a marine industry that he has seen make great strides from 10 years ago. “It’s a nice wave to ride,” he says.

In regard to President Trump’s tariffs, Wollard says the division has yet to feel any effects on the product side, and won’t this year. “The answer is no, but if [the tariffs] continue it will have some effect on our business,” he says.

The Conference Board’s Leading Economic Index, which attempts to predict future economic activity, was flat in August. “The U.S. LEI remained unchanged in August, following a large increase in July. Housing permits and the Leading Credit Index offset the weakness in the index from the manufacturing sector and the interest rate spread,” Ataman Ozyildirim, senior director of economic research at The Conference Board, stated in a press release. “The recent trends in the LEI are consistent with a slow but still expanding economy, which has been primarily driven by strong consumer spending and robust job growth.”

The U.S. Department of Commerce reported that retail sales rose 0.4 percent in August, more than expected, but the results were propelled by purchases of cars and trucks. Apart from those categories, sales were flat, suggesting that many consumers pulled back their spending as the end of the summer neared.

Inflation was tame in August. The Personal Consumption Expenditures Price Index, the Federal Reserve’s preferred inflation gauge, was flat for the month, and the core rate of inflation, which excludes volatile food and energy prices, rose just 0.1 percent.

The Fed lowered its benchmark interest rate a quarter point, to a range of 1.75 to 2 percent, on Sept. 18 in an effort to bolster the economy. Fed chairman Jerome Powell said at a press conference after the new rate was announced that the economy is still strong, but that risks remain. “There may come a time when the economy weakens and we would then have to cut [rates] more aggressively,” he said, according to The New York Times. “We don’t know. We’re going to be watching things carefully, the incoming data and the evolving situation.”

According to The Washington Post, Powell also said, “Trade developments have been up and down and then up, I guess, or back up, perhaps over the course of this intervening period. In any case, they’ve been quite volatile. We do see those risks as actually more heightened now.”

Confidence among the nation’s small businesses declined slightly in August. The Small Business Optimism Index of the National Federation of Independent Business fell 1.6 points, to 103.1, as fewer owners say they expect better business conditions and sales volumes in the coming months.

“In spite of the success we continue to see on Main Street, the manic predictions of recession are having a psychological effect and creating uncertainty for small business owners throughout the country,” NFIB president and CEO Juanita D. Duggan stated in a press release. “Small business owners continue to invest, grow and hire at historically high levels, and we see no indication of a coming recession.”

NFIB chief economist William Dunkelberg echoed Duggan’s sentiment, stating in a press release that the August report showed no sign of inflation and did not reflect the Fed’s notes. “The pessimism we’re seeing is contagious, even though the actual economy is thriving,” Dunkelberg stated. “Expectations can be infected and, as a result, could turn sour. All the talk about an impending recession can create a false reality, but it doesn’t make it right. Main Street is continuing to produce and remains strong in spite of the headlines.”

In the housing sector, home builder confidence in the market for newly built single-family homes rose 1 point, to 68, in September from an upwardly revised August reading of 67 on the National Association of Home Builders/Wells Fargo Housing Market Index.

September’s reading was the highest since October 2018. Any index reading higher than 50 indicates that more builders see conditions as good than poor. “Low interest rates and solid demand continue to fuel builders’ sentiments, even as they continue to grapple with ongoing supply-side challenges that hinder housing affordability, including a shortage of lots and labor,” NAHB chairman Greg Ugalde, a home builder and developer from Torrington, Conn., stated in a press release.

NAHB chief economist Robert Dietz stated in a press release that positive builder outlook stemmed from solid household formations and attractive mortgage rates. “However,” he added, “builders are expressing growing concerns regarding uncertainty stemming from the trade dispute with China. NAHB’s Home Building Geography Index indicates that the slowdown in the manufacturing sector is holding back home construction in some parts of the nation, although there is growth in rural and exurban areas.”

New-home sales rose 7.1 percent in August from July, to a seasonally adjusted annual rate of 713,000. July’s results were revised upward to 666,000 from an initially reported 635,000. Existing-home sales also improved in August, rising 1.3 percent from July to a seasonally adjusted annual rate of 5.49 million. Lawrence Yun, the NAR’s chief economist, pointed to falling mortgage rates as the reason for the increase.

“As expected, buyers are finding it hard to resist the current rates,” he stated in a press release. “The desire to take advantage of these promising conditions is leading more buyers to the market.”

The median existing-home price in August was $278,200, up 4.7 percent from August 2018. The price increase marks the 90th consecutive month of year-over-year gains. “Sales are up, but inventory numbers remain low and are thereby pushing up home prices,” Yun says. “Home builders need to ramp up new housing, as the failure to increase construction will put home prices in danger of increasing at a faster pace than income.” 

This article originally appeared in the November 2019 issue.

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