Economic Take

Ongoing angst in the industrial sector has led analysts to talk recession, but there are several reasons this slump likely isn’t cause for alarm—including that industrial activity only accounts for 10 percent of the total economy and central banks will likely be able to cushion the impact from stalled industrial activity.

Based on trends in jobless claims, the expansion seems to be holding steady. This week: updates on industrial production, the state of the consumer, the Brexit drama and US-China discussions.  

LIBOR is an interest rate index that’s been used across financial products for decades, but is now slowly being phased out and will likely cease to exist after 2021. Given that LIBOR is used so widely for everything from loans to derivatives to securitizations, what impact will this move have on businesses across the globe—and what should they be doing now to prepare? Special guest: David Watson, Managing Director and Head of the Libor Transition program for JPMorgan Chase Commercial Banking.  

At just 2 percent below this summer’s record high, the stock market is bullish and appears unfazed by the looming Brexit deadline and other uncertainties, both international and domestic. Also this week: the Fed’s approach to future trouble, the economic impact of the General Motors Co. strike and the latest in US-China trade negotiations.

Last week’s gloomy manufacturing report from the Institute of Supply Management sent ripples of anxiety through the financial markets. But these reactions would feel more appropriate in the old days, when purchasing managers’ reports were seen as important signals of economic health. Today’s stalled industrial sector is most likely the result of weak activity in the energy sector and Boeing’s slowed 737 MAX 8 production. In other words, weak industrial trends are worth keeping an eye on, but they aren’t the whole economy.

With all eyes on the latest jobs report, there’s some concern about why hiring has slowed so much since last year. But now that the US is close to full employment, the economy is beginning to transition from recovery mode to steady state. At this stage in the business cycle, metrics such as layoffs and worker pay provide a more accurate measure of the state of the economy than the pace of new hiring.

The September 14 attack on Saudi oil facilities briefly raised fears of a crippling oil shock like the 1973 OPEC embargo. These reactions, however, don’t reflect the current environment, considering most countries now have a lot more oil sitting in strategic reserves. The US is also the largest oil producer in the world, and despite the slump in new development, crude output recently topped 12 million barrels per day. In other words, one region’s shock is another region’s opportunity.  

Apocalyptic economic forecasts took a bit of a bruising as long-term Treasury bond yields surged last Friday. This may be another sign that sovereign bond yields have become disconnected from reality due to years of asset purchasing from central banks. Also this week: Why the Federal Reserve is expected to cut interest rates again.

There was a lot of encouraging news last week for the US economy—car sales in August were better than expected, jobless claims held low, consumer spending remained strong and the stock market bounced back to a near-record high. With US-China trade talks resuming and the chances of a no-deal Brexit growing more slim, recessionary worries appear to be just that: worries.       

Labor Day 2019 saw the US economy in a strong position. Official unemployment is at lifetime lows and the steady pace of jobless claims in every state—despite worries about trade wars—indicates that trade disruptions aren’t visible in the pulse of US economic activity. Also this week: a look back at the economic impacts of major hurricanes.

President Trump announced plans to add another $58 billion of tariffs on top of the $63 billion already in place—a move that rattled the markets and intensified worries at the Fed. Unlike earlier tariffs, which were effectively neutralized by Chinese currency depreciation, this round could be borne by American businesses and consumers. Also this week: exploring the factors behind the slowdown in capital expenditures (hint: they’re not related to trade).  

There’s been a lot of market chatter about the inverted Treasury yield curve—a phenomenon that has preceded nearly every recession. But it’s important to remember how quantitative easing (QE) continues to affect the bond market and possibly reconsider if sovereign yields are the best measure of true “risk free” interest rates. Also, why low oil prices may be a bigger deal than current trade frictions.

Bond yields can be a weathervane for economic health, so why, during this time of exceptional growth, do they seem to be pointing in the opposite direction? Also this week: Key developments to watch for in the next two months, including additional tariffs on Chinese imports, the Brexit deadline and a possible US trade agreement with Japan.

From renewed tariff threats to the possibility of a no-deal Brexit in October, there are plenty of causes for concern in the coming months. But, as the jobs report shows, the US economy is still strong–the stock market is just 3 percent below the all-time record high and inflation remains low. Should we be worried about more tariffs on China or are we overreacting?

Despite the economy’s current stable state, the Fed seems poised for a quarter-point rate cut on Wednesday—which is likely being used as insurance against potential trouble in the future. Also this week: what the July jobs report, July car sales and the Q2 GDP estimate tell us about the economy.