Economic Troughing Continues, While a Recovery Awaits Further Confirmation Beyond Employment

Dec 06, 2019 | Nick Scholte


Specifically, the ISM indices might be signaling a "U" shaped troughing pattern, while employment achieves a lofty standard not seen since 1969. Meanwhile rhetorical bluster continues on the trade front - ignore the bluster.

To my clients:

It was a mixed week for North American stock markets with the Canadian TSX falling 0.3%; the U.S. Dow Jones Index falling 0.1%; and the U.S. S&P 500 rising 0.2%.

In last week’s update I suggested that the typical slew of beginning-of-month economic indicators released this week would be “an especially important time for economic prognosticators as well as for the markets”. I indicated that I was cautiously optimistic. Well, the readings are in and I’d suggest that the results were, in aggregate… indeterminate. Let me explain.

Beginning with the pair of ISM Indices (Manufacturing and Non-Manufacturing), both came in lower than the previous month and both missed expectations. However, neither suffered egregious declines, with the Manufacturing sector at 48.1 only slightly diminishing from the prior month’s reading of 48.3, and the Non-Manufacturing sector (aka: “Services”) declining somewhat more materially to 53.9 from 54.7, yet still remaining comfortably in expansionary territory. With respect to the trend in these indices, both have demonstrated a consistent decline in readings since September/October 2018, with the manufacturing sector more pronounced in its decrease. But, while this week’s data did not signal a new uptrend had begun, it did seem to indicate that the troughing in these economic indicators might be playing out in “U”-type fashion with a more pronounced period of bottoming than would occur in a “V”-type rebound. Bottom line: we will need at least one more month of data to determine if a “trough” is indeed being formed, or if instead we are merely at a “pause” in an ongoing downtrend (Reminder: I, and RBC, strongly suspect the former, although we cannot be blind to the latter possibility).

Moving on, while the ISM indices offered an indeterminate economic outlook, there was no such ambiguity with respect to U.S. employment metrics – these were strong. Period. The U.S. Employment Report released this morning showed the U.S. created 266,000 new jobs in the month of November. This far and away blew past the consensus estimate of economists for 186,000 new jobs to be created. Further, positive revisions to prior reports added another 41,000 jobs. Further still, the unemployment rate reached a 50-year low of 3.5%. And yet still further, weekly Jobless Claims (reported yesterday) showed just 203,000 applicants filing for unemployment benefits, handily bettering the estimate of economists here too. Recall that RBC has 6 primary economic indicators that we track to gauge recession probabilities (with dozens more secondary indicators), and the trend in weekly jobless claims is probably our second favourite of these primary indicators. This indicator is definitively signaling “green”, as is the overall U.S. employment picture. An interesting piece in today’s New York Times has gone so far as to suggest that “experts” (including economists, the U.S. Federal Reserve, and the Congressional Budget Office) may have to re-evaluate the concept of what full-employment means and how much the U.S. economy can grow before setting off inflation. If interested, the article can be found here (it, along with other useful links, is also available in the Curated Library section of this website).

So, overall, while ISM indicators didn’t materially worsen, they also didn’t signal definitive recovery from the current slow patch in economic growth. Offsetting the ISMs were blockbuster employment metrics. While I’d tend to favourably skew the combined readings of all of these, they still fell short of the standard I’d need to see to add back some equity to client portfolios: equity that was, in three separate moves over the past year, removed from client portfolios for defensive purposes. As it now stands, clients are in line with their individual long-term equity targets after several years of being substantially overweight.

Lastly, I’d be remiss if I didn’t make an obligatory comment or two about U.S./China trade relations. December 15th looms, and recall that is the date when the next tranche of trade tariffs are to be imposed by the U.S. against China. One would presume that this date acts as a “D Day” of sorts for trade negotiators trying to complete a Phase 1 trade deal. Earlier this week, President Trump mused that “it might be best” just to put the whole matter aside and leave it until after next November’s Presidential election. The markets suffered a significant decline on Monday and Tuesday as a result. But then later in the week more positive rumours emerged culminating in an announcement today by China’s finance ministry that China will waive some tariffs on U.S. pork and soybean imports. My take aways from all this are what they’ve always been: that this is a negotiation and that Trump’s favored negotiating tactic is bluster; allowing the bluster of negotiations to dictate one’s portfolio positioning will inevitably result in being “whipsawed” out of positions; and that some reasonably material (although not all-encompassing) deal will ultimately result because both sides are motivated to reach such a conclusion. If/when a deal is consummated, this may prove to be the sentiment boost required to push the aforementioned ISM indices out of their collective troughing phase and into recovery.  In the meantime, ignore the bluster.

That’s it for this week. All the best,


Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager

Scholte Wealth Management
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