The economic expansion that began in the Obama years, mostly thanks to the Federal Reserve, has contined to rage on in the Trump years. This time thanks to the Fed, fiscal stimulus and regulatory rollback passed in Trump’s first year in office. June will market the 10th year of a growing economy. Barclays Capital says that it’s not stalling. There is no recession on the horizon.
“The April employment report points to an economy that remains in expansion phase, as opposed to stall or recession,” Barclays economists led by Michael Gapen wrote in a report to clients on Monday.
The April unemployment rate and labor participation rate declined by 0.2 percentage points to 3.6% and 62.8%, respectively. Participation is seen remaininging stable through 2019, with upward pressure from the ongoing expansion offsetting downward pressure from retiring baby boomers.
Gapen and his team at Barclays think 2018’s rise in the participation rate has been reversed and he expects the unemployment rate to dip lower. Wage pressure will gradually intensify as Americans earn more on the job than ever before.
With the first quarter behind us, investors were surprised that tariffs have not hurt profit margins enough to send markets lower.
The S&P 500 is up roughly 25% since its December low thanks in part to strong earnings results. Cost-cutting and efficiency gains due to advances in technology are helping to moderate inflation, higher costs from tariffs, and higher wages.
Despite rising concerns that rising wages could spur labor shortages — and wage inflation — corporate profits are holding up.
BlackRock Investment Institute’s chief equity strategist, Kate Moore, rifled through broker reports going back 10 years in search of trial words like “margin pressure”. The term is below the historical average in broker reports today, while the share of documents highlighting “tight labor” is at all-time highs.
How to explain this apparent disconnect? Companies have been using technology to drive efficiencies that keep costs down, reduce the need for labor and help keep profit margins stable. Automation, coupled with another fact — household deleveraging — have served to keep inflation in check.
“The pressure on earnings is likely to intensify in this late-cycle period as wage inflation picks up and productivity growth slows,” she warns. But “for now, companies are taking actions to cushion the downside, with many also returning capital to shareholders through share buybacks.”
If you’re in the market, this is as great a time as any. If you’re not in the market at all, except for maybe a 401(k) plan, a strong economy with wages going up and no recession in sight is as good as it gets.
The U.S. economy still faces serious market factors like global trade talks. Trump promises to increase tariffs on China. If not China, maybe Europe. The threat of higher costs is always there, with a full blown trade war back on the table after Trump’s Twitter rant on Sunday about China trade talks.
U.S.-China trade negotiations resume this week. Markets have been too optimistic about a potential deal this year, spurred on by an over-confident Trump.
A new deal may leave bigger questions unresolved, while enforcement of the agreement will be challenging. Market attention to global trade tensions has been falling all year, but that could go up swiftly this week.
Moore says there is the potential for greater market impact should Trump makes good on his tariff hikes by Friday.
Eight months ago, the market was reacting negatively to Trump’s promise to tariff $200 billion worth of Chinese goods. A month later, the S&P 500 was up again. It’s been on a tear since.
“We never had the earnings recession some were predicting. I know we weren’t predicting it,” says Scott Clemons, an investment strategist for Brown Brothers Harriman. “We are back at the highs in October.”
What comes up, will come down.
Beyond that sure thing, the labor market data is showing the economy is in solid shape. The U.S. is set to break a record expansion this summer. Interest rates are lower and the likelihood of a very aggressive Fed is remote.
“All of this is supportive of economic expansion,” says Clemons.