Like a good Tom Clancy novel there are a lot of storylines unfolding in the economy. Any one of those narratives may be the one to cause the collapse of the world as we know it – or it may save the day. Some of those storylines are international and some domestic, but they are all linked through the general economy.
China strong first storyline
One of the strongest story lines is related to the Chinese government’s actions. China has regularly managed the value of its currency. Roiling markets this past week, it announced it would allow the value of the yuan to drop to the point that $1 would buy more than 7 yuan. That prompted the Trump administration to notify China it was considered a “currency manipulator.” And of particular concern to the agricultural sector, the Chinese announced it would halt imports of U.S. agricultural products.
Equities tanked. A 1,000-point decrease in the Dow in a single trading session is a bad day. A 1,000-point decrease given where we are in the economic cycle is somewhere to the worse side of bad. The Chinese government stated later in the week they would not let the yuan devalue to the more than the 7-yuan level. Our equities showed some – but not full – recovery.
Jobs report second storyline
The U.S. jobs report for July had headline numbers that looked okay. But underneath the numbers weaknesses are showing. Eight major economic sectors account for more than 50 percent of the nation’s employment. Leisure and hospitality, for example, comprise 11 percent of total jobs. After an atypical January the sector added an average of less than 10,000 new slots a month, a meager showing for a sector employing nearly 17 million.
Health care, the next-largest sector, keeps on trucking. It has added an average of more than 32,000 new jobs each month in 2019. It will likely become the largest employment category in the next few years.
Retail-trade employment has been sluffing off jobs every month this year but January. The retail-sales sector is still trying to sort out what the future looks like. Manufacturing job numbers increased in July. But again, other than an atypical January, every month in 2019 has shown job-growth numbers that are less than the same month in 2018. Some months have had numbers that are markedly less.
Construction employment, which accounts for nearly 5 percent of all jobs, has shown positive but slow growth in 2019. Construction jobs are not going to be a major economic driver.
Wholesale trade – 4 percent of the overall jobs market – has shown positive growth for all but one month of the year.
The temporary-help-services sector decreased more than 25,000 positions in January; it has been essentially flat for the past four months. One could view this in a positive light and suggest employers are going straight to full-time employment. Or one could view it as companies don’t need to expand at this stage, even temporarily.
Truck-transportation employment is the last of the “big eight,” accounting for 1 percent of non-farm jobs. It also has been demonstrating a somewhat “meh” performance this year, with numbers well less than the same time this past year – and much less than where we were in the last six months of 2018. Take out the health-care-sector employment numbers and the other seven sectors are positive, but only just so.
Yield curve another storyline
Tom Clancy seemed to always have at least six storylines running in his books at any one point. Another storyline here is the yield curve. The 10-year Treasury note was less than the Federal Funds rate by 31 basis points in June. It was a full one basis point more than the Fed Funds rate in May, so technically not inverted until the June figures. A yield-rate inversion, which occurs when long-term rates are less than short-term rates, has historically been an indicator of an economy poised to worsen. Just because an inversion has occurred doesn’t suggest a recession will arrive tomorrow. It has been anywhere from 12 to 24 months downstream, but it’s a key marker.
Storylines come together
One of the interesting features of a Clancy novel is the way all those storylines come together by the end of the book. We have a long way to go in this tale, but the links between our three are already starting to show.
The trade war alone was driving some investors to the haven of government bonds. China’s currency tactics are sending even more investors in that direction. Greater demand for bonds increases the price of those bonds, which decreases the interest rate. Investors tend to look toward the longer-term notes, thus decreasing the long end of the yield curve. Retaliatory tariffs have certainly hurt the agricultural sector. Overall manufacturing-sector employment growth – while not bad – has certainly backed off the previous year’s pace.
We are probably only two-thirds of the way through this book. Heck, given the size of a good Clancy novel, we may only be a third of the way through. We are in the midst of what will likely become the longest economic growth period in the history of the country. But there are storm clouds gathering. Just remember clouds don’t necessarily mean rain.