A Cycle Within a Cycle

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by Ralph Cole, CFA

The U.S. economy has been expanding for over 10 years, the longest economic expansion in U.S. history. When looking back, the bull run in stocks and the economic expansion may seem “easy” but there have been multiple periods of angst as we flirted with slow growth. This is to be expected when you are recovering from a financial crisis. This slow growth expansion has made it more precarious, just like the slower you go on a bike, the easier it is to fall over.

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Source: Strategas

This expansion has been punctuated by periods of severe slowdowns. Below is the chart of the ISM Manufacturing Index. It is a survey of 300 manufacturing firms and monitors their production levels from month-to-month. In this survey, numbers below 50 are considered to be “contractionary” which means that the manufacturing part of our economy is in a recession. This is the third time during the last 10 years that the ISM has been below 50. It is important to note that in the prior two episodes the overall economy never went into recession.  

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Source: FactSet

The rapid drop in ISM has our attention. During the prior slowdowns we felt comfortable that the consumer would rule the day. Unemployment remained low and job growth was strong. Today, those numbers are slowing. September unemployment numbers came in at a 50-year low of 3.5 percent. Today, actual job growth slowed to just 136,000 this month (albeit with upward revisions to the prior months). We had been expecting job growth to slow, because the number of employable workers is drying up. If job growth starts to contract, that would signal that a recession was imminent, and we would act.

Where Does That Leave Us?

At this point in time we think patience is important. While headlines scream recession, tariffs and impeachment, our instruments tell us that the economy continues to grind ahead yet at a slower rate. We have reduced risk across our portfolios over the past 12 months and now find ourselves in a neutral-or-balanced position.

Week in Review and Our Takeaways

  • For the third time during this expansion, the manufacturing part of our economy has dipped into recession territory

  • The market traded off early in the week on poor manufacturing news but rebounded later in the week as employment data came in at an acceptable level