Bob’s Journal for 2/21/19

The economy clearly is slowing. Is there a recession on the way?

Most of the economic data the last few months has been weaker than previous data and weaker than expected. That has caused many economists to begin warning that a recession might occur in 2020 and perhaps later in 2019.

Corporations have been issuing their own recession warnings in earnings conference calls. I’ve even seen a few analysts assert that we already are in the early stages of a recession.

It is important not to overreact to one economic report or even a small number.

The latest report to tip many people into the recession camp was last week’s Retail Sales report. The report was delayed because of the government shutdown; it was for December sales. That’s pretty old, as far as data goes.

As I reported in last week’s Bob’s Journal, the numbers were bad and well below expectations. Among the bad news was that it was the steepest monthly decline in retail sales since September 2009.

There are a few points to keep in mind before drawing strong conclusions from the report.

Retail sales usually are inconsistent from month to month. We need to examine trends over several months instead of one month’s data. Also, retail sales is one of the reports that routinely is revised, sometimes substantially.

The sharp decline in retail sales isn’t consistent with the other data we have from last December. While economic growth declined late in 2018, other data, including surveys and anecdotal reports, aren’t consistent with the sharp decline reported in the retail sales report.

Perhaps most importantly, we now have most of the corporate earnings reports from the fourth quarter of 2018, and they don’t reflect sales declines consistent with the retail sales report.

The economy clearly is growing at a lower rate than it was during most of 2017 and 2018. But it’s important not to overreact to a few economic reports. It is quite common for growth to slow several times during an extended expansion. Sometimes it even pauses. You don’t want to assume too early that a recession is developing, because you could miss a lot of investment gains.

That’s why I rely on a range of indicators to assess where the economy is heading and focus on those that have consistently given reliable warnings of imminent recessions. None currently indicates we’re on the cusp of a recession.

Even so, I also realize that no indicator is 100% accurate. That’s why it’s important not to position your portfolio to benefit from only one economic outcome. Instead, we maintain balance, diversification and a margin of safety.

The Data

The Empire State Manufacturing Survey, like other recent manufacturing reports, indicates growth is stabilizing after declining in late 2018. The survey’s index was reported at 8.8, up from 3.9 last month. The new orders component more than doubled, while shipments declined, and delivery times slowed.

The Philadelphia Fed Business Outlook Survey tells a different story. The index dropped to negative 4.1 from a positive 17.0 last month. That’s the first negative number in this index since May 2016. Even so, the six-month outlook reported in the survey is very positive.

Industrial Production, on the other hand, declined 0.6% in January, and December’s reported 0.3% increase was revised down to a 0.1% increase. The manufacturing component declined by 0.9%, and last month’s 1.1% increase was revised down to 0.8%. Business equipment, a key measure of business investment, declined 1.5%.

Durable Goods Orders for December were mixed. The headline number was a 1.2% increase. But excluding transportation, the increase was only 0.1%. Core capital goods, which is a good measure of business investment, declined 0.7%. And November’s core capital goods orders were revised lower to negative 1.0% from negative 0.6%.

The PMI Composite Flash index also showed manufacturing weakened. The composite increased to 55.8 from 54.5, and the service sector increased to 56.2 from 54.2. But manufacturing declined to 53.7 from 54.9. The components of the service sector survey were particularly strong. The decline in manufacturing was attributed by survey respondents to slower global growth.

Consumer Sentiment, as measured by the University of Michigan, increased to 95.5 from 91.2. The increase is largely attributed to the end of the government shutdown just as the last reading’s sharp decline was attributed to the continuation of the shutdown. Even so, the latest number is the second lowest since July 2017, exceeded only by the previous report.

Lower mortgage rates appear to be helping new home sales. The Housing Market Index from the National Association of Home Builders increased to 62 from 58. The index still is struggling to return to the highs reached in the third quarter of 2018, but all the components of the index improved.

But lower mortgage rates didn’t help existing home sales for January. They declined 1.2%, though December’s sales were revised slightly higher. Over 12 months, existing home sales are down 8.5%.

The Index of Leading Economic Indicators from The Conference Board declined 0.1%. Last month’s index was revised higher to no change from a 0.1% decline. The belated release of some government data because of the partial government shutdown delayed some of the data used to compile the index.

New unemployment claims plummeted 23,000 down to 216,000. The four-week average still increased by 4,000. Perhaps this means increased claims in January and early February were a consequence of the government shutdown.

The Markets

The S&P 500 gained 1.24% for the week ended with Wednesday’s close. The Dow Jones Industrial Average rose 1.72%. The Russell 2000 added 2.59%. The All-Country World Index (minus U.S. stocks) increased 2.09%. Emerging market equities gained 1.40%.

Long-term treasuries rose 0.69% for the week. Investment-grade bonds added 0.21%, while Treasury Inflation-Protected Securities (TIPS) gained 0.55%. High-yield bonds increased 0.45%.

On the currency front, the dollar declined 0.62%.

Energy-based commodities increased 2.88% for the week. Broader-based commodities rose 2.06%, while gold jumped 2.56%.

Bob’s News & Updates

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