Business confidence remains near current cycle lows as increased volatility in the stock market, rising trade disputes, and signals from the bond market have put company leaders on the edge. Moreover, concerns over a deceleration in the global economy, led by lower production out of China and slower growth in Europe, continue to cloud the economic landscape. Although the decline in business confidence should be monitored closely, the strong labor market is displaying that business are still hiring as job listings outnumber the current supply of labor for the first time since records were first tracked in 2000.
*WTI Crude Oil Spot Price. Data points through end of May 2019. Change represents month-over-month change.
Both the ISM Manufacturing and Non-manufacturing indices declined in April 2019. The non-manufacturing sector, less impacted by the rising trade tensions between the U.S. and China, is faring better. Services related businesses continue to expand as employment growth in the private sector increases. However, the lack of a trade deal has been a drag on the manufacturing sector since 2018 and the impact is becoming significant. Despite both indices reporting above 50, suggesting that the prolonged economic expansion has room to run, the manufacturing index is flashing yellow.
Despite a healthy U.S. economy, growth in imports grinded to a halt in 1Q2019 as the trade war with China is now displayed in trade volumes. U.S. exports were not left unscathed either with annual growth the slowest since late 2016 coming in at 2.6% year-over-year. Although a strong dollar and healthy consumer confidence should be a boost for trade, the deterioration in a trade resolution between China and the U.S. will ultimately lead to higher prices for consumers. Additionally, as imports become more expensive and U.S. exports become less competitive abroad trade volumes are expected to decelerate further in the near term.
Real private fixed investment continued its steady deceleration since mid-2018 as manufacturers and private businesses continue to deal with rising economic uncertainity in the States and abroad. Manufacturing investment posted year-over-year gains of 3.3% in 1Q2019, the slowest pace since early 2017. The private sector, which seemed almost immune to the ongoing trade war, also decelerated but still showed solid gains of 4.7% since the same time last year. As the effects of the corporate tax cuts fade further in the backdrop, combined with the deceleration in business confidence, business investment growth shoud be monitored closely moving forward.
The spread between corporate and 10-year treasury bond yields compressed in the last few months as economic uncertainity increased. As the U.S. trade war with China has intensified, the probability that the Federal Reserve will increase rates has now declined substantially, with a possible rate cut now in investors’ minds. Spreads have declined below their long-term average as investors have fled equity markets in fear of the trade war dragging down corporate earnings. Investors’ sudden switch to fixed income has put the rebound in the equity market earlier this year safely in the rearview mirror. If the bands of economic uncertainity continue to widen expect spreads to decline even further as investors look to safety.
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