Business confidence remains near its current cycle lows despite a mild uptick in early August. Increased stock market volatility, a back-and-forward in trade disputes, and bond market yield inversion have all tested business leaders. Moreover, growing concerns over a deceleration in the global economy, led by lower production out of China and slower growth in E.U.’s largest economy, Germany, continue to cloud the economic landscape. The decline in business confidence should be monitored closely in the near term as consistently low confidence levels may lead to less hiring as business uncertainty increases.
*WTI Crude Oil Spot Price. Data points through end of August 2019. Change represents month-over-month change.
The ISM Manufacturing and Non-Manufacturing indices have declined by seven and three points respectively over the last twelve months. The tit-for-tat trade war creating increased uncertainty amongst businesses has been largely to blame and both indices are near their levels seen in the run up to the 2016 election. The Non-Manufacturing index by and large has been less impacted by the trade war, but the lack of a deal is becoming a significant drag for both indices. The Purchasing Managers index dipped below 50 for the first time since August 2016. Although the Non-Manufacturing index suggest that the prolonged economic expansion has some room to run, the Manufacturing index is flashing yellow.
Despite a healthy U.S. economy, growth in imports were flat in Q2 2019 as the trade war with China and rising dollar begins to show up in trade volumes. U.S. exports saw the worst of it with annual growth turning negative for the first time since early 2016, declining by 1.6% year-over-year. Although a healthy U.S. consumer 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. As U.S. exports become less competitive abroad as the dollar continues to appreciate export trade volumes are expected to decelerate further in the near term.
Real private fixed investment continued to decelerate through the first half of 2019, following the trend witnessed since the first half of 2018. Rising economic uncertainty in the States and abroad means fewer reasons for manufacturers and businesses to continue investing. Both manufacturing and overall private business sectors investment posted year-over-year gains of 2.6% in Q2 2019, the slowest pace since late 2016 and early 2017 period. The service sector, which was almost immune to the ongoing trade war, has now lost its growth edge over the manufacturing sector. The effect of corporate tax cuts has completely faded in the backdrop and business investment growth should be monitored closely in combination with business sentiment moving forward.
Despite rising concerns of a global economic slowdown and flashing recession indicators, lower tier corporate bond spreads remain at a level consistent with their long-term averages. This is largely driven by foreign capital inflows searching for higher yields and sustained faith in the health of the U.S. economy, particularly in light of the recent reversal in Fed monetary policy. As of July 2019, the corporate-bond-to-10-year-Treasury spread stood at 134 bps versus its long-term historical average of 138 bps. Since year-end 2018, the 10-year Treasury yield has fallen 94 bps, while BBB corporate bond yields fell by 119 bps.
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