There Are No One-Handed Economists
In the years immediately after WWII, as he sought to implement the Marshall Plan, Harry Truman was quoted as saying: “Give me a one-handed economist. All my economists say ‘on one hand…’, then ‘but on the other…”
As fundamental data-driven investors we never run out of hands. This is part of the opportunity and challenge as we seek to build enduring portfolios to help our clients achieve their long-term goals.
Today we note the fairly significant disconnect which has existed between the tentative mindset of business leaders and the fairly upbeat US consumer over the past 12 months. On the corporate side, one telling sign comes from the Global Business Outlook, a quarterly survey of CFOs. At this point, 53% of respondents believe there will be a recession over the next four quarters. This figure is an increase from 38% six months ago. This sentiment was reflected in the second quarter’s decline in business investment and the Purchasing Managers’ Index, which fell below 50 in August, indicating a contraction.
In addition, the small business confidence index, which saw a significant spike immediately after the Presidential election, has seen meaningful deterioration since last fall. This is due to a combination of global trade friction, weakening economic conditions in Europe and Brexit. While people can (and do) credibly argue that certain trade practices, such as excessive government subsidies and forced technology transfers, are unfair and need to be remedied, the process of identifying and trying to renegotiate these imbalances brings a meaningful degree of uncertainty.
The recently implemented tariffs and threats of others have impacted trans-Pacific trade volumes as well. The Port of Long Beach, which is the second largest port in the US has seen a 5% decline in loaded inbound container cars thus far in 2019.
Though much could be written about Brexit, which entered a new chapter in July under the leadership of Boris Johnson, and is lurching towards its October 31 deadline, a more tangible sign of risk lies across the pond. The German economy, which is the export engine of Europe, saw a 0.1% decline in quarter-over-quarter GDP. This was driven by a contraction in the country’s manufacturing sector.
On one hand:
If we assume the average consumer does not closely follow the issues of global trade, it makes sense that he/she carries on without worry. The labor market continues to be strong, with the unemployment rate holding at or below 4% since early 2018. Beyond the recent wage gains, we have seen companies rolling out low-cost benefits like flexible office hours, relaxed dress codes and expanding telecommuting policies to retain valued employees. A benign inflation environment and low interest rates potentially being made lower by the Federal Reserve’s rate cut in September have benefited the consumer, whose spending was up 4.7% in the second quarter. As a frame of reference, US consumer spending accounts for almost 70% of US GDP, and 16% of Global GDP, so the mindset of the American shopper cannot be overstated.
On the other hand:
There are some signs that the persistent concerns weighing on businesses might be making their way to the consumer. The August sentiment survey reflected a marked decline, although this looks similar to the drop off in January 2019, so we caution that one data point does not make a trend.
Another closely watched indicator of consumer health is recreational vehicle (RV) sales, which are large and highly discretionary purchases. After two record-setting years there has been a notable decline in 2019 dealer orders. Though delivery logistics and tariff fears impacted some inventory management decisions, any sustained increase in gas prices due to the drone attack on a Saudi oil processing facility would be a broader economic headwind.
From an investment standpoint, we are closely watching the fortunes of corporations and consumers. While lower interest rates have benefited both groups, corporate borrowers have seen a more significant loosening of lending standards. As such, Oxford’s views have become more favorable on consumer credit in our portfolios.
While President Truman never received his wish, in time, we will know whether these hands can work together and meet with a celebratory high five, or an arm-wrestling match. In the event of the latter, we are rooting for the consumer.
The above commentary represents the opinions of the author as of 9.25.19 and are subject to change at any time due to market or economic conditions or other factors. The information above is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.