September 20, 2023

What Is (and Isn’t) Working in the U.S. Economy

By Michael McKeown, CFA, CPA - Chief Investment Officer

What Is (and Isn’t) Working in the U.S. Economy

Have economists become the boy who cried wolf? Coming into the year, surveys showed the highest percentage of economists ever predicting a recession.

Thus far, in 2023, they are either wrong or early.

Stocks are up double digits this year. Employment is decent. Profit estimates are trending up. Inflation is down (though above the Fed’s goal).

Certain sectors and regions of the economy have diverged. But first, let’s level set on the U.S. economy.

The services portion of the economy makes up 78% of what we produce (as measured by Gross Domestic Product). Manufacturing is just 12% of the economy. Over time, the U.S. economy, like most developed countries worldwide, became more service-oriented than manufacturing-based. Employment followed suit.

Percent of Employees in Services vs. Manufacturing

Why does this matter? Well, economists did get a slowdown right – in the smaller of the two major sectors of the economy – manufacturing. New orders fell throughout this year. We saw similar indicators in Marcum LLP’s 2023 National Manufacturing Survey, where 72% of participants reported a growth in revenue of at least 5% year-over-year, a decrease from the prior year.

Services, on the other hand, showed expansion throughout the year.

ISM Survey: New Orders

Regionally, we see differences in the seven most populated states. The largest, California, has seen a rise in unemployment. Perhaps this has to do with the technology sector layoffs along with the outmigration. The other six largest states have a relatively flat to lower employment rate. Florida has the lowest unemployment rate in the chart with Ohio not too far behind (I had to get that reference in there!).

State Unemployment Rates

The Sahm Rule states that when unemployment rises over 0.5% in a 12-month period, a recession has a high risk of starting. Nationally, the latest monthly report shows the unemployment rate rose from 3.4% to 3.8%. We are not out of the woods just yet.

The interest rate hikes that started in March 2022 are slowing down cyclical parts of the economy. This includes big-ticket items that are financed with debt, like houses. We all have seen the 7% mortgage rates and rising housing prices, making owning a new home out of reach for many. In turn, this has pushed homebuilders to slow down new construction.

US Housing Construction

On the positive side, we are seeing looser financial conditions relative to the last twelve months. This tends to be positive for growth in the next couple of quarters. In addition, most people underestimated the trillions in excess savings households have from the pandemic stimulus. With government deficits this large today, the private sector is running a surplus. This is why betting against the U.S. consumer is tough.

US Pandemic Savings

In summary, we have mixed signals today. Momentum looks positive in the near term, though some clouds are gathering on the horizon. The old joke seems relevant again, “economists have successfully predicted nine of the last five recessions.”

We will continue to look across all the data to manage portfolio risk and keep clients on track with their financial plans.

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