By Tim Courtney, Chief Investment Officer
In recent months, we’ve seen some unexpected shifts in economic indicators, leaving investors confused and searching for clarity on the state of the U.S. economy.
First, let’s look at the recent jobs reports. Data from July and August has shown weaker-than-expected job growth and significant downward revisions to past reports.1 Initially, we thought the economy added about three million jobs over the last 12 months. However, after revisions, that number dropped by about one million, and there could be further adjustments.2 This suggests either another substantial revision lower or that the population has increased substantially from immigration. The numbers are very noisy and have not been adding up, and it's making it difficult to get an accurate read on the health of the labor market.
Investors have also started to look at another traditionally reliable economic indicator, the yield curve, with skepticism. Historically, recessions have followed within 24 months of an inversion.3 However, we’ve passed that 24-month mark without a recession. Adding to the confusion, the yield curve recently uninverted.4 Having long-term bonds with lower yields than short-term bonds is a strange situation, and the market is communicating something when this happens. However, with interest rates jumping all around over the last three years, it is difficult to know exactly what the inversion is communicating.
Despite having access to more economic data than ever before, the economic picture has become less clear. While some signals are flashing warnings, others, like stock prices, are indicating continued growth ahead. At the heart of these conflicting signals is an important question: Is this information actionable for investors? While we do take price signals into account when making buy/sell/rebalancing decisions, we don’t recommend using this noisy data to make sweeping or abrupt changes to allocations.
The U.S. economy could be thought of as a massive cruise ship. Due to its size, any change—whether increasing or decreasing speed or adjusting direction—takes time to have an effect. Over the last few years, we’ve seen extreme changes in how we’ve been operating the ship. In 2020, we effectively turned off the engines. A few months later, we turned everything back on at full power, pushing the economy forward at maximum speed. Then, after about a year and a half of rapid growth, we threw the engines in reverse by raising interest rates at an unprecedented pace to combat inflation. Now, we’re lowering rates and steering back to port in an attempt to navigate a soft landing.
The official entity that defines recessions, the National Bureau of Economic Research, usually tells us we’re in a recession well after it has begun by backdating the recession’s start by multiple months or quarters.5 So, as investors, we’re left with indicators that are currently very difficult to read. In times of uncertainty like this, the typical solution is to diversify. Own assets that will behave differently under varying conditions. We believe that’s the best way to navigate turbulent waters.
If you have any questions, please reach out to your Exencial advisor.
Sources
- Axios (September 6, 2024) - August Jobs Report: U.S. Labor Market Cools Again in August, Adding 142,000 Jobs
- NPR (August 21, 2024) - U.S. Added Fewer Jobs in the Past Year Than Initially Reported
- Marketplace (September 12, 2024) - Why the Inverted Yield Curve Is Typically a Recession Predictor
- NPR (September 5, 2024) - The Yield Curve Keeps ‘Uninverting.’ What That Means and Why It Matters.
- National Bureau of Economic Research (September 26, 2024) - Business Cycle Dating
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A yield curve represents the yields or interest rates of bonds with the same credit quality but varying maturity dates. It predicts the direction of interest rates and potential shifts in economic growth or decline.
