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Economic Outlook

By: Russ Colbert
Fall 2019 (Vol. 37, No. 3)

In spite of all the noise we keep hearing about a recession, the employment reports clearly show we are not in an economic downturn. The best news about the unemployment rate is that it is the lowest most Americans have seen in their lifetime. The drop in the jobless rate has been broad based. The Hispanic unemployment rate has fallen to around 3.9%, and the Black unemployment rate has fallen to about 5.5%, both record lows. The lowest Hispanic jobless rate in a prior expansion was 4.8% in 2006, the lowest Black unemployment rate during a previous expansion was 7.0% in 2000. Workers age 25 and up who lack a high school degree have an unemployment rate of 4.8%, down from 15.8% back in 2010. Remember the news stories suggesting these workers would never find new jobs because of automation.

Remember a few years ago all the talk about how all the job growth was due to part-time work, and not full-time jobs? We don’t feel that was the whole story, instead, in our view, the case of some analysts letting their political leanings get in the way. Now that belief would be absurd. Part-time workers are only 17.1% of all employed workers, versus the peak of 20.1% back in 2010. Over the past 40 years 16.7% has been the lowest part-time share and it looks to be close to that again sometime during 2020. Eventually, the job creation pace should slowdown somewhat as we continue to get a larger share of economic growth from the rising productivity that has continued to grow in response to the lower tax rates and deregulation. There are limitations on how far the unemployment rate can fall, and how many workers, on average, can join the work force monthly. Payroll growth of around 100,000 per month should be enough to maintain the unemployment rate around 3.5%. Payrolls are up about 179,000 per month for the past year.

The U.S. will eventually fall back into a recession, but we don’t feel it will this year or the next, and probably not in 2021 based on what is currently going on with the economy. We think the U.S. economy will grow around 2.5% in 2020, around the same pace as this year. Earnings remain at good levels despite trade uncertainty that we feel will diminish in the months ahead. The technological innovations are continuing to proceed at great pace. The money supply (M2) has accelerated over the past year. Businesses are better off, adjusting to a lower tax rate and much better regulatory environment. We are not experiencing the swift economic growth we experienced back in the mid- 1980s or late 1990s, but it is significantly stronger than the pace we experienced from 2009 through 2016.

Since we expect the economy to grow around 2.5% next year, there will be some sectors that won’t do quite as well. Some of these are driving-age population growth and scrappage rates. They are showing the sale of cars and smaller trucks (pickups and SUVs) will most likely continue to slow over the next several years. Auto sales have continued to slow since 2016 while the overall economy has picked up speed.

The Federal Reserve has just finished cutting interest rates again after three consecutive meetings. The complete opposite stance from where they were a year ago after raising interest rates a number of times in 2018. In our opinion that contributed in causing the stock market to pull back the second half of the year, especially the December correction and held back economic growth. The Federal Reserves’ current stance seems to be more unlikely to raise rates anytime soon and suggest looking ahead we should experience solid economic growth and stronger growth for the stock market.

If you have any questions or need a free portfolio review to keep you on track with your investments or retirement plan, please call me.

Russ Colbert
Senior Portfolio Manager

Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.