As we come to the end of the first half of 2019, what data should we be watching in the second half of the year?
Tie for the Longest Post-War Expansion
We just completed year 10 of this economic expansion, now officially tied for the longest business cycle expansion in the post-war period. This expansion has now lasted 120 months, matching the length of the 1991-2001 expansion. While most economists will tell you that expansions don’t die of old age, the odds of fatal missteps increase the older they get. Even though this expansion appears to still have some legs, there are growing signs that the party may be coming to an end.
Inverted U.S. Treasury Yield Curve
An inverted yield is generally considered a precursor of a recession. The U.S. yield curve has been flattening steadily over the last nine months and is currently inverted. Since October 2018, the spread between the U.S. 10-year note and the U.S. 3-month bill has fallen from over 100 basis points to -12 (as of June 25). This measure of the slope of the yield curve also inverted at the end of March, but at that time markets were soothed by hopes for an impending trade agreement with China and the 10-year rose in response. May’s events, including a resumption in the tit-for-tat tariffs by both the U.S. and China, have stoked fears of an extended trade war which would increase the odds of a global economic recession, suppressing long-term yields. In addition, the Fed’s recent shift to a more dovish stance has caused a downward shift of the entire curve.
G7 PMIs Show Widespread Manufacturing Contraction
In reaction to the increase in global trade tensions, we’re seeing a slowdown in global manufacturing activity, as evidenced by the dramatic decline in many countries’ manufacturing PMI readings over the last 18 months. An index reading above 50 indicates an expansion in overall activity while a reading below 50 indicates contraction. Within the G7, only the U.S. and France are currently showing expanding manufacturing sectors, with PMIs for the rest of the G7 having slipped below 50. Germany is showing the biggest deterioration in manufacturing activity, with the PMI having fallen from 63.3 in December 2017 to 45.4 in June 2019.
Wage Growth Doesn’t Reflect Tight Labor Market
In previous expansions, cyclical lows in the unemployment rate were accompanied by a surge in wages. As shown in the chart below, this has historically meant wage growth above 4% year-over-year, as defined by average hourly earnings for private production and nonsupervisory employees. We see this in 1990, 1997-98, 2000, and 2006-2007; the 1997-98 jump in wages is the only point over the last 30 years where this jump in wages was not immediately followed by a recession. Compare this to the current expansion. Unemployment has fallen from a peak of 9.9% in December 2009 to a near 50-year low of 3.6% in May 2019. However, throughout this period wage growth has struggled to get above 3%, only surpassing 4.0% in one month (December 2018).
Gold Prices Jump to 6-Year High
Viewed as a safe haven by investors in uncertain times, gold prices jumped above the psychological threshold of $1400 per ounce last week. This is the first time the metal has crossed this threshold since September 2013. The surge in demand for gold comes as global market uncertainty has risen in response to the imposition of new U.S. sanctions on Iran as well as growing certainty of one or more Fed rate hikes this year. Expectations of lower long-term interest rates and the resulting weaker dollar are both contributing to gold’s strength.
VP, Associate Director, Thought Leadership and Insights
Sara Potter joined FactSet in 1999 and is based in Norwalk. She is responsible for developing applications that facilitate the analysis of global markets at a macro level, highlighting FactSet’s vast benchmark and economic content sets. Sara has also managed the economic database development team where she was responsible for the integration of third-party economic content as well as the development of FactSet Economics data. Sara earned a M.A. in International Economics and Finance from Brandeis University and holds a B.A. in Economics and French from Dartmouth College. She is a CFA charterholder.