Trade uncertainties, a slump in manufacturing and the global slowdown continue to headline the list of risks to this bull market. We are not quick to dismiss these threats, but in our view, these issues are not an inevitable trigger for recession. Instead, we think the economy’s dependence on the consumer will allow it to avoid recession this year despite challenges in manufacturing and trade.
Trade tensions linger on – The manufacturing segment is in contraction, a slump that is unlikely to reverse course in the very near term as trade uncertainties continue to weigh on business investment and industrial activity. Importantly, we don’t think the headwinds from trade or the collateral damage the tariff uncertainty has inflicted on manufacturing will end the U.S. expansion. Total U.S. exports represent less than 13% of U.S. GDP, and U.S.-China trade is equivalent to less than 1% of global GDP. The potential for trade worries to eventually spill over into business and consumer confidence (impairing spending) presents a credible recession risk, but that outcome is far from certain, in our view.
Manufacturing downturn doesn’t have to end in recession – The slowdown in global manufacturing has been playing out for the past year but has more recently taken shape domestically. However, manufacturing is a notably smaller piece of the U.S. GDP pie today. We’ve seen several periods of weakness in industrial production during this expansion, none of which triggered a more widespread decline. Goods production comprises 18% of U.S. GDP, about half the level of the 1960s, and manufacturing jobs are 8.5% of today’s labor force, less than one-third the level from 50 years ago. The services component of the economy and labor force is now the more dominant influence. Positively, recent surveys have shown the service sector remains in fairly good shape.
Pockets of weakness in the economy, along with political drama (election, Brexit), will likely spur ongoing bouts of volatility in the market. We don’t, however, think they mark the end of the expansion. Don’t shift your strategy in response to headlines. Instead, increase asset class and sector diversification to help navigate market volatility as we advance in the latter stages of the cycle.
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