The U.S. and global equity markets got shaken up a bit last week, with weak manufacturing numbers in the U.S. and globally indicating pronounced slowdowns in factory activity, employment, and trade. The manufacturing sector is very globally interconnected, with very few sophisticated products being assembled in a single country, so the synchronized slowdown comes as no surprise. There are cyclical forces at work here, in my view, but the adverse impact of the trade war is also starting to show up in the numbers.

With the impeachment inquiry also flooding the airwaves last week, it may feel to some readers as though we’re due for a reckoning. I would tend to agree that in the short term, all the noise is likely to contribute to higher levels of volatility, full stop. But does that mean it’s time to shift portfolios or turn fully defensive? I don’t think so.

If you ignore the noise and consider the broad range of fundamentals, the picture for markets and the U.S. economy does not look as bleak.

Manufacturing versus The U.S. Consumer, Labor Markets, and Services

Manufacturing is an important component of the U.S. economy and has historically been a leading indicator. But news last week made it appear as though factory activity is a bellwether for the U.S. economy. It isn’t. The manufacturing sector only accounts for around 10% of the U.S. economy, and that number has been shrinking progressively over the years.1

I believe this shrinking trend does not signal any kind of economic downfall and should not be viewed in a negative light – it is simply part of a longer-term transition, where the U.S. has moved from being an industrial economy to now being a services and consumption-based economy. In the modern economy, skilled labor has more value and pays higher wages than unskilled labor, which has led to overall increases in wealth over time (though creating winners and losers in the process).

Services Account for a Growing Share of the U.S. Economy


Source: Credit Suisse2

To be fair, if the ISM services data last week had indicated contracting activity in the U.S. economy, my tone here might be a bit different. But the ISM Non-Manufacturing PMI, which measures services in the U.S. economy, remained comfortably in expansion territory and relatively healthy. Many news reports noted that services data was less expansionary than expected, and that it surprised to the downside, but at the end of the day growth is growth.3

Macroeconomic data in the labor market and retail sales (the all-important U.S. consumer) also offer evidence that it is not all doom-and-gloom in the U.S. economy. Job growth as measured by non-farm payrolls remains strong, with reports last week showing that the U.S. added 136,000 jobs in September, bringing the jobless rate (3.5%) to its lowest level in 50 years.4

Small businesses, which are often considered a key growth engine for the U.S. economy, have been increasingly reporting labor shortages, where 57% of owners have said they’re hiring or trying to hire new workers. A majority of these business owners have reported finding few, if any, qualified applicants for open positions, which might at once point to strength in economic activity but also a skilled labor shortage in the U.S. A key takeaway from the NFIB Small Business Jobs Report was that “hiring has slowed down, but it’s due to the inability to find qualified workers, not because of a lack of customers.”5

The U.S. consumer is another proxy for the health of the U.S. economy, and signs for now point to solid spending as we enter the holiday shopping season. Total retail sales for the June 2019 through August 2019 period were up 3.7% from the same period a year ago, with a particularly strong showing in July. In the latest ISM Non-Manufacturing report, the statement from the Retail Trade sector was that “business continues to pick up as we quickly approach Q4. Week by week, we inch closer to a much-anticipated holiday retail season, which requires not only last-minute buys, but a push to fill open positions.”6 Again, not all doom-and-gloom.

Bottom Line for Investors

Recession risks are clearly rising, and growth across the global economy is slowing. U.S. corporate earnings are also expected to post their third straight quarter of negative growth in Q3, which hasn’t happened since 2015 – 2016. Investors should expect any bit of bad news to invoke a volatile response in the stock market.

But it’s not all doom-and-gloom out there, and the base case is that the U.S. economy is still growing. The all-important services sector remains in expansionary territory, the U.S. consumer is still spending at a nice clip, the jobs market is quite healthy, and interest rates are falling. Recessions do not tend to happen when these factors are all working in the positive, and I do not think that changes now.


1 National Association of Manufacturers, 2019.

2 Federal Reserve Board, Haver Analytics®, Credit Suisse. October 2, 2019.

3 Institute for Supply Management, October 3, 2019.

4 The Wall Street Journal, October 4, 2019.

5 NFIB Small Business Jobs Report, September 2019.

6 Institute for Supply Management, October 3, 2019.


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