CoStar Economy: The Waiting Is the Hardest Part

The Waiting Is the Hardest Part

Manufacturing Feels the Weight of Uncertainty Over Trade Agreements

ROBERT CALHOUN AND MATT POWERS (via CoStar Group)

Holiday season in Michigan is going to be different this year.”
– Patrick Anderson, principal at Anderson Economic Group of East Lansing, Michigan

The month of October feels like it is dragging along very slowly: The first week we eagerly awaited trade deals; the second we found tentative agreements; the third we yearned for more details. This past week was a quiet one for economic data, but there was confirmation that trade deal yo-yoing, with little actionable information, hurts the economy.

U.S. orders of manufacturing goods in September fell more than 5% from a year prior. This is the biggest drop since June 2016, the last time we saw a serious slowdown in global growth. The the lack of visibility around the future is much greater now than then.

This kind of uncertainty is likely to weigh on the labor market as we await the Nov. 1 report on hiring trends. Reviewing recent hiring, we see the decline in manufacturing. This disproportionately impacts some states. Gregg Phelps, president and CEO of the Lakeland Cos., a group of manufacturing and distribution companies headquartered in the Twin Cities, said the impact of trade uncertainty on businesses is like when a snow globe is shaken and “all the snow goes whirling around inside.”

Midwest economies with high manufacturing exposure in particular have been seeing barely more than 0% job growth over the past year. They face not only trade uncertainty but also a surge in organized labor disputes, such as General Motor’s United Auto Workers and the Chicago Teachers Union. “Holiday season in Michigan is going to be different this year,” said Patrick Anderson, principal at Anderson Economic Group of East Lansing, Michigan. It seems that unions consider the current generationally tight labor market as a good time to strike, if you’ll pardon the pun.

Worth mentioning is the one uber outlier: Alabama. Although it is the second-most reliant state on manufacturing at roughly 17% of its gross domestic product, it has job growth of more than 2% year over year. No other state with manufacturing higher than 14% of its state GDP has job growth north of 0.75%. Alabama’s service sector has been surging over the past year, most notably in Huntsville, as the state has found itself a hotbed of technology job growth.

While the third-quarter earnings reports piling in this week have been generally good. The outlook remains mixed, with more companies lowering guidance than raising it. Firms are reporting tighter margins, something we hinted about in this space a few weeks ago. We had discussed the National Federation of Independent Business Research Foundation survey showing fewer firms planning price increases.

The S&P 500 continues its months long struggle to remain above 3,000. Real Estate real estate investment trusts have outperformed in October helping the Wilshire REIT index surge to a new high. After suffering a stagnant 2016-18, largely in response to higher interest rates, tightening Federal Reserve policy and the flattening yield curve, REITs got a second wind in 2019.

Most striking is the resistance of industrial REIT stocks against the weakening in the U.S. industrial sector and slowing global growth. Prologis, the largest U.S. industrial REIT, has risen more than 6% since the start of October, showcasing continued optimism for the sector despite headwinds.

It’s possible the REIT sector is sending a good signal to the Fed. If the sector struggled with tighter policy and a flatter curve, surging REIT stocks should convince the Fed that further easing would be well received. The yield curve inversion earlier in the year was taken as a sign of recession by many, so should we interpret its recent un-inversion to mean a recession could be averted with further easing?

The answer to this question probably varies by your geography. Some areas, such as the Midwest, are undergoing real pain; many service-driven coastal economies are doing just fine; others, like the South, seem to be using the opportunity to shift further away from manufacturing.

The Week Ahead …

Next week figures to be one of the busiest of the year for economic data. Friday’s jobs report probably will show an economy that keeps settling into a slower hiring pace. This is not slow enough to raise the unemployment rate. Wage growth remains essential to economic growth going forward. We we will be looking to see if average hourly earnings growth can rebound from September’s sharp drop to 2.9% from 3.2% in August. Wednesday’s third-quarter GDP release, a report we previewed in last week’s note, will probably again show the consumer leading the economy.

The Fed meets on Wednesday to almost certainly cut interest rates again, though with as much internal debate as we’ve seen in a long time. In last week’s final European Central Bank meeting led by Mario Draghi, the former chief who only recently stepped down called for rates to stay unchanged until the inflation outlook can “robustly converge” to their target. Likely not as poetic or as vigorous, Fed Chairman Jerome Powell may nevertheless try to shore up the rickety growth outlook.

As if all that isn’t enough, international trade will continue to compete for headlines. The United Kingdom is asking for another Brexit extension and has set Dec. 12 as a new election date. Tory Prime Minister Boris Johnson finally got some basic agreement within Parliament for his deal, but faces a tough test given his narrow margins and unpopularity. The United States has penciled in the mid-November Asia-Pacific Economic Cooperation summit to finalize some part of its trade deal with China, but that has not stopped anyone from leaking updates.

Robert Calhoun is a managing director and senior economist and Matt Powers is associate director of market analytics for CoStar Market Analytics in New York City.

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