The Big Event 2019 Economic Update

May 17, 2019

Melissa Bean, president and CEO for Mesirow Wealth Advisors, provides insights into key economic factors business owners and investors may want to consider when making long-term investment decisions, and in determining how these factors might impact Lake County businesses.

U.S. Gross Domestic Product (GDP)

GDP growth over the last decade has averaged around 2% annually post-crisis, well below the 3.1% historical average since 1947. While the first quarter of this year has shown improvement at 3.4%, the market is viewing that growth somewhat skeptically, given the boost from tax cuts may be unsustainable as benefits of those tax cuts haven’t trickled down to lower-and-middle income households.

  • As of March 31, 2019, the current period of expansion is the second longest in U.S. history at 117 months.
  • GDP would be approximately $3.3 trillion higher if we continue to grow at the historical rate of 3.1%.

Housing

While housing starts have improved since the market bottom, they’re still well below trends. We are operating at an annual run rate of about 1.23 million new homes in 2019, still well below the average of 1.4 million annually since 1960.

Employment

The jobs picture has improved remarkably since the financial crisis. Unemployment is down to 3.6% nationally and about 4.2% in Lake County compared to almost 10% at its peak during the crisis.

  • Underemployment is 7.4%, compared to 17% at the peak.
  • One of the numbers that hasn’t improved as much as we would expect is labor force participation. Lake County Partners understands that the skills gap has a lot to do with this, particularly in the manufacturing and healthcare industries. Automation and technology like artificial intelligence are changing the nature of work and the skills required, keeping many workers on the sidelines. This is why workforce development initiatives in Lake Country are so critical.  
  • A major wealth gap prevails because many American families have not participated in this record-breaking economic expansion over the last decade. Only 10% of households own 85% of all stocks. While corporate profits have been at record highs, employee incomes haven’t reflected that, which means less disposable income to drive consumer spending, which contributes just under 70% of GDP.  

Debt

This economic expansion and jobs picture has been fueled by an extremely low rate environment from accommodative central banks both here and abroad which means that leverage is back.

  • The good news is that consumer debt for families and households is largely in check (excluding student debt). Household debt-to-income is at a near all-time low but balance sheets of corporations and the government look very different.
  • Corporate Debt-to-GDP is at multi-decade highs and federal Debt-to-GDP at an all-time high. 

Interest Rates

The yield curve inversion between two- and 10-year Treasuries has historically served as a precursor to a recession. As of the week of 5/13, one-month Treasury rates of 2.4% were higher than five-year Treasury rates of 2.15%. It is unlikely that the Fed will raise rates and cause further inversion unless the trade wars cause price increases and inflation.

  • This is important because a rise in rates make debt loads difficult to pay down and we’ve seen that the threat of increased rates impact the stock market. The stock market is particularly sensitive to rates, as we saw when stocks dropped almost 20% from their Sept 2018 peak when rates were expected to increase, and then bounced back when the Fed reversed course and paused their plans to continue raising rates.
  • This market response shows how fragile and reliant the stock market is to the Fed’s ongoing stimulus.

Things to Talk With Your Advisor About

  • Look at your debt exposure and understand the risks involved if interest rates rise.
  • Discuss whether the increase in short-term rates on money market funds should affect your asset allocation strategy.
  • Understand that while there is still potential upside in the stock market, return expectations should be tempered compared to last decade
  • Always remember that developing and sticking with a long-term strategy will help you meet your financial goals.