Split Personality: U.S. Economy’s Bifurcation Persists

Key Points

  • Friday’s releases of job growth and manufacturing data highlight the ongoing bifurcation in the economy between weak manufacturing/capex and stronger services/consumption.
  • The bifurcation is also seen in the stark differential between CEO and consumer confidence.
  • Profitability and employment data continues to be key to watch for any signs of the bifurcation breaking down.

The U.S. economy’s bifurcation continues. Manufacturing’s beleaguered state persists alongside weak business investment (capital spending)—courtesy of ongoing uncertainty with regard to trade and tariffs. On the other hand, the services side of the economy remains in expansion mode, while consumer spending and confidence remains healthy. Much ink has been spilled on these divides; with our take that any cracks in those dividing lines would likely be seen through the employment channel. As of Friday’s labor report, we can say so far so good.

Nice report

There was a lot to cheer in the October nonfarm payrolls report from the Bureau of Labor Statistics (BLS). Payroll employment rose 128k with net upward revisions totaling 95k for the prior two months. Although the unemployment rate ticked up from 3.5% to 3.6%; it was for the “right” reason given that labor force participation ticked up. In addition, household employment (a separate survey)—from which the unemployment rate is calculated—jumped 391k, the sixth consecutive increase.

There were only two marginal negatives. There was a fairly paltry increase in average hourly earnings which kept the year-over-year gain at 3%—fairly low at this point in the cycle based on history. In addition, temporary employment, which is a leading indicator of job growth, fell. On the other hand, the acceleration in manufacturing’s weakness in terms of payrolls was mostly due to the GM strike; which of course is now over.

Source: Charles Schwab, Bureau of Labor Statistics, as of 10/31/2019.