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What could go wrong? By September of this year, America’s unemployment had dipped to 3.5%, the lowest observable rate since December 1969. Despite a weakening global economy, the specter of negative interest rates in much of the advanced world, enormous indebtedness among households, corporations and governments around the world, simmering trade disputes, geopolitical tensions from Hong Kong to the Turkish/Syrian border, Brexit and a host of other vulnerabilities, U.S. equity and bond markets have continued to perform brilliantly.

Buoyed by a strong job market, U.S. consumers continue to punch above their lofty weight, and a long-predicted U.S. corporate earnings recession has failed to materialize.

As 2019 exits and gives way to 2020, contractors continue to report difficulty finding workers and lengthy backlogs—according to ABC’s Construction Backlog Indicator (CBI), the average backlog stood at nine months in August 2019. All of this seems consistent with the notion that America’s economic expansion, now in its 11th year, is not on the verge of ending anytime soon.

Former Federal Reserve Chairwoman Janet Yellen and many other economists have said that economic expansions don’t die of old age. Indeed, the fact alone that this is the lengthiest expansion in American history does not imply an impending stoppage. After all, Australia, another advanced economy, hasn’t suffered a recession in nearly 30 years.

Despite the availability of research indicating that expansions don’t simply reach an expiration date, many economists seem to believe that they really do. The Wall Street Journal polled 73 economists at the beginning of 2019, asking them what they expected of the economy for the coming year. The results of the survey indicated that a quarter of the respondents predicted a recession at some point during the current year. This was the highest reading since October 2018. Moreover, in 2017, only 13% of respondents predicted a recession.

There are several reasons for this. According to Bernard Baumohl, chief global economist at the Economic Outlook Group, “A further deterioration in the trade dispute with China, combined with a deeply divided U.S. government and a conclusion to [Former Special Counsel Robert] Mueller’s investigation could sap all the energy out of the economy.” Additionally, at the start of last year, many had expected the Federal Reserve to continue raising rates, thereby lifting borrowing costs and impeding both consumer spending as well as private investment in new construction, equipment, etc.

These fears proved to be unfounded. The Mueller investigation essentially fizzled as an economic factor. In light of persistently low inflation, the Federal Reserve didn’t raise rates further in 2019, but instead has cut rates three times as of press time.

But new risks have emerged in the interim. Despite a partial trade agreement reached in mid-October, trade disputes continue to roil markets and add to the levels of uncertainty facing them. The president finds himself embroiled in fresh controversy, this time involving Ukraine. Through it all, U.S. equity markets have largely responded with shrugs and yawns, with each significant reversal in stock prices invariably followed by a subsequent rally.

LACK OF INFLATION

Without question, the biggest surprise of 2019 doesn’t relate to impeachment, immigration policy or other matters of deep interest to the inside-the-Beltway crowd. Rather, the biggest surprise has been the lack of inflation generated by the U.S. economy.

To understand just how shocking this is, one has to take a few steps back. In December 2015, the Federal Reserve began ramping short-term rates higher in an effort to normalize monetary policy and to combat presumed inflationary pressures. Between December 2015 and December 2018, the Federal Reserve would raise rates no fewer than nine times, lifting the Fed Funds rate from essentially zero to just above 2%.

Coming into 2019, the presumption was that the Fed would continue to tighten monetary policy. After all, America is a nation that cut taxes dramatically in late-2017 when the economy was already approaching full employment. In 2018, U.S. economic growth accelerated meaningfully from 2017, when the U.S. economy expanded 2.2%, to just short of 3%, and given already low unemployment, the thinking at the time was that problematic inflation was sure to follow. As of September 2019, the nation had continued to add jobs for 108 consecutive months. The number of job openings per unemployed worker has hovered around 1.2 in recent months, which is extraordinarily inflationary given that construction firms, distributors and others are continuously striving to identify new talent and cling to the human capital that they have already amassed.

But rather than accelerating, inflation has remained benign—hovering at least at or slightly below the Federal Reserve’s stated 2% target. There are many conceivable explanations for this, including a weakening global economy, which reduces demand for goods and services, thereby keeping prices low; a strong U.S. dollar; the Amazon effect (ever improving supply chains and transparent pricing); and worker productivity growth.

One key ramification is that rather than raising rates, the Federal Reserve chose to cut rates in July, September, and again at the end of October. In other words, despite guiding monetary policy in a nation at full employment, the Federal Reserve has decided to further support growth rather than to fixate on inflation. Few, if any, economists had predicted that stance coming into the year—a year that was supposed to be associated with both emerging inflationary pressures and rising rates.

It is not the case, however, that the Federal Reserve has flipped to slashing short-term rates merely due to a lack of problematic inflation. The U.S. economy has been slowing, led by a manufacturing sector that is arguably already in recession.

MANIFESTATIONS OF A SLOWDOWN

Last year, the U.S. economy expanded 2.9%. During the first quarter of the current year, the U.S. economy expanded 3.1% on an annualized basis. Then came the second quarter—a quarter associated with 2% growth on an annualized basis. Many economists predict that the latter half of 2019 will be associated with sub-2% growth, in part due to a faltering industrial sector. It is likely a source of disappointment to some that the U.S. economy has already slipped to a rate of growth observed prior to the passage of the Tax Cuts and Jobs Act of 2017.

Manifestations of this slowdown are abundant. In September, U.S. factory activity contracted for a second consecutive month. The Institute for Supply Management reported in early October that its measure of factory activity reached a ten-year low. As indicated by writer Harriet Torry, new orders for durable goods, products designed to last at least three years such as computers and machinery, have been down more than 4% from a year ago.

This weakness is beginning to permeate throughout the broader economy. Job growth is slowing. Over the past six months for which there is available data, job growth in America has averaged 154,000 jobs/month. During the prior six months, the monthly average stood at 204,000. As an example, in September, the nation added 136,000 net new jobs, according to the initial estimate from the Bureau of Labor Statistics, continuing a trend of softening employment growth.

It would be possible to argue that slowing job growth is hardly an indication of broadening economic weakness. After all, in a nation offering more job openings than available workers, one would expect that job growth would trend lower as the task of securing new workers becomes more challenging with the passage of each and every month.

With consumer spending representing approximately 70% of aggregate demand for goods and services, a strong labor market would tend to produce a healthy consumer sector, which, in turn, would tend to keep GDP growing. All of this is fodder for those predicting that the U.S. recovery will continue to persist through 2020 and beyond.

But this is a debate, with each point that is made by those who predict ongoing expansion likely to be countered by an equally plausible point emerging from doomsayers. For instance, while the number of job openings remains elevated, the absolute number has been in decline in recent months.

What’s more, wages are not growing as rapidly as they had been, which compromises the strength of the consumer spending hypothesis. While America’s rate of unemployment had declined to a 50-year low in September, the labor market’s resilience is no longer extending to wages. Hourly wages actually declined in September for the first time in two years; the one-cent-per-hour slip recorded in September to $28.09/hour represented the first monthly decline registered since October 2017. Over a recent 12-month period, average hourly wages were up a mere 2.9%, the slowest pace registered since July 2018.

In the past, sharp declines in unemployment have frequently triggered commensurate increases in earnings. But not this time around. One reason speculated for that shift is fear. Rising worries about a potential recession over the next 12 to 18 months are rendering employers more risk averse, causing them to limit raises and other forms of wage increases.

NOW, A WORD FROM OUR LEADING INDICATORS

One way to tilt toward one side of the debate relative to the other is by analyzing the trajectory of leading indicators, which are indicators shown to lead the trajectory of the broader economy. The Conference Board, a private organization in New York, represents an important source of leading indicators. Its Leading Economic Indicator (LEI) Index is comprised of 10 leading indicators in their own right, such as the number of building permits issued. In the past, the direction of the LEI Index has proven a useful way to predict the direction of the broader U.S. economy.

The LEI Index exhibit (p. 27) provides readings for the most current month as of press time (August 2019), as well as readings from six months prior (February 2019). As indicated, over the last six months, the index has edged higher, but several leading indicators are in retreat. Consumer sentiment has also softened. According to the University of Michigan’s Consumer Sentiment Index, it dropped below 90 in August 2019 for the first time since October 2016. The latest reading has consumer sentiment rising to 92.3 in September.

CONSTRUCTION MOMENTUM PERSISTS

While construction spending is generally viewed as a lagging indicator of economic activity (among the last segments to be impacted by a downturn and among the last to begin to recover after one), the performance of the nation’s construction industry remains robust. The construction industry added 7,000 net new jobs in September, the last month for which there is available data at press time. For the year, the industry added 110,000 jobs, an increase of 1.5%. The data indicates, however, that like a growing number of industries, monthly construction job growth has begun to soften.

Still, that represents an impressive year-to-date tally for a number of reasons. Ask any contractor about their circumstances, and they are likely to break out with laments regarding an inability to secure sufficient numbers of electricians, plumbers, glaziers, roofers, superintendents or estimators.

These shortages come at a time when contractors have elevated demand for new workers. According to the August 2019 reading of ABC’s Construction Confidence Index (CCI), 59.3% of contractors intend to expand their staffing levels over the coming six-month period, while just 9.8% intend to decrease their staffing levels. (See p. 22.)

Shortages aside, construction firms have managed to continue to find new people, though in many instances the newcomers require substantial training. Among experienced workers, wages continue to rise rapidly, helping to drive up the overall cost of delivering construction services, even in the context of generally well-behaved construction materials prices.

Construction spending in several private nonresidential categories has waned (see p. 30), perhaps because of rising concerns regarding overbuilding in certain segments. Among these segments are office and lodging, both of which have experienced chunky increases in spending over the last five years, recent weakness notwithstanding. This has resulted in private spending being down and public spending doing the heavy lifting.

Indeed, one of the sources of strength for the U.S. economy over the last year has been a pickup in infrastructure spending. While the federal government has yet to fashion a full-fledged infrastructure plan for the nation and the Highway Trust Fund is set for insolvency by 2021 absent Congressional action, infrastructure-related outlays remain a good news story. So far, state and local governments have come to the rescue, supported by rising collections of income, sales and property taxes. Several key construction segments have benefitted as a result, including water/sewer, transportation and highway/street.

These outlays have pushed the infrastructure segment of ABC’s CBI (see above) to 10.4 months of backlog as of August 2019, the highest of the three segments considered by the indicator. By contrast, backlog in the heavy industrial category slipped to 7.7 months in August, a decline of 12%. It appears that the slowdown in factory activity is now being reflected in construction spending data.

Growing contractual volume in the infrastructure category helped to push backlog among Middle States contractors up to 8.8 months, a 1.8-month gain. Overall, backlog continues to be lengthiest in the South and West.

2020: FLASHING YELLOW

Economists have been predicting the next economic recession for years now. The last year was especially difficult to forecast given the enormous influence of uncertain policymaking. Tariffs announced as definitive one month would be postponed indefinitely during the next, only to return a few weeks later.

Though the Federal Reserve has cut rates twice in 2019, reducing borrowing costs likely won’t solve the issues underlying the economy. American households and businesses face significant uncertainty heading into 2020, with individuals struggling to understand the impact of international trade disputes and the consequences of their own expanding indebtedness.

What is known is that there will be elections in the United States in less than one year, which will serve to further expand uncertainty. For businesses, this means an indefinite future in the coming months regarding taxes, health insurance, defense contracting, trade relations and, of course, regulation.

For households, this translates into uncertainty regarding federal taxes, state and local tax deductions, incentives to purchase electric vehicles, social assistance, payments to farmers, and more. Even state and local government policymakers face growing ambiguity regarding future federal spending on infrastructure and social programs such as Medicaid.

Ultimately, the heightened level of uncertainty could induce many economic actors to adopt a wait-and-see attitude, further reducing economic activity in the context of an already rapidly softening global economic environment. An inverted yield curve and other indications have been flashing yellow for months.