The unemployment rate is near a five-decade low, as is the rate at which people are filing new jobless claims. The American consumer appears strong; this is looking to have been one of the strongest holiday sales seasons in many years.
Surveys of supply managers, which act as an early warning system for slowdowns in business activity, are in strongly positive territory. In the Institute for Supply Management’s surveys, an index above 50 indicates the economy is in expansion; its most recent reading was 62.1 for the manufacturing sector and 60.7 for services.
The most concrete warning signal is coming from financial markets. But the bond market is generally more closely tethered to economic ups and downs than the stock market, and while it is suggesting slower growth ahead, it is not at recessionary levels.
For example, the two-year Treasury bond yielded 2.56 percent at Monday’s close. That’s still higher than the roughly 2.4 percent where the Fed’s benchmark overnight rate now sits. You would expect that if a recession were imminent, the two-year yield would fall lower, reflecting expectations of Fed rate cuts to combat the downturn.
At this point in December 2007, which we now know was the beginning of the Great Recession, the Fed’s target interest rate was 4.25 percent. But the bond market was already pricing in more cuts in the years ahead, with the two-year yield ending the year at 3.12 percent.
Most economic and financial indicators are not pointing toward some economic collapse in 2019, but rather to a return to the kind of moderate economic growth that was completely normal from 2010 to 2017.
In this story, 2018 has been the aberration — fueled by a commodity boom and the temporary effects of tax cuts. To the degree there is a market correction and adjustment in business sentiment, it is about realizing that we’re returning to the old new normal.
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