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Caution – Signs of economic slowdown ahead
By: Edward Jones
Despite these healthy market gains, the path forward in the near term may be challenging, especially as the economy weakens and potentially enters a mild recession. This past week we have seen signals of a pending slowdown emerging, including weakness in the labor market, manufacturing, and housing (see below). And this comes as the banking sector looks to potentially tighten bank-lending standards, adding incremental downward pressure on consumers and corporations. Nonetheless, for long-term investors, there may be opportunities forming in the months ahead, particularly as markets start to look past the economic slowdown toward a recovery period.
Three signs of a slowing economy:
1. The labor market is showing signs of faltering: The labor market in the U.S. has been a source of strength in the economy, with an unemployment rate still near multidecade lows at 3.6%. However, last week we may have seen the first signs of cracks in the otherwise resilient job market. The ADP private-payrolls report for the month of March showed an increase of 145,000 jobs, well below the expected 250,000 increase.
2. Manufacturing and services activity continues to fall: Last week data for U.S. manufacturing activity and services activity for the month of March came in well below expectations. The ISM manufacturing index, a gauge of manufacturing health, fell to a near three-year low to 46.3, below expectations of 47.5. Readings below 50 indicate a contraction in activity.
3. The housing sector is softening: Over the past couple of weeks we have seen housing data come in softer than expected. The housing and rental components of inflation have remained elevated, although the real-time data indicate a housing market that has started to soften. Last week's Case-Shiller national home price index saw moderating gains for seven straight months, coming in at 3.8% year-over-year, which has not been seen since the pre-pandemic period1. Higher mortgage rates and cooling housing demand have weighed on the sector, which could also see further downside if mortgage-lending standards tighten.
Sources: 1. Bloomberg, past performance is not a guarantee of future returns.
Edward Jones - Mae Luchetti