In the financial media, it’s easy to see what the economists and analysts think about the current economy because usually they propose more of the same when asked about the future. It’s simple to extend the current trend indefinitely, but that’s not always a good idea, nor is it realistic. Even during economic expansions, there are mid-cycle slowdowns. While a slowdown doesn’t mean a bear market is coming for the overall market, it could mean a correction is coming in at least a few sectors. Therefore, it should affect how you allocate capital.
The chart below shows the cyclicality of the manufacturing industry.
Manufacturing Is Volatile
Manufacturing and emerging markets had weakness in 2012 and 2016. There have been several phase changes, so it would be wrong to ever assume the current situation would continue for the next few years. Currently, the U.S. manufacturing ISM PMI is at the highest point since May 2004. It’s easy to get excited by this, but stocks will trade on future results not past reports. There probably needs to be a recession to justify a bear market, but there are still a lot of other situations to choose from after you rule that out.
ECRI Says Weakness Could Be Coming
The ECRI leading index suggests there could a slowdown in the first half of 2018 despite the fiscal stimulus. The stimulative measures are the tax cut and the $400 billion spending program over the next 2 years. One thing to keep in mind is the first quarter was mired by the risk of a government shutdown, so it may take until Q2 to see the positive effects from the government spending. The other thing to follow is that the bump up in growth caused by the rebuilding after the hurricanes is mainly gone.
The ECRI index suggests weakness in the first half of 2018 and then strength in the second half of 2018. To give context on the success of this indicator, in March 2009 the ECRI outlook said “Such upticks on leading index growth have always been followed by a growth rate cycle upturn.” The weakness in the past few weeks could signal economic weakness in early 2019, but it’s too early to tell if the weakness will be prolonged. For the immediate term, it’s certainly easy to see manufacturing slowing down.