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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.

Payrolls Table

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

The graphic below is a handy look at the relationship between payroll increases and the unemployment rate. This will be important going forward to assess whether there continues to be enough job growth (a coincident indicator) to keep the unemployment rate (a lagging indicator) from moving higher. For the purposes of this chart, we would need to see an average monthly gain of 107k jobs to keep the unemployment rate at 3.6% for the next year.

Tying Payroll Gains to Unemployment Rate

110414_Payroll Calculator

Source: Charles Schwab, Bureau of Labor Statistics, Federal Reserve Bank of Atlanta, as of 10/31/2019.


The BLS data for payrolls is biased up by larger companies. On the other hand, the data released by ADP is broken down by company size. Earlier last week, ADP’s October jobs report showed that companies with less than 20 employees have shed payrolls in five of the past six months. As noted by Bianco Research, this likely means that many of these smallest companies are simply shutting their doors. Conversely, none of the larger companies are showing a similar pullback in payrolls. This is important to keep an eye on since it’s been smaller companies that have been the primary driver of job creation since the 2007-2009 recession. This is also reflected in the Small Business Hiring Plans Index from the National Federation of Independent Business (NFIB); although the latest uptick may be a sign of a trough.

Small Business Hiring Plans Troughing?

110419_NFIB Hiring Plans

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

Manufacturing’s continued contraction

Also released on Friday was the well-watched Institute for Supply Management (ISM) Manufacturing Index for October. Although up slightly from September, for the third month in a row it remains below 50—the dividing line between expansion and contraction. As you can see in the table below, every component of the index—with the exception of new export orders—remains below 50. That said, the overall index, new orders and employment all ticked higher. 

ISM Manufacturing components

Source: Charles Schwab, Bloomberg, as of 10/31/2019.

Important to watch will be the release of the October ISM Non-Manufacturing Index. September's release showed the first decline in services employment in nearly 10 years. Hopefully last Friday’s payrolls report bodes well for an improvement in services employment. 

The other weak spot in the economy has been business investment (capital spending). Biased lower by Boeing’s problems, business fixed investment (as reported within the GDP report) fell by 3% in the third quarter, led by a 15.3% decline in structures, a 3.8% decline in equipment; but helped by a 6.6% gain for intellectual property. On the other hand, housing has picked up and consumer spending/confidence remains healthy. You can see all the components of GDP in the handy table below; which looks at each component over the past four quarters.

110419_GDP Components

Source: Charles Schwab, Bureau of Economic Analysis, as of 9/30/2019. *Represents contribution to percent change in real GDP. Numbers may not add up to 100% due to rounding. All components represent annualized quarter/quarter percentage change.

CEOs vs. consumers

Reflecting the aforementioned divides, there is presently a stark difference between CEO confidence and consumer confidence, as seen in the charts below. The first chart of CEO confidence shows the lowest reading since the Global Financial Crisis; and as you can see in the accompanying table, continued weak CEO confidence augurs poorly for corporate profits—which in turn feeds into capital spending and employment.

CEOs’ Confidence Nosedived

110419_CEO Confidence110419_CEO Confidence Table

Source: Charles Schwab, FactSet, Copyright 2019 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at For data vendor disclaimers refer to, The Conference Board. CEO Confidence of 9/30/2019.

On the other hand, consumers remain fairly confident, as you can see in the first chart below, which shows the Consumer Confidence Index (CCI) from The Conference Board. The hope is that courtesy of stronger job growth and better stock market performance consumer confidence could accelerate again. This would be welcome, given that, as you can see in the chart, peaks in confidence have been warnings of recessions in the past.

Resilient Consumer Confidence

Consumer Confidence Index

Source: Charles Schwab, Bloomberg, The Conference Board, as of 10/31/2019.

One factor to consider though, as it relates to consumer confidence, is the widening difference between how consumers assess their “present situation” vs. their “future expectations.” The chart below shows the spread between the two. It widened out again with the October CCI release—consumers’ confidence about their present situation is rising, but confidence about the future is declining. We don’t yet know whether we are nearing a maximum negative spread; but as you can see in the chart, prior troughs have been recession warnings historically.

Consumers Much More Confident About “Today” Relative to “Tomorrow”

Consumer Confidence Index Expectations minus Present

Source: Charles Schwab, Bloomberg, The Conference Board, as of 10/31/2019.

On the one hand …

Manufacturing is less than 12% of U.S. gross domestic product (GDP); while consumer spending represents nearly 70%. However, there is more of a bias within various indexes of leading indicators to manufacturing data than consumer- or services-related data for the simple reason that manufacturing tends to lead the rest of the economy. Basically, it punches above its weight.

In turn, although nonresidential business investment (capex) is less than 15% of U.S. GDP, it can be a significant factor in terms of economic weakness. The chart below shows the relationship between business investment and consumption during every negative GDP quarter in the post-WWII period. In nearly half of those occurrences, business investment declined enough that even with consumption remaining positive, the economy still contracted.

Business Investment vs. Personal Consumption in Negative GDP Quarters

110419_Business vs Consumption

Source: Charles Schwab, Bloomberg, Bureau of Economic Analysis, as of 9/30/2019. Negative quarters for real GDP only shown. All components represent annualized quarter/quarter percentage change.

The net is that we continue to think the dividing lines between manufacturing and services, and between business investment and consumption, remain intact. We will continue to watch employment data—and leading indicators thereof—for signs that there are definitive cracks appearing on those lines. For now, the cracks are sufficiently small to keep economic weakness contained to the smaller manufacturing and business investment segments of the economy.

Next Steps

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