Content Provided by Kostya Etus, CFA, Senior Portfolio Manager

There are many drivers of the economy and the financial markets which are always present. It is important to evaluate them, determine which may be the most important, and help address investor concerns. Each month, the CLS Portfolio Management team discusses the various reasons markets could rise or fall, and we publish these reasons in our Monthly Perspectives piece. The key idea is that there are always positive and negative drivers, despite how the media may present the current market climate and regardless of where we are in the economic cycle.

Below, I have selected the top three strengths and weaknesses which I believe are important to consider for the U.S. economy going forward.

Strengths

1. Consumer Confidence — Consumer spending fuels service-based economies, such as the U.S., where it represents about 70% of gross domestic product (GDP). This is a good measure of economic growth. One of the best ways to predict spending is by measuring consumer confidence, a great leading indicator for the overall economy. Currently, consumer confidence in the U.S. is near record levels, which may bode well heading into the holiday season.
2. Corporate Earnings Growth — We have seen strengthening, double-digit earnings growth each quarter this year and expect this momentum to continue into 2019. Strong earnings allow companies to increase capital expenditures and growth within their businesses. Improving technology, expanding corporate offices, updating machinery, and hiring more employees all support the economy. Companies are also able to use profits to become more competitive through lower prices and higher wages for employees, which both support consumer spending.
3. Low Unemployment — Unemployment is at its lowest level in decades. A low unemployment rate means more people are working, which means more productivity and output for the economy. It also means it may be easier to find a job since there could be more job openings than there are people looking for work. This forces employers to raise wages to both retain and attract workers. More money in U.S. workers’ pockets leads to more spending and an additional boost to economic growth.

Weaknesses

1. Tariffs — The largest impact of tariffs may be rising prices. For example, prices of metals are likely to go up, increasing manufacturing input costs. Thus, prices of metal-heavy products (such as cars and soda) will likely go up, too. These price increases will partly be passed on to consumers who may then buy fewer of these expensive products. A trade war, even a skirmish let alone a global fight, could be a headwind for economic growth. That said, currently affected imports make up a small portion of the global economy.
2. High Debt Levels — The levels of public and private debt are historically high and rising. This is an issue across the globe, not just in the U.S. Higher debt levels have been associated with lower economic growth, lower inflation, and lower interest rates. Expected increases in fiscal spending may boost growth in the short-to-intermediate term. However, high debt levels may curtail growth in the long term.
3. Rising Interest Rates — As corporate debt matures, companies will have to reissue bonds at higher rates, raising interest costs and tightening margins. For consumers, higher rates may curb their appetites for big purchases, such as houses and cars, leading to lower spending. Businesses may also cut back on spending for new equipment, thus slowing productivity and potentially reducing jobs. Luckily, the Federal Reserve has been quite slow and methodical in its rate increases, taking into account current economic conditions.

2060-CLS-10/30/2018