For the last 12 months, the U.S. economy has experienced a deceleration although growth has remained firmly positive. However, the deceleration is largely due to a slowdown in manufacturing which has become outright recessionary in some sub-industries and regions. Of course, this slowdown has been exacerbated by the uncertainties of the trade war.
It's ironic yet inevitable that the trade war between the U.S. and China is hurting manufacturing the most, since that's precisely the industry it's supposed to help the most in the long-run. The common fear for the last year has been the weakness in manufacturing infecting the rest of the economy would result in a recession. For anyone invested in this narrative, there has been some supporting evidence but certainly nothing decisive.
Another perspective on the same data would be to marvel at the economy's resilience especially in terms of major indicators like the S&P 500 (SPY) at an all-time high, retail spending, housing, and the jobs market which have slowed but continue to trend higher despite the multitude of threats. If these continue to trend higher and manufacturing went from a headwind to a tail wind then there is the possibility for an acceleration in economic growth.
Some leading indicators are beginning to act as if this outcome is not possible. It seems as if the current rally in stocks is discounting the increasing odds of this possibility. This can be seen in the strength of transportation stocks, semiconductor stocks, and industrial stocks. These have gone from underperforming the broader markets since late 2018 to now outperforming.
In terms of manufacturing data, there some very small green shoots in terms of lower inventory readings and an uptick in new orders. This could simply be just noise or it could indicate that trade is going to tick higher as inventories are replenished. On top of these more-speculative, leading indicators, there has been meaningful progress in terms of a trade deal with expectations that a 'Phase 1' deal will be signed within the next month. Resolution of even marginal progress could unleash trade as well. Prior to the imposition of tariffs, there was a burst of activity, and it's possible there could be another burst if tariffs are lifted especially given the low level of inventories.
The Institute for Supply Management's report on Thursday is going to be hugely anticipated to see whether it confirms the recent, constructive signals from other manufacturing surveys and regional Fed boards.