Elliot H. Kallen

Financial Planner, Wealth Manager, Registered Principal
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This Week's News in Wealth Management

The Federal Reserve’s new Beige Book for August rolled in, and it’s a recipe for broad, steady growth that is neither too hot nor too cold - a “Goldilocks economy.” Conditions are “just right” because the Fed feels no pressure to hit the brakes on the economy any time soon, particularly with inflation slowing.

Since growth is coming with almost no inflation, the Fed is nowhere even close to considering tightening credit.
That’s good because Fed intervention, when rates are hiked too much by policymakers and choke off growth, always eventually causes a recession. With no Fed action on the horizon, this 99-month-old expansion could very well surpass the record 120-month long post-War boom of the 1990s.

The Institute of Supply Management’s August survey of corporate purchasing managers came in this week at a strong 58.8%. Although this indicator has occasionally slipped below 50% during expansions, it has historically collapsed well below 50% right when the economy has fallen into recessionAt 58.8%, the manufacturing economy is looking good.

The ISM’s manufacturing purchases index is calculated monthly based on ten equally weighted components.
One of the ten measures new orders. The New Orders Index is a metric of business orders entering the pipeline at large manufacturing companies, and a good way of judging growth in the weeks immediately ahead. At 60.3%, new orders in August were exceptionally strong.

Of course, the manufacturing sector accounts for only about 12% of the U.S. economy. The non-manufacturing services sector is more important to American prosperity. While it has a limited history dating back only to 2008, the survey of purchasing managers in non-manufacturing strengthened from 53.9% in July to 55.3% in August, staying well above the 50% line where recessions become a concern.

The forward-looking component of this indicator showed new orders rose to 57.1% in August. This indicates the pipeline for non-manufacturing companies - 88% of the economy - is loaded up with new orders in the weeks immediately ahead. One caveat is needed here: the hurricanes that hit Houston and Florida are likely to cause some business disruption and create some new uncertainty.

With the economy cruising along at a sustainable pace and almost no inflation, a recession -the most likely cause of bear markets - is not on the horizon. But bear markets have occasionally occurred during expansions.

The Standard & Poor’s 500 stock index has repeatedly broken its all-time record-high price since the start of the year in a strong new leg of the eight-and-a-half-year bull market. A natural disaster, domestic political uncertainty, the standoff with North Korea, or some completely unexpected crisis could trigger a change in sentiment and a 15% drop in stock prices at any time. The economy shows no sign of weakness and a bear market is unlikely, but a bear market can never be entirely ruled out. However, Goldilocks conditions have set in motion a virtuous growth cycle that could continue rolling along, and stock prices could be driven much higher still.

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