Too Much Of A Good Thing Not Always Good

The post-Great Recession recovery has been uneven. Jobs have been one of the bright spots. In the dying months of last year, job openings – both non-farm and small-business – weakened. It is too early to declare a trend has begun. If it has, the Fed’s conventional toolbox is hardly full. The Fed funds rate is already at a range of 150 to 175 basis points, down 75 basis points last year. Historically, a sustained drop in the policy rate coincides with both recession and peak in stocks.

 

Last November, US non-farm job openings dropped big, down 561,000 to 6.8 million from the prior month. This was a 21-month low. The all-time high of 7.63 million was recorded in November 2018.

A month after that, in December 2019, the NFIB job openings sub-index dropped five points month-over-month to 33, matching May 2018’s reading. Beginning December 2018, record-high 39 was hit three times before the metric weakened last month (Chart 1).

Post-Great Recession, the recovery/expansion has been uneven, with jobs one of the bright spots, so any potential weakness on this front is worth watching.

 

Several other metrics are weak and have been that way for a while now.

Capacity utilization continues to languish. In the 12 months to December, it declined 3.1 percent to 77 percent. Last October’s 76.9 percent was a 25-month low. The cycle high 79.6 percent never crossed 80 percent, which is a rarity in itself (Chart 2).

Subdued capacity utilization was one of the excuses the Fed needed to ease last year. The fed funds rate was reduced by 75 basis points in three 25-basis-point increments, to a range of 150 to 175 basis points. Rates are already so low that in the event the economy genuinely weakens, the Fed has very little it can do in the way of traditional tools such as its benchmark rate.

 

Manufacturing has been in contraction the last five months. In December, the ISM manufacturing index dropped 0.9 points m/m to 47.2 – the lowest since June 2009. Activity has weakened since peaking at 60.8 in August 2018. December’s was the fifth month in a row of sub-50 reading.

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