Peak Economy, Peak Markets?


The headline number of the September jobs report was bad, but the rest was very strong.

The report, released Friday, showed the U.S. economy lost 33,000 jobs last month, way below the consensus and what we’ve seen much of this year.

Although the Bureau of Labor Statistics said it couldn’t quantify the overall impact of Hurricanes Harvey and Irma, which pulverized Texas and Florida, it did say the two storms likely led to the loss of 105,000 jobs in restaurants, which have been stellar job creators. (The BLS also revised down July’s and August’s new jobs by 38,000, making those two months before the hurricanes look less robust.)

But there was plenty of good news to feast on, too.

First, the unemployment rate fell to 4.2%, its lowest since January 2001. (The nearly half-century low of 3.8% was in April 2000.)  The jobless rate for all adults fell under 4%.

Second, labor force participation rose 0.2% to 63.1%, its highest since March 2014, as 575,000 new people entered the workforce last month.

Finally, wages grew at an annual rate of 2.9%, tying last December for the post-recession best.

Sounds like it’s about as good as it gets. So, what’s the problem?

That it may not get much better.

The economic recovery is eight years old, though it seems to have gotten a second wind since the election of Donald J. Trump, which has pushed business and consumer confidence near recent highs.

GDP grew at a 3.1% annual clip in the second quarter, but by the end of the year it probably won’t do much better than 2-2.5%.

And the prospect of tax reform—ah, tax reform!—has gotten business owners and investors salivating at the growth and profits to come.

Not so fast! Tax reform will be a long, tough slog, and when it’s done, it’s likely to be more modest than Wall Street expects.

And those expectations are quite high. As of Thursday, the Dow Jones Industrial Average, Standard & Poor’s 500, and Nasdaq Composite index had all hit set a string of all-time highs, marking an incredible run.

So, when the economy and the stock market are firing on all cylinders, what usually happens?

Well, it often means they’re peaking.

Is that happening now? I don’t know. Maybe tax reform will magically push GDP growth to 3-4%, prolonging the recovery for years to come. But lots of other things could happen, too, like a new Fed chair who wants to raise rates faster, war with North Korea, what have you.

One thing’s for sure: we’re much closer to the end of the recovery and bull market than to the beginning, and risk is rising.