The U.S. Keeps Humming Along


Thank God I’m an American!

That may sound jingoistic to some and overly pious to others, but in the real world of dollars and cents, well, it’s true.

While investors who were foolish enough to throw their money into emerging markets now race for the exits, amid 60% interest rates in Argentina, 18% inflation in Turkey, recession in South Africa, and a currency crisis spreading to Indonesia, even India, the U.S. economy is humming along.

In August, employers added 201,000 new jobs, slightly above the consensus forecast; the unemployment rate stayed at 3.9%, and average hourly earnings rose by 2.9% year over year.

That last stat got the most attention, because wage growth has long been the missing piece of this economic puzzle. As unemployment has plunged, wages haven’t followed. But if wage growth persists—a big “if”—that would be great news for the millions of Americans whose income has fallen behind.

Yet there’s a downside as well.

That wage growth will probably embolden the rate-setting Federal Open Markets Committee (FOMC) to raise the federal funds rate by ¼ point at its next meeting later this month. That meeting also features a press conference by Chairman Jay Powell, a good showcase for such an announcement.

Another quarter-point rise will push fed funds up to 2.25%, boosting short-term rates with them and flattening the yield curve.

When yield curves flatten—the current spread between yields on two- and ten-year Treasuries is only 0.24%, or 24 basis points—and especially when they go negative (meaning the two-year yields more than the ten-year), historically recessions have followed. That’s because bond investors are less optimistic about the long term than the short run.

This time, other factors are involved. As the Fed keeps raising rates, more foreign capital streams into the U.S. As emerging markets currency chaos continues, global investors flock to U.S. Treasuries, driving the dollar higher and ten-year yields down. It all becomes a self-fulfilling prophecy.

Meanwhile, U.S. stocks have slipped amid the currency crisis and revelations of chaos in the White House (is this really new?) in a new book by Bob Woodward and in an anonymous New York Times op-ed by a “senior official.” The S&P 500 has lost about 40 points, a little more than 1%, in the six trading sessions since it hit its all-time closing high of 2914.04 on August 29th.

I don’t expect Trump “chaos” to hurt stocks much—though an announcement of more tariffs against China might have—and so far, the EM currency crisis has been contained. If it doesn’t spiral out of control, look for U.S. stocks to recover as investors realize that despite our poisonous political climate, the U.S. economy and markets are still second to none.