The Federal Reserve's August beige book forecasted broad-based, steady growth that is neither too hot nor too cold, a "Goldilocks economy."
It's an ideal environment because it suggests the Fed will not feel compelled to hit the monetary brakes any time soon, particularly with inflation slowing down.
The Institute of Supply Management's survey of corporate purchasing managers index came in this week at a very strong 58.8% for August. This indicator historically has slumped below 50% just before the economy fell into recession, although it has slipped below 50% even in a period of expansion.
The new orders component of the manufacturing purchasing manager index - a forward-looking metric of business orders in the pipeline at large companies - was exceptionally strong as well in August, at 60.3%.
Of course, the manufacturing sector accounts for only about 12% of all economic activity and the non-manufacturing sector accounts for the vast majority of U.S. growth. The survey of managers in non-manufacturing strengthened from 53.9% in July to 55.3% in August, well-above the 50% line where recessions sometimes follow. While the non-manufacturing index has only a limited history, it is also well above the 50% level at which recessions are sometimes more likely to occur.
Of the 10 components of the index, the forward-looking benchmark of new orders rose from 55.1% to 57.1% in July. Since businesses outside of the manufacturing sector account for about 88% of all economic activity, this indicates the growth in the pipeline for the U.S. is intact.
At 99-months old, this expansion and bull market is cruising toward becoming the longest on record in Post-War II America because it takes a Fed mistake to cause a recession - by slowing a hot economy susceptible to rising inflation or by raising interest rates too much. Since growth is lately coming with almost no inflation, the Fed is nowhere even close to considering monetary tightening.
Recessions trigger bear markets, but the converse is not true; not every bear market has always been accompanied by a recession.
Driven by the strong economy, the price of 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. The close on Friday of 2461.43 was less than 1% off from the all-time record closing high reached on August 7. At any time, however, political uncertainty, a natural disaster, North Korea, or some completely unexpected crisis could trigger a 15% drop in stock prices. But the economy shows no sign of weakness and a recession-driven bear market is not on the horizon. In fact, the Goldilocks conditions are just right for the virtuous growth cycle to continue, which means stock prices could also be driven much higher as the good times roll along.
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ISM: "A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting. A PMI in excess of 43.1 percent, over a period of time, generally indicates an expansion of the overall economy."
This data series was created in 2008. ISM: "A reading above 50 percent indicates that the non-manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting."