With a persistently low unemployment rate and robust gross domestic product (GDP) growth, the U.S. economy appears to be exhibiting signs of strength.
But according to Lauren Goodwin, economist and director of portfolio strategy at New York Life Investments, the situation may not be as favorable as these indicators suggest.
“The employment report that we saw today, to me, is a pretty clear signal that the last of our economic dominoes are beginning to topple,” she said in a recent interview with CNBC’s Brian Sullivan, referencing the Labor Department’s October 2023 jobs report.
Sullivan concurred, noting frequent downward revisions made to past jobs figures.
In the October jobs report, the initially reported change in total nonfarm payroll employment for August was revised down by 62,000, and the figure for September was also adjusted downward, by 39,000.
“I’m not putting on the tinfoil hat or anything, but sometimes the government data doesn’t always match up with maybe what your ears and eyes see or people tell you,” Sullivan said.
“So, I’m hearing you say you’re a little bit concerned, but the macro government data shows that it’s the greatest economy in the history of the world.”
Goodwin responded with a touch of humor, saying, “I think you’d look amazing in a tinfoil hat.”
Leads vs lags
Sullivan referenced a strong GDP figure as evidence of a “greatest economy” narrative.
On Nov. 29, the Commerce Department reported its latest estimate that real GDP increased at an annual rate of 5.2% in the third quarter of 2023. This figure marked the biggest increase since the fourth quarter of 2021. It’s up from the initial estimate of 4.9% made the previous month.
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Goodwin maintains a cautious approach when interpreting macroeconomic indicators.
“What you’re describing is really a matter of leads and lags,” she told Sullivan.
Leading indicators are predictive economic measures that tend to change before the economy starts to follow a particular pattern and can be used to anticipate movements in the economic environment. Lagging indicators, on the other hand, are metrics that change after the economy as a whole does.
According to Goodwin, the GDP figure has limited predictive power regarding future economic activity.
“The Q3 GDP data doesn’t tell us anything about the way employment’s going to evolve in the next couple of months,” she remarked.
Will stocks pull back?
The S&P 500 has climbed about 19% in 2023, albeit with considerable volatility. Sullivan highlights observations from various experts suggesting that stocks might be overvalued.
Goodwin says that from a tactical perspective, she expects to see weakness in the equity market. However, she also notes that valuations “aren’t a great timing indicator.”
She added: “When we look at timing of market weakness, we’re really looking at when do jobless claims start to materially rise, and when do earnings start to fall off. That’s when the equity market says, ‘Oh, we’re in recession,’ and that’s when we see valuation weakness. It’s not going to come just because valuations are high right now,” she explained, noting that this shift could be a few months in the future.
If concerns about market weakness and overvalued stocks are weighing on your mind, it might be wise to consider diversifying your investment portfolio beyond the stock market.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.