While not everyone will have a particular interest in how the stock market is doing, most people are impacted by how the economy is performing. For that reason it is important to see, if there has been any discernible changes in the economy thus far.
During the first week of each month some of the more significant economic reports are released covering the prior month. These include the monthly employment report, purchasing manager surveys, and auto sales. Given that the market had a significant decline for the month of August, looking at the economic data for that month is relevant.
The most widely watched piece of data is the monthly employment report. For August, 173,000 net new jobs were created. This was a little below expectations, but certainly not enough to signify a major shift in business hiring. In addition the national unemployment rate fell to 5.1% from 5.3%.
Results from the purchasing manager surveys were somewhat mixed. The manufacturing report came in a little weaker than expected, but still shows the manufacturing economy expanding to a modest extent. The services side of the economy, which is much larger than manufacturing, was quite strong signifying solid expansion. It was slightly lower than the July report, but was still one of the strongest readings of the year.
Auto sales for the month of August were extremely strong coming in at an annualized pace of 17.8 million vehicles. Fifteen to 16 million units is considered to be a normal level. This was the highest pace for auto sales in 10 years. Relatively low gasoline prices, at least for the rest of the country, are certainly helping to fuel auto sales.
Besides the reports just mentioned, it is also useful to look at trends in consumer confidence. The readings did weaken a little in August, but nothing to indicate that there was a significant change in consumer sentiment.
One thing mitigating against weaker consumer spending in a declining stock market is the strength of the real estate market. For many people, the value of their house is more significant relative to their investment portfolio. This is especially true in our local area, where real estate values are very high.
Some people may recall the major one-day drop in stocks during October 1987, and another significant decline in 1998 during an Asian financial crisis. During both of these time periods the real estate market was performing well, and neither stock market correction caused the economy to falter.
The year 2008 was a completely different story. Both the stock market and real estate were declining in a significant manner. Not surprisingly, we had a major recession.
Certainly a declining stock market does have a negative wealth effect. However, the impact would tend to be felt more by higher income households who own the bulk of stock in this country. In addition a stock market decline would have a much greater impact in New York versus Los Angeles, given the importance of finance in New York City.
It is still too early to definitively say that this stock market correction will only have a minor impact on the economy. We will need to see how the economic data looks over the next several months before making a better determination.
All market downturns are different, so it is difficult to forecast how long this one will last, and what the ultimate impact on the economy might be.
However, given that the economic reports in August were decent, and we have a strong real estate market the odds of the economy falling into a recession do not appear to be too high.
