Baird Advisors Managing Director and Chief Investment Officer Mary Ellen Stanek, CFA, recently provided the group’s annual investment outlook. Stanek explained that Baird Advisors, which manages $59.1 billion in fixed income assets using a consistent and predictable approach, believes the economy will remain in a period of expansion that is remarkable for its longevity, but not its magnitude. “We believe the same two words continue in prominence,” she said. “Lower and longer.”
While making the case for sustained, steady growth, Stanek also identified a handful of structural headwinds that have limited the expansion and could create challenges for fixed income market participants. Following are the highlights of her remarks:
The Case for Lower and Longer
At 100 months and counting, the current U.S. economic expansion is already the third longest since World War II. It’s also one of the weakest, with average GDP growth of 2.1%, less than half that of U.S. expansions over this post-war period (though it is notable that this growth rate is well above that of Europe, the U.K. and Japan). We think this lower, longer theme has legs and have reason to believe the expansion ultimately could break the post-war record of 120 months set over the course of most of the 1990s.
Consumers Are Feeling It
The most powerful tailwind for the economy may be the buoyant U.S. consumer. Consumer confidence and small business optimism gauges are at or near multidecade peaks. Regardless of one’s political leanings, one thing is clear: President Trump’s business friendly, pro-growth policy agenda brought U.S. consumers a burst of optimism. And with consumers representing nearly 70% of U.S. economic activity, sentiment matters.
Risk Factor: There are signs –a weakening U.S. dollar and falling 10-year Treasury yields, for example – that the “Trump bump” is fading somewhat, as a new administration that campaigned on regulatory rollback, infrastructure spending, tax reform and repeal of the Affordable Care Act runs into the realities of governing. But, so far consumers show no sign of returning to a pre-Trump state of funk.
Jobs Data Is Solid
U.S. nonfarm payroll employment has seen seven years of solid growth with the unemployment rate falling from a post-recession high of 10% to 4.1%, well under the 6% or so considered “full employment.” Just as telling, the high underemployment rate and lower labor force participation – both lingering aftershocks of the 2008 financial collapse and Great Recession– also show signs of improvement. Slowly but steadily, significant slack is being taken out of the jobs market.
Risk Factor: Tight labor markets can spark inflation and investors should be keeping an eye on wage data. However, there are secular forces helping to keep a lid on inflation: i) Baby Boomers are retiring – or better yet from an inflation standpoint, remaining in the workforce, thankful to have a job with benefits and in no hurry to demand wage increases; and ii) technology advances mean that tightness in the jobs market is more likely to be met with investments in robots to make existing workers more productive as opposed to higher wages to attract new workers.
For now, even as wages have firmed slightly, overall consumer inflation remains at a benign 1.6%, safely below the Fed’s 2% long- term target.