Schwab Market Perspective: Tension

Competing narratives have emerged to describe the state of the U.S. economy.

The tug-of-war over the economic outlook continues, as investors wait to see whether the Federal Reserve will raise its benchmark policy rate again this year. The picture is not clear: while some sectors have weakened, others have remained resilient. Amid the uncertainty, bond market volatility and 10-year Treasury yields remain elevated.

Meanwhile, Chinese data has been surprisingly strong as government stimulus takes hold, which may lift sentiment and stocks of companies with China exposure. However, given the problems in its property market, China's economic growth is unlikely to see a V-shaped rebound.

U.S. stocks and economy: The downside of data dependency

Given mixed economic indicators, competing narratives have emerged to describe the state of the U.S. economy. This is in line with our view that the U.S. has been experiencing rolling recessions that affect certain industries or geographies—different from an official national recession1—for most of the past year and a half. While there have been noticeable declines in areas like housing and consumer goods, those pockets of weakness have been more than offset by resilience in services and the job market.

Yet it's worth noting that job growth, a key pillar of U.S. economic resiliency, has been slowing rapidly lately. Payroll growth has slowed considerably since the post-pandemic re-opening phase in 2021. Looking at the three-month average of monthly job gains, the fall to 150,000 in August marked the lowest since the COVID-19 pandemic began in March 2020. This is mostly in line with the average seen during the past few economic expansions, but the pace of decline this year has been sharper than what is typically seen in an expansion.

This underscores an important aspect of economic data that investors should always consider: It's often the case that "better" or "worse" tend to matter more than "good" or "bad" when it comes to shifts in the economy. Investors should pay as much—if not more—attention to rates of change.

Payroll growth has slowed markedly