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story.lead_photo.caption Target team leader Andy Hillard stocks shelves with notecards before the sales tax holiday this weekend at the store at 1892 N. High St. in the University District. (Kyle Robertson/The Columbus Dispatch/TNS)

If the U.S. economy closely resembled any object, it'd probably be a broken traffic light.

That's because the overall financial and economic system is flashing every color possible, from healthy green glows and yellow warning lights to heavy recession-red colors. With so many mixed signals, it isn't exactly easy to tell just how strong any underlying momentum may be.

"Right now, economic growth is decent, but once you dig below the surface, things look a little bit more fragile," says Scott Anderson, chief U.S. economist at San Francisco-based Bank of the West. "It's a bifurcated expansion. We're really looking at a tale of two different realities."

Here's what's happening in the U.S. economy right now based on five main tiers _ as well as what's making or breaking it.

1. The U.S. job market is still on firm footing, but hiring has slowed

The job market has provided a comforting steadiness for those trying to spot check the health of the U.S. economy during such turbulent times. The unemployment rate is at 3.7 percent, the lowest since Dec. 1969, while employers have added positions for a record 107-straight months.

"It's a labor market that continues to defy expectations of softening," Anderson says.

But it's evident that the pace of job creation is slowing. At this time last year, the U.S. economy had added nearly 1.87 million new positions. That total year has fallen by 32% this year, with employers creating about 1.27 million positions.

But with the U.S. expansion now in its eleventh calendar year _ the longest on record _ some slowing is to be expected. In August, U.S. hiring totaled 130,000 new positions, bringing the three-month average to nearly 156,000 positions, a slower but still-healthy pace.

It's still puzzling economists why wages haven't picked up more than they already have throughout the current expansion, but through the first half of 2019, workers in the U.S. saw some of the strongest wage growth yet. Average hourly earnings on an annual basis rose in February to an expansion high of 3.4 percent, and they've been holding above 3% since October.

"The tightening labor market was starting to have some impact on employers having to boost their wages for their new hires," Anderson says. "They were finding some creative ways to avoid that, but they have been doing that to more extent."

2. Consumers continue to prop up the U.S. economy

Broadly speaking, that's keeping the American consumer intact, an important component for the economy. Two-thirds of the U.S. economy is based off of consumer spending, so growth relies heavily on how willing consumers are to spend.

Case in point: The U.S. economy grew by 2% in the second quarter of 2019. Net exports and private, fixed investments weighed on growth, but the U.S. consumer kept it on solid footing. That's because consumption grew by 4.7 percent, contributing more to growth than any other category.

It's the same story for U.S. retail sales, which jumped in July by the most in four months. After several months of volatility, retail sales have also grown for five-straight months, offering economists a sigh of relief. Personal-consumption expenditures also grew in August.

"The consumer has been a big part of this story," Anderson says. "They're definitely the bright spot still."

3. Consumer confidence is starting to slip

But if you want to know how much longer consumers are going to remain upbeat, it's good to keep an eye on confidence. For the most part, sentiment among Americans has remained historically elevated throughout 2019. Though a measure of consumer sentiment out of the Conference Board showed that Americans' confidence declined slightly in August, their perception of current conditions reached a 19-year high.

But signs of more worrisome moderation have also appeared, when a widely watched measure of Americans' sentiment out of the University of Michigan fell by the most since 2012.

It showed that consumers were starting to react to the rocky events surrounding the broader economy. President Donald Trump on Aug. 1 announced that he'd slap tariffs on an additional round of imports from China, fueling market volatility. In the preliminary reading of the report, consumers were also worried about the expansion's future after the Federal Reserve cut interest rates for the first time in more than a decade.

"Consumers strongly reacted to the proposed September increase in tariffs on Chinese imports," said Richard Curtin, who leads the survey, in a statement accompanying the preliminary reading, released Aug. 16, while "the main takeaway for consumers from the first cut in interest rates in a decade was to increase apprehensions about a possible recession."

That doesn't bode well for the future of consumer spending, Curtin said, with consumers concluding that they may "need to reduce spending in anticipation of a potential recession."

"Consumers really were a more optimistic bunch last year, and that carried over into this year as well," Anderson says. "But the consumer isn't immune to these confidence effects. We'll see that more as data comes in. As soon as you start to see the market volatility hitting people's 401(k) or see more visible layoffs and less hiring, consumers are going to have a rethink."

4. Trade wars are causing a slowdown in business investment, manufacturing

That's not the only aspect of the U.S. economy struggling to parse through trade disputes. Manufacturing activity is in the midst of a slowdown, with the Institute for Supply Management's purchasing manager index fell for a fourth straight month in July and contracted in August for the first time since 2016.

A Federal Reserve gauge of industrial production has also dropped off after peaking in December 2018 at 110.6. Between then and July 2019, the most recent reading, production has fallen for two straight months to 109.2.

With the current declines, it's safe to say we can call this a global manufacturing recession, says Joe Brusuelas, chief economist at RSM. That's comes with implications for the broader U.S. economy.

"All the janitors, all the window washers, accountants _ you go through and think about what it takes to maintain a factory," Brusuelas says. "We're concerned that the manufacturing recession will spill over into the service sector area because of the unusually large contribution the manufacturing sector makes toward the establishment and support of service sector jobs."

Businesses are also holding back on making investments. During the third quarter of 2018, private, fixed investment contributed 2.27 percentage points to gross domestic product. It's since moderated, and shaved more than 1 percentage point off of growth in the second quarter of 2019.

Businesses and producers are set back by the ongoing trade war between the U.S. and China, as well as a slowdown in the broader global economy. Though much about trade policy is up in the air, minutes from the Fed's July 30-31 rate-setting meeting show that businesses throughout the country are operating under the assumption that these disputes won't get resolved.

"The causal linkage is that trade policy is imposing an uncertainty tax on the economy," Brusuelas says. "Firms are now exceptionally concerned about the direction of that policy. Therefore, they're pulling back on investments. If they don't make those investments, productivity slows, hiring slows, and compensation begins to fall back."

5. Financial conditions are tightening due to trade wars

Most economists would say that the markets aren't the U.S. economy _ but the tightening of financial conditions is an important part of the narrative.

The 10-year, 2-year Treasury yield curve inverted Aug. 14 for the first time since the financial crisis, a recession indicator that's widely watched by markets and economists. Meanwhile, the S&P 500 has since rallied after falling as much as 5% in trading during late August, but is still down by about 3% as of Wednesday trading.

Markets took a beating Aug. 1 after fresh escalations in the U.S.-China trade. They were also already down on July 31, after investors struggled to interpret Fed Chair Jerome Powell's comments about future Fed moves.

"Financial conditions are becoming much more important now," Brusuelas says. "Excluding housing and tech, financial conditions are negative. They're a drag on growth. When you get that sort of volatility in financial markets that we've seen caused by the trade wars and tariffs, upper and middle-income households are notoriously sensitive to swings in equity prices. It will tend to slow the pace of spending."

 

A tale of two economies

It's a "tale of two economies right now," Brusuelas adds. "The American consumer is propping us up," but other aspects, such as investment and manufacturing, are weakening.

"What's driving things? It's obviously trade policy," Brusuelas says. "The best thing for the U.S. economy right now would be for President Trump to say that the trade balance has narrowed, declare victory and end the trade war."

Even though the majority of the slowdown so far is happening among manufacturers, it's still worth keeping an eye on, Anderson says.

"In economics, we track cyclical sectors _ or sectors that tend to go up and down with the business cycle. Some of the most sensitive to overall economic activity are manufacturing," Anderson says. "Those sectors tend to move first in a downturn. The timing can vary; these things don't happen overnight, but I think the trends are in motion in that direction, as long as this uncertainty continues to escalate from the trade war."

Economists are looking to Fed policymakers to see what they can do to offset any of the negative impacts from the trade war. But Powell indicated in a recent speech at a monetary policy symposium in Wyoming that even Fed officials are struggling to respond to tit-for-tat tariff wars.

There are "no recent precedents to guide any policy response to the current situation," Powell said. "Monetary policy is a powerful tool that works to support consumer spending, business investment and public confidence, it cannot provide a settled rulebook for international trade."

"They're not making a lot of promises that the Fed is going to be all that effective to offset the risks from the trade war," Anderson says. "What I worry (about) is, we don't have the right tools or enough tools in place, both in fiscal and monetary policy, to handle a sharp recession. The Fed can soften the impact, but whether they can stop this freight train is another story."

 

Bottom line

It's a good time to start preparing for the end of the business cycle, Brusuelas says. For consumers, that means paying down high-cost debt, boosting your emergency savings and identifying ways that you can cut back in the event of a sudden loss of income.

A recession, however, doesn't look like it's immediately around the corner, Anderson says. But a growth slowdown and market volatility is to be expected more than 10 years into the economic expansion as market participants navigate choppy waters from the trade war that can change any given day.

"We're in a fragile situation," Anderson says. "The consumer has a lot of momentum, and it would take several months for further weakening to get to the danger zone in terms of economic growth, but that doesn't mean we can't be there a year or a year-and-a-half down the road. It's getting harder and harder to point to what the good news is."

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