The United States is starting to look like a two-speed economy. As I write in my latest weekly commentary, last week's economic data paint a very mixed picture of the U.S. economy.
On the positive side, all the manufacturing data - including the ISM National Survey and the regional surveys - came in much stronger than expected, with new orders looking solid. In other words, U.S. manufacturing looks stable, or is even expanding.
At the same time, U.S. job growth, and by extension consumption, remain muted. While the October jobs report won't be out until Friday, last week's private ADP employment survey came in weaker than expected, and as has been the case most of the year, slow job growth continues to be associated with low confidence and lackluster retail sales.
This is not just a U.S. phenomenon. There's a similar two-speed pattern happening in many other countries. For instance, China achieved a nice growth rebound in the second quarter, but its growth continues to be led by investment and infrastructure, not consumption. In a similar fashion, Spanish growth ticked up this quarter, but the gains were led by exports, while Spanish unemployment remains close to record levels.
So how can this divergence be solved? Either the global and U.S. recoveries will eventually broaden or the rebound in manufacturing will peter out as inventories start to climb too high. I still continue to believe that there will be some modest, with an emphasis on the word modest, improvement in the global economy in 2014.
In the meantime, there are two implications for investors:
Consider underweighting Treasuries, particularly as the yield on the 10-year note gets close to 2.5%. While I still believe that any rise in rates will be contained, there is a floor to how low yields are likely to go thanks to continued strength in manufacturing and a Fed likely to start tapering early next year.
Consider increasing exposure to cyclical companies, which are supported by the rebound in manufacturing. In general, cyclical companies remain cheaper than defensives, and they will also benefit disproportionately from any improvement in the global economy. It's also worth noting that even during the relatively weak growth of the last three months, U.S. cyclical companies have gained around 4.5%, roughly double the pace of more defensive sectors. In particular, I like the global technology and energy sectors, and U.S. manufacturers (such as chemical companies) geared to lower energy costs.