“From the Desk of Michael Sheldon, CIO”
A number of key economic reports have come out recently and this Friday the monthly jobs report will be released. Overall, mostly overseas but to some degree here at home as well, we have seen a few somewhat weaker economic reports to start the year. Employment, the U.S. consumer and the services side of the economy remain bright spots here at home in early 2019. Importantly, we may be starting to see a few “green shoots” that may develop into more positive global economic growth during the second half of the year. For example, in China (where growth has clearly slowed), officials have cut reserve requirements, pumped more money into small businesses and recently announced plans to spend an additional $289 billion on infrastructure (Data Source: Reuters). We will have more to say on this topic as news develops in the months ahead.
Turning to recent economic data in the U.S., the first look at Q4, 2018 GDP last week provided further evidence that the U.S. economy has slowed, but importantly has not stalled. U.S. real GDP growth slowed to a 2.6% rate last quarter versus a level of 2.9% for all of 2018 (near the 3.0% growth rate we forecast earlier in the year). The increase in GDP last quarter reflected positive contributions from personal consumption, non-residential fixed investment (i.e. business spending), exports, investment in inventory, and federal government spending. Worth noting, business fixed investment bounced back nicely and increased 6.2% this past quarter compared with growth of 2.5% last quarter. One negative is that inventories rose last quarter, which may subtract somewhat from growth in the early part of 2019. For 2019, the average GDP estimate of economists (data source: Factset) is currently 2.4% (again versus 2.9% last year).
The ISM manufacturing index (out on March 1, 2019) declined by 2.4 points to 54.2 in February, against expectations for a more modest decline (reversing the 2.3-point increase in January). The composition of the report was weak, as new orders declined 2.7 points to 55.5, production fell 5.7 points to 54.8 and employment declined 3.2 points to 52.3. Other manufacturing related data (except for the GDP release highlighted above) have also been on the soft side recently.
In a separate report that came out on Tuesday March 5th, the ISM Services Index (the sister report to the monthly ISM Manufacturing report) rose from 56.7 last month to 59.7 this month. Given that the U.S. economy has become more service oriented over the past several decades, we think this report is worth highlighting. Last month’s report reverses some of the weakness we have seen since the index peaked at 60.8 back in September, 2018.
As a reminder, for both the ISM Manufacturing and ISM Non-Manufacturing indices, a reading above 50 indicates expansion while a reading below 50 indicates contraction.
Next, the February jobs report which comes out this Friday at 8:30 am will provide additional information (along with weekly jobless claims and the JOLTS monthly Labor Market Report) on the health of U.S. labor markets. For reference, so far job growth has remained consistently positive over the past several years (see chart below – source: Factset). This month estimates call for 183,000 in employment, for the unemployment rate to decline from 4.0% back down to 3.9% and for year over wage growth to increase from 3.2% to 3.3%. We will also be looking at a number of other statistics from the monthly jobs report including hiring in the manufacturing and temp areas (a leading indicator on future hiring), the percent of all industries hiring last month, the duration of unemployment as well as alternative measures of unemployment (like the U6 report that includes discouraged workers and those marginally attached to the job market).
Federal Reserve Chairman Jerome Powell touted robust labor market conditions when he provided a reason to remain optimistic in terms of the longer-term outlook for U.S. growth in the face of mounting external headwinds. While U.S. job growth has remained steady so far, new information shared by the central bank earlier this year (after reviewing overseas economic data as well as liquidity and credit conditions here at home last quarter) indicates that they appear comfortable remaining on hold for an extended period of time (i.e. until we get more persuasive data on the direction of the economy).
Looking at historical data released each month by the Bureau of Labor Statistics (BLS), the 12-month average of nonfarm payroll gains accelerated from January 2018 (173,000 per month) to January 2019 (234,000). Over the past three months, average job growth has been 241,000 while over the past three years, the average job growth has been 204,000. Putting my economics hat on, it seems somewhat unusual that job growth is accelerating this late in an economic expansion with so many people already employed. Part of the answer is that people who dropped out of the labor market over the past several years are now moving back into the labor market in search of higher paying jobs. Ultimately, job growth will start to slow at some point as the economic expansion ages. However, for now, the recent pickup in employment is encouraging and should help support additional job and economic growth in the months ahead.
Lastly while RDM clients know that we focus mostly on business fundamentals (i.e. sales, profits, Fed policy, GDP, employment, business spending etc…) sometimes we come across historical data that we think is worth sharing with clients. According to research from HighTower, o f the 29 instances since 1930 where the S&P 500 Index posted a gain of greater than 5.0% in each of the first two-months of the year (i.e. a year similar to 2019), annual returns have been positive 76% of the time and gains have averaged 6% for the remainder of the year. Chances are good that there will be a correction or two along the way, which is why we believe that trying to time the market can work against you and potentially hurt your long-term investment returns.
As always, we welcome any comments you may have.
Data Source: Factset
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