Bob’s Journal 12/20/2018
Last week’s Employment Situation reports were extremely strong, but don’t use them as good indicators of the strength of the economy or its trend.
The nonfarm payrolls report showed that 312,000 new jobs were created, and revisions added a total of 58,000 jobs for the previous two months. The number of new jobs was well above expectations and the highest monthly number since February.
There are a number of ways of expressing the strength of the jobs report. For example, the report exceeded expectations by the largest amount since June 2009. It also topped expectations by the sixth-largest margin since 1998. The three-month average of new jobs created is the highest since August 2016.
More importantly, wage growth continues to accelerate. Annual wage growth is at its highest level since 2009. For most of the years since the financial crisis, wage growth didn’t exceed 2.5%.
The annualized rate of wage growth in each of the last two months was over 4%. The 12-month rate of growth is 3.32% and the three-month growth rate is 3.8%, annualized.
The growth of jobs and wages has been strong enough to trigger an increase in the labor force to the highest level since September 2013, as a number of previously retired workers seek jobs.
These are impressive numbers for the labor market. The important thing to remember, however, is that the labor market generally is a lagging indicator of the economy.
It is normal to see the labor market be strong months after a recession has begun. Wage growth continues and new jobs are created long after other data indicate the economy is shrinking. Likewise, after a recession the labor market usually remains weak for months after the economy hit bottom.
Other data that are better indicators of the near-term state of the economy aren’t showing a recession is imminent, but they are telling us that economic growth is slowing.
Most manufacturing data have been weaker the last few months. We’re below the peaks in both consumer and business confidence surveys. The housing market has been very weak. In fact, the labor market is just about the only sector of the economy for which recent data have met or exceeded expectations.
Don’t take the strong labor market as a sign that the economy and earnings are about to surge. We’re late in the economic cycle. Economic growth is slowing, and the surge in the labor market could be a last hurrah for the strong growth that occurred in 2017 and 2018.
The Data
I covered last week’s Employment Situation reports above.
The PMI Services Index declined to 54.4 from 54.7. That’s a small decline and still indicates healthy growth. But in the report, new orders are at a 14-month low and expectations for the future are at a 12-month low.
Likewise, the ISM Non-Manufacturing Index declined to 57.6 from 60.7. It also was below expectations. But unlike the PMI index, new orders were at their highest level in eight years. Business activity declined, which indicates that the unsustainable strong growth of the last three months is easing.
The Small Business Optimism Index from NFIB declined slightly to 104.4 from 104.8. There were decreases in expectations for the economy over the next six months, plans to make capital outlays and in the view that now is a good time to expand.
There was mixed news in the JOLTS (Job Openings and Labor Turnover Survey) report. The number of job openings declined, though last month’s number of job openings was revised a little higher. The number of unemployed people actively looking for jobs still is less than the number of job openings, but not by as wide a margin as the record in August. Remember that in March 2018, job openings exceeded the number of unemployed for the first time in the 19 years of this survey.
The number of people quitting jobs also declined a bit. The JOLTs report, which is more detailed than the Employment Situation reports, gives us the first indications that perhaps the labor market is weakening.
New unemployment claims declined by 17,000 last week to 216,000. This continues the volatility in this number that began in November.
The Markets
The S&P 500 soared 3.11% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 2.38%. The Russell 2000 added 6.12%. The All-Country World Index (minus U.S. stocks) rose 4.23%. Emerging market equities rose 3.78%.
Long-term treasuries declined 0.74% for the week. Investment-grade bonds rose 0.59%. Treasury Inflation-Protected Securities (TIPS) added 0.51%. High-yield bonds gained 3.51%.
The dollar fell 1.76%.
Energy-based commodities jumped 7.24% for the week. Broader-based commodities gained 4.43%. Gold rose 0.73%.
Bob’s News & Updates
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