NEW YORK (March 8) - The December jobs report printed this morning at a deeply disappointing 20,000 new jobs. The consensus estimate had been just 181,000. Revisions for December (+5,000) and January (+7,000 jobs) netted just 12,000 more jobs. The revisions resulted in average three months job creation of 186,000, jobs and six months average jobs creation of 188,000. Job creation was down a staggering 93.9 percent from the same month last year, which had printed at 330,000,
The unemployment rate was 3.8 percent, down 2/10ths of a percentage point from January, and down 3/10ths of a percentage point from February 2018. The U-6 Unemployment, at 7.3 percent, dropped 8/10th of a percentage point from January’s 8.1 percent, and down 9/10ths of a percentage point since last year. It is the lowest U-6 number since March, 2001.Nominal average weekly wages increased by 3.10 percent, year on year, at a rate that is higher than inflation. Real wages increased by just 1.10 percent, assuming the December Trimmed Mean PCE annual inflation rate of 2.0%.
Analysis: Details and Outlook
We have been saying since our November jobs report that we see a flashing red light, requiring investors and businesses to stop and assess conditions before moving forward. The “good” jobs reports of December and January were anomalous.We anticipate 2019Q1 to print at just 2.1 to 2.6 percent, down from the 2.3 to 2.8 print we had anticipated just last week in the 2018Q4 GDP report that had been delayed by the government shut-down.Let's look at our exclusive jobs creation by average weekly wages for the October jobs report:
December Jobs Creation by Average Weekly Wage Source: The Stuyvesant Square Consultancy, compiled from BLS Data for February, 2019.
The number of people employed in February increased by 255,000, up from the 251,000 decrease that occurred from December to January. Some 163,000 individuals joined the workforce, down 45,000 from the 163,229 who joined the workforce last month.
The JOLTS survey for December, the latest available data, released February 12th, showed 169,000 new job openings from That’s an improvement over the 243,000 fewer job openings from October to November. It’s also a huge 1,666,000 jump from December of last year.
Oil Pricing And Geopolitical Concerns
We're heartened to see fuel prices continuing below the $3 per gallon threshold. Gasoline prices for February are 2.3 percent higher than last month, but nearly 1 percent lower than last year.
But oil prices, as measured by West Texas Intermediate crude, have climbed 7.14 percent from last month and, but are 6.6 percent lower than last year.
US sanctions against Iran will also adversely affect the economy of its neighbor, Iraq, thereby putting pressure on the country’s political regime.
We remain concerned about Iran’s belligerent rhetoric and sanctions against Iran precipitating some unforeseen flash point in the region. The round of sanctions the White House imposed in November are claimed to be the harshest in our 40 year dealing with the Islamic Republic. Iran has said several times that they would cease all flow of oil through the Straits of Hormuz if Iran could not sell oil because of U.S. sanctions. The regime has engaged in more missile testing, causing the U.S. to request even stronger sanctions from the UN. As of Monday, the Kearsage ARG is off the coast of Oman, relieving carrier group U.S.S. John Stennis (CVN 74) in the Persian Gulf. It appears the national command authority will continue to deter, if not intimidate, Iran’s leadership from pursuing misadventures in the straits. Nevertheless, Europe is anxious to strengthen the international role of the euro, and its ministers would like to undermine the US “exorbitant privilege” as the world’s reserve currency. European allies that supported the Joint Comprehensive Plan of Action (“JCPOA”) on Iran’s nuclear arms development now have a ready excuse to abandon the USD as the currency for its oil trading, as we discussed in greater detail here. We think this strategy, not an Iranian military initiative in the Straits of Hormuz, would have a greater effect to retaliate against the USA, but would not amount to an act of war by threatening a vital American interest. The effort to “de-dollarize” oil measure, taken by Iran together with our putative “allies” in the EU who still support the JCPOA (“Iran Deal”), notwithstanding reported violations, could greatly diminish the USD status as the world’s reserve currency and wreak economic hardship upon the USA.
A Lessening Of Concerns
Our earlier concerns about the US possibly sanctioning Saudi Arabia (“KSA”) over the murder of Washington Post columnist Jamal Khashoggi have been largely allayed, although some have continued to raise it in Senate hearings Wednesday on the appointment of General John Abizaid (US Army, Ret.) as our ambassador. As we have stated since the first reports of the murder implicating the kingdom and possible sanctions, retortion might result, particularly by KSA repricing its oil in euro, yuan, or perhaps even some new OPEC backed currency. We think the implications of that upon the USD as the world’s reserve currency, and on US interest rates, would be staggering. Dollar Denominated Debt
Similarly, in earlier months, we had concerns that higher rates and a stronger dollar impinge developing nations ability to repay dollar- and euro-denominated debt they owe to American and European banks. But those have been largely allayed by the Fed’s more dovish view.
Nevertheless, the slowing of the Chinese economy continue our concerns about foreign debt held by China. It has $750 billion in USD-denominated Offshore Corporate Dollar Bonds (or “OCDB”). Toward the end of last year, Nomura had warned to monitor the situation, and expressed concerns about the bond rollovers could be problematic, given the decline of the yuan. We have similar concerns, but mostly related to a weakening Chinese economy. With other developing economies, particularly India, where the USD:INR exchange rate had ended 2018 at 1:70, we are seeing recovery, presumably because the Fed has pulled back. (The INR traded at its lowest point in history in October, 1:74.) But war tensions with Pakistan, while allayed for the last week or so, should keep investors on razor’s edge.
Other Macro Data
Note that we have substituted the Department of Transportation statistic, the Transportation Services Index, or TSI, in our model because the data is produced more closely to the monthly jobs report and it has a closer correlation to GDP than the North American Trans-border Freight numbers we had been using. Source: US DOT TSI Percentage Change Data Chart
The TSI printed at -2 percent for December, comprised of a -3.1 percent drop in freight and a 0.2 percent increase in passenger transport.
We continue to be heartened that people are taking home more cash from the tax cut, so that debt service will account for a lesser percentage of disposable income. Data released early last month for 2018Q3 continued to support our thesis we have expected since the tax bill passed. That, together with cheaper gasoline prices should help maintain consumer spending.We note these other developments since our last jobs report, which had been somewhat data-starved because of the government shut down:
The wholesale trade report for December, reported last month, showed sales up 1 percent, year-on-year, down 1 percent month-on-month. Inventories were up 7.3 percent from last year, down 1.1 percent month-on-month. The inventory to sales ratio was 1.33 percent, up from the 1.25 percent last year.
Building permits for January, released this morning, increased 1.4 percent from December but down 1.5 percent from last year. Housing starts increased by 18.6 percent, month-to-month, but fell 7.8 percent, year-on-year.
The ISM Manufacturing report for February, released March 1, showed continuing growth, at 54.2, but down significantly from January’s 56.6. The ISM Non-manufacturing report for February, the latest available, released March 5th, printed at 59.7, that’s up 3 points from January’s 56.7, but still down from the 59.5 that printed for the same period last year.
Personal Income & Outlays was delayed for the government shut-down, and January only printed income (not outlays). For December, released March 1st, disposable personal income increased by 1.1 percent in current dollars, and also up 1.0 percent in chained 2012 dollars. Those are down from 0.3 and 0.2 percent in November, respectively.
Personal consumption expenditures (PCE) for December decreased 0.5 percent in current dollars and 0.6 percent in chained 2012 dollars. That’s down from 0.6 percent and 0.5 percent increases in November for current and chained dollars, respectively.
For January, personal income is down 0.2 percent in current dollars and unchanged in 2012 dollars.
The IBD/TIPP Economic Optimism Index,released March 5th jumped to 55.7, up 10.7 percentage points. (Anything above 50 indicates growth.) This and the ISM Services index are among the few brighter data points in this economy.
We are heartened by recent Fed statements moving away from tightening rates too much, too quickly. While inflation for personal consumption expenditures, less food and energy, or "Real PCE", had hit the Fed's target of 2 percent, we’re seeing that slip somewhat in the last couple of months. We continue to believe that moves toward normalization should take place more slowly and only after growth had become decidedly more robust over several more quarters; at least four quarters of a consistent 3 percent GDP growth. We are only halfway to that goal as of 2018Q4. We would also like to see more stable growth in Gross Domestic Investment, growth of at least 1.5 percent, excluding inventory. As we have illustrated in our GDP report for 2018Q4, the 2018Q3 and 2018Q2, the better than expected GDP reports for those quarters included a lot of “shifting” from and to earlier or later quarters. And as we noted in our 2018Q3 report, there were signs of slowing, with 200 bps of the 3.5 percent GDP growth coming from inventory restocking. As with Gross Domestic Investment, we would like to see steady, consistent, growth in each of the four categories of GDP growth.We have long held the view that trimmed mean PCE, produced by the Dallas Fed, is a better measure of inflation in the day-to-day costs of most Americans, it is currently around 2 percent, but it has been volatile. The 3 percent rate the Fed adopted in December, and the poor top-line jobs report from today, will likely put a damper on further Fed normalizing.
The yield curve, of which we have been gravely concerned in the last several months, is now simply dangerous volatile. The Fed rate hikes, which have their greatest effect on short-term rates (and why we use the 3Mo/10Yr curve) in 2018 premature and outpaced the economy's growth. We started 2018 with a spread of the 3 Month/10 year yield curve two of nearly 102 bps, just half the 200 or so bps that started 2017. Starting 2019, the 3 Month/10 year yield curve was just 15 bps apart. We’re also seeing repeated yield curve inversions among the shorter term rates.The 10 year rate is barely able to sustain 2.70 percent so far in 2019, increasing the Fed’s likelihood that yield curves will invert. The 3 Month/10 year curve is now just 19 bps. We would like to see a minimum of two quarters of at least a 75 bps spread (pulling back from the higher 150 bps spread we had cited earlier for what appears) between the 3 Mo and 10 Yr yield before the Fed considers another rate increase in what is in our view, an increasingly anemic economy.
We are simply not seeing any holistic appetite among investors for increased risk, as signaled by moving away from Treasuries and into “risk-on” assets, which would tend to drive rates higher. (Treasury yields are inversely proportional to risk appetite, so the lower the Treasury rate, the more dollars invested there and not in risk-on assets.) While we dogmatically prefer a strong dollar from a high demand for US goods and services, we're wary of dollar strength that is attributable to the Fed's interest rate hikes more than demand for U.S. goods and services. We think a stable -- or even a lower -- Fed rate would help on a number off fronts, not least of which would be relieving foreign debtors of USD debt obligations they might not be able to meet with a strong dollar. With Asia, Europe and North America all showing evidence of a slow down, we think it is vitally important for the finance ministers and central bankers of all three major economies agree a strategy to address what we foresee as a very challenging time later this year for the global economy.
We remain unperturbed by the trade dispute with China, and by the Trump tariffs, but we’re not willing to ignore the “herd instinct” of ignorant investors who buy into the lie that “tariffs cause (or worsen) depressions”. (Milton Friedman’s estate has a Nobel Prize that says otherwise.) We support the president's more diligent management of trade to defend against cheating and to oppose tariff and non-tariff barriers, and to protect intellectual property and technology transfers. President Xi has shown little tolerance for corruption among Chinese officials in his efforts to make China a respected member of the family of nations. We only hope that he will extend that attitude to end China’s more egregious trade cheating. That said, we would like to see the president engage America’s Asian and European allies to step up to join a "coalition of the willing" to challenge China's decades-old unfair trade practices and thefts of intellectual property because the one-on-one dispute could simply trigger mutual retaliation. There is more power in American dealings with Xi from a multilateral “we” than a unilateral “us”. Moreover, China can't afford a restless - or even a rebellious - populace being unemployed. Its leaders need exports to the U.S. and Europe more than the West needs access to China’s markets. Losing American sales in Chinese markets might hurt American and European companies bottom line and anger American farmers; losing Chinese jobs to American tariffs might collapse China’s government, particularly given the Chinese firms’ possible future inability to roll-over its USD and EUR denominated debt. China’s exports dropped over 20 percent, Y-on-Y, so President Xi’s negotiators should have significant motive to achieve a deal with President Trump quickly.
While CEOs seem concerned about margins if China manufacturing sites are lost in a trade war, we note that contract producers in most businesses are available in other locations and at lower wages than China and that continuing thefts of intellectual property present a longer-term threat to US businesses. We remain bullish on India, and believe it is a much more promising venue for low-wage manufacturing investment over the long-term than China; however, the continuing geopolitical issues with Pakistan require investors to tread cautiously in one of the world’s fastest growing economies. We’re circumspect about the rate of GDP growth reflected in the last three reported quarters. We continue to believe the favorable numbers from 2018Q1 and 2018Q2 arose largely from stacking up GDP from prior and later quarters, as discussed here. Then, 2018Q3, at 3.5 percent, had a huge 2 percent bump from an inventory build. We think the 2018Q4 GDP of 2.6 percent will likely presage continued lower growth for 2019.Our doubts will continue until we see two consecutive quarters of increases in all four categories of GDP (i.e., Personal Consumption Expenditures, Net Exports, Gross Domestic Investment, and Government Consumption Expenditures.) We predicted a slowing economy in our November jobs report and we are inclined to continue that view today, given the jobs report today and all these shorter term yield curve inversions.We expect 2019 Q1 to print at 2.1 to 2.6 percent, down from the 2.3 to 2.8 percent we predicted just last week in the delayed 2018Q4 GDP report. Today’s jobs report, a rapidly narrowing yeld curve, additional signs that China and Europe are slowing, the prospect of “No Deal” Brexit, a failed summit in Hanoi, and signals that China trade negotiations may not end as we had hoped force us to down-play economic growth in all of 2019. We would not be surprised if 2019 yielded growth for the full year at 2 percent or less, all things being equal.
We urge investors who are at or near retirement to move to at least a 75 percent cash portfolio. With growth prospects dim, we don’t think there is sufficient capital growth prospect for equities to justify a sharper market downturn on a grey or black swan event, such as a flare-up of the Pakistan-India dispute, a resumption of North Korean nuclear testing, or further political troubles in the US or Europe. In equities, we’re inclined to mostly stand pat with these sectors from our 2018Q4 summary, but in less proportion, and with some changes, as follows:
Outperform: Consumer discretionaries in the mid- to high-end retail sector; trucking on speculation of consolidation and acquisition; companies or REITs that own real estate in sectors identified as "opportunity zones" under the Tax Cut and Jobs Creation Act of 2017; CHF.
Perform: Consumer staples, energy, utilities, telecom, and materials and industrials. Lower-end consumer discretionaries, like dollar stores; the asset-light hospitality sector on speculation of stabilizing franchisee property values and room rental costs; certain leisure and hospitality.
Underperform: Healthcare; financials; and technology; lower-end, low-quality QSRs (e.g., MCD, DPZ,YUM, etc.) on greater delivery competition in the US and rapidly slowing foreign economies; currencies of developing nations, such as INR; and the GBP and EUR
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Additional disclosure: Disclaimer: The views expressed, including the outcome of future events, are the opinions of the firm and its management and do not represent, and should not be considered to be, investment advice. You should not use this article for that purpose. This article includes forward looking statements as to future events that may or may not develop as the writer opines. Before making any investment decision you should consult your own investment, business, legal, tax, and financial advisers.