Economic Insights - February 11 - 15, 2019
- US labor market surge. Record job openings, robust wage gains, rising labor market participation, and amazing job growth 10 years into this business cycle—the US job market is as good as it can get.
- Week in review. The US retail sales report for December was just awful; fortunately, no other data corroborates the disaster. Officials in China attempt to boost growth; it should succeed with a modest pickup in the second half.
- Investment implications. World stock markets have soared since Christmas. Robust wage gains, slower global growth, and no more boost from US tax cuts may downgrade earnings. The upside from here? Likely limited.
US labor market surge
Is the US job market red-hot or what? Take a look at the numbers.
For the first time in US history, a record high 7.335 million job openings in December outpaced the total number of unemployed by about a million. Prime-age workers rejoined the labor force at a fast clip, with more people working than the last high in mid-2013—and that number is rising even as I write. Three-month average private sector payroll job gains of 234,000 with average hourly earnings up 3.2% over the prior year. Excellent news any time of the business cycle, but especially so in the 10th year.
What’s not to like?
Digging deeper into the data confirms it: Today’s labor market is one of the best in US history. Recall that the US Department of Labor produces two monthly job series: the payroll report from business establishments and the household survey from individuals. The total job gain for 2018 from the household canvas was 2.88 million, the most since 2006 and the third best annual rise in over three decades.
It’s worth noting that the rise in workers’ participation rate comes after the retirement of US Baby Boomers, estimated at about 10,000 per day. Prime-age workers (between 25 and 54 years), especially males, were leaving the labor force for years. But even men are working more, hitting a fresh cycle high of 82.6% from a long-time low in 2015. Where are they coming from? The ranks of discouraged workers as well as those on disability, the latter down 421,000 from the peak for the first major dip since the early 1980s. This is why the jobless rate has edged up: people coming back into the workforce.
Income adds a nice bump, too. A healthy raise for all workers is an even faster acceleration in average hourly earnings for production and nonsupervisory workers. The report for January showed an annual smoothed gain of more than 3.6%. And that’s after a steady monthly step-up in wage growth from only 2.3% in January 2018. Combining wage gains with the increase in aggregate hours suggests that total consumer income could be running at a 5.4% annual rate, the best since the mid-2000s. Former Fed Chair Janet Yellen had a good point when she mentioned the economic advantage of bringing people back into the workforce and letting the economy run a little hot to do it.
Outside the US, tightening labor markets and mildly accelerating wage growth are consistent themes throughout the United Kingdom, the Eurozone, and Japan. Good household spending supported by healthy income gains from a hearty job market keeps those economies growing. Eventually, this will help central banks create the inflation they want. However, that may have significant, positive long-term investment, and interest rate implications that I’ll cover in a later Economic Insights.
Week in review
Tough Valentine’s Day for US retail sales. In fact, the December report painted a genuine calamity, the worst decline for overall retail sales since mid-2009. That disastrous print caused some fourth-quarter economic growth forecasts to fall by a full percentage point.
Time to despair? Likely not.
If it’s not revised higher, maybe chalk it up to a sudden wealth effect from the late-year stock market plunge and a spending drought by workers affected by the government shutdown. In other words, one-off events with little future impact.
It will surely be revised higher. Data collection efforts could easily have been compromised by the shutdown. Further, there’s a total lack of corroboration from any other information. The Johnson-Redbook Index of same-store sales was especially strong in December. Job growth and wage gains have been stellar, so the plunge was not from income worries. Consumer sentiment did fall a bit in December but remained high. Retailers added a sizeable number of new jobs in January and retail stocks shrugged off the awful sales report with little effect the following two days.
We’ll await the next print without much trepidation.
Stimulus helping growth in China? Early year economic news is always clouded by the variable dates of the Chinese New Year holiday. And rather than further significant weakness, recent data has been mixed. On the positive side, a nice surge in new yuan-denominated loans, the total trade volume of both imports and exports and the money supply, M2, all expanded ahead of expectations. So, it’s possible last year’s weaker growth may be reaching some sort of temporary trough. If so, it has still come only after a year’s worth of official stimulus: sizeable tax cuts, lower interest rates, loan programs designed for small businesses, easier lending conditions, and lax enforcement of environmental pollution rules. Chinese equities have been on a tear since early January, perhaps from expectations that the stimulus would revive growth.
Even with substantial official support, the weakness may not be over. The narrower M1 measure of the money supply is still decelerating, now to the slowest annual growth in its history. China’s producer price index is at best flat over the last year, suggesting that dwindling price gains will aggravate profit problems in a slowing economy. And while official jobless numbers show little increase, anecdotal reports imply there were significant job losses last year. New Year holiday travel and celebrations this year seem much more subdued than in the past.
We expect growth to stabilize through mid-year with a modest pickup in the second half. However, this likely doesn’t change the long-term outlook for a gradual, structural deceleration of growth.
World stock indices have soared since Christmas, led by cyclical sectors such as technology, industrials, and small caps as the worst recession fears faded. The S&P 500 Index surged 18.1% from Christmas through February 15th, an amazing run.
But robust wage gains, slower global growth, and the end of the one-time profit boost from US corporate tax cuts suggest earnings downgrades may be ahead as the first-quarter reporting season approaches. So, the upside from here may be limited as earnings guidance gets downgraded. The inability of long-term interest rates to rise and the yield-curve to steepen as stock markets surge higher suggest the rally is not on a firm foundation. We’d stay cautious.
Still, we like real estate, real assets in general, and expect a weaker US dollar and emerging markets to outperform US equity indices.