SOLID ECONOMY, BUT RISING UNCERTAINTY IN JANUARY REPORTS
January’s reports painted a picture of a solid economy struggling with global uncertainty. The Conference Board’s Leading Economic Index (LEI), an aggregate of ten leading indicators, declined 0.1% in December, but grew 4.3% year over year for 2018. While the LEI declined for the month, positive yearover-year momentum signaled low odds of recession in the coming year.
Still, data showed pockets of the U.S. economy weakened through the end of 2018. The Institute for Supply Management’s (ISM) manufacturing Purchasing Managers Index (PMI), a gauge of U.S. manufacturing health, fell to its lowest level in two years in December. Although the level of activity was near average for the cycle, the magnitude of December’s decline from the prior month was striking: The drop was the ISM PMI’s biggest since October 2008. Markit’s PMI fell to a 13-month low in December, confirming the decline in manufacturing. We see the ongoing trade dispute with China as the primary obstacle to corporate health, as some businesses have opted to put future expansions on hold until there is more clarity on the tangible and intangible effects of tariffs on demand and profits.
Rising economic uncertainty also weighed on business and consumer confidence data. In December, the Conference Board’s Consumer Confidence Index fell the most since August 2011, while the National Federation of Independent Business’s (NFIB) measure of business confidence slid for a third straight month. While the decline in confidence business confidence.
Jobs data continues to be solid despite trade uncertainty. Nonfarm payrolls rose 312K in December, beating the median consensus estimate of 184K by a very healthy margin.The unemployment rate ticked up to 3.9%, but the labor force participation rate rose, indicating that more participants were enticed by solid labor market onditions to enter the workforce. Many of these new entrants are initially unemployed. Average hourly earnings grew 3.2% year over year in December, well below the 4% wage growth that has preceded economic recessions in the past [Figure 1].
Pricing gauges also showed that inflationary pressures remain manageable. The core Consumer Price Index, which excludes food and energy, increased 2.2% year over year, while the core Producer Price Index climbed 2.5% year over year. Core personal consumption expenditures, the Federal Reserve’s (Fed) preferred inflation gauge, rose 1.9% year over year, just below policymakers’ 2% target.
Many economic releases were delayed by the partial government shutdown, adding to the uncertainty. Releases on durable goods, housing, trade, inventories, and the monthly budget statement were pushed off due to agency closures. The biggest delay was the fourth-quarter gross domestic product (GDP) report, which the Bureau of Economic Analysis postponed indefinitely. With the government now open, we expect to see the delayed data released in the coming weeks.
Fed Pauses in Response to Crosswinds
Fed policymakers reconvened in January and decided to leave interest rates unchanged. More significantly, they removed language from the Fed’s policy statement that “some further gradual (rate) increases” would be consistent with economic conditions and added language that they would be “patient” when determining future rate adjustments. In the post-meeting press conference, Fed Chair Jerome Powell noted that the Fed based its decision on rosscurrents and conflicting signals,” including slowing growth in China and Europe, trade risk, elevated uncertainty, and deteriorating sentiment. However, Powell also emphasized several times that the U.S. economy is solid and inflation remains manageable.
Financial markets are now positioned for a pause in rate hikes through at least the end of this year [Figure 2]. We expect to see one or two more interest rate hikes this economic cycle, though not necessarily in 2019, if inflationary pressures build too quickly or other signs of excesses appear.
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