KEY DATA: IP: +0.9%; Manufacturing: +0.1%/ NAHB: down 2 points/ Vitality Index (Over-Year): +4.0%
IN A NUTSHELL: “The energy-sector rebound is helping accelerate the economy.”
WHAT IT MEANS: In 2015, the economy expanded at a very strong 2.9%. But conditions faded in 2016, with growth coming in at a tepid 1.5%. What was one of the biggest reasons for the slowdown? The collapse of energy prices and the energy sector! Well, conditions changed last year and the energy sector is now leading the way again. Industrial production surged in December, and for the year as a whole, but not because of manufacturing. Manufacturing activity ticked up minimally in the last month of the year. There was no consistency in the sector, with almost as many industries posting large declines as those showing solid gains. For the year, manufacturing was up a solid, but not spectacular 2.4%. On the other hand, the mining sector surged in December and was up double-digits over the year. The large rise was driven by a 40% rise in oil and gas drilling for the year. With energy prices continuing to increase, I expect that the energy industry will help lead the way again this year. However, the vehicle sector, which was largely stagnant in 2017, may see both lower sales and output.
Homebuilders have been ecstatic about conditions lately and that really didn’t change despite a decline in the National Association of Home Builders’ Index in January. The level is very high and has rarely been seen except at the peak of both the dot.com and housing bubbles. I am not saying that we are in another bubble, just that you have to have really good economic conditions for developers to feel this euphoric.
ADP’s Workforce Vitality Index was up again in the fourth quarter, which should surprise no one. This report is worth following because it is one of the more comprehensive reports on wage gains we have. It breaks down wage changes by region, industry, age of worker, tenure in job, company size, by full-time vs. part-time and whether workers switched jobs or held them. Obviously, it is too extensive to easily summarize, but it can be said that wage gains are accelerating, especially in the resource and mining and hospitality and leisure industries. Job switchers are doing better than job holders and that has led to a further rise in the turnover rate. It is now over 50% in leisure and hospitality. If firms want to hire stable workers, they should look to those over 55, not those under 35. Of course, that is not what they do, but that is a topic for another commentary.
MARKETS AND FED POLICY IMPLICATIONS: Today’s reports really don’t change much for anyone. We are in earnings season. Investors are either going to love a lot, or a love a lot more, the earnings report. It will likely take a lot of terrible reports to get the animal instincts under control. And the data are not so strong as to cause any of the Fed members to rethink their views on rate hikes. Sometime this month the Senate will confirm Jerome Powell as the next Fed Chair, but that is a formality. Right now, doing something that is largely noncontroversial is not something most Senators want to do. Instead, they will focus on how to keep the government running. The supposedly World’s Greatest Deliberative Body has devolved into a Tower of Partisan Babel, so what will happen is anyone’s guess.