KEY DATA: ADP Jobs: +271,000/ ISM (Manufacturing): -5.2 points; Orders: -11 points/ Construction: -0.1%
IN A NUTSHELL: “Job growth may be holding up but there are growing signs that the economy is indeed slowing.”
WHAT IT MEANS: Firms may still be hiring, but it is not clear how long that will last. Tomorrow is Employment Friday and a preview of the number is often, but not always, provided by the ADP estimate of private sector job gains. Well, if you believe the estimate, the number could be huge. Strong growth was reported in all sizes of businesses and across all sectors. There was a huge rise in construction hiring, though it is not clear why given the issues facing the housing sector. The only decline was in natural resources/mining, which was likely due to declining energy prices affecting jobs in that sector.
There were two other labor market-related numbers released. Jobless claims jumped last week, but they have been more volatile than normal lately. The level remains quite low. Challenger, Gray and Christmas reported that layoff notices rose sharply in December from the December 2017 levels and for the year, they were up nearly 29%. These data don’t tell us a lot given that job growth was solid in 2018 and the unemployment rate declined.
While the manufacturing sector joined in the hiring binge in December, activity decelerated sharply. Indeed, the Institute for Supply Management’s index hit its lowest level in two years. Critically, new orders cratered and are now barely expanding. Backlogs, which when rising generally point to expanding production, have stopped increasing. Still, the sector is not collapsing. Production is still growing solidly, those less rapidly as it had been, and hiring remains solid.
Construction spending eased back in November even as government activity jumped. The private sector cut back spending on both residential and nonresidential projects.
MARKETS AND FED POLICY IMPLICATIONS: The day started out well with a robust jobs report but then other numbers started showing up which were not as sanguine about future growth. The so-called “Trump Bump” that was seen in the markets and manufacturing, has been largely wiped out. But that doesn’t mean the economy is headed into recession. The “Trump Slump” seems to be taking us back to more normal growth levels, which we might not even hit until the spring or summer. We seem to be replacing the irrational exuberance of the election and tax cuts with an irrational despondence of a slowing economy. I, as well as most other economists who don’t work for politicians, warned that the tax cut sugar-high would wear off in about a year. Well, we are a year into the tax cuts and not surprisingly, growth is decelerating. Notice, I wrote decelerating not declining. Growth is still decent but the risks have risen. While most focus on the Fed, another fifty basis point increase would not kill the golden goose if it were indeed golden. But a trade war would and it already is causing real concerns. China’s economy is slowing more than even the U.S. economy and when you have the two biggest economies in the world decelerating, it is going to impact world growth. Will we wind up in a recession? Only if the tariff battles continue this year and almost definitely if the threat to impose a 25% tariff on Chinese imports comes true. More likely, we are headed toward moderate, sustainable, Obama-like growth if the trade war dissipates. We are not going to see 3% or greater growth for an extended period. Investors needed to be disabused of the bill of goods they were sold that the economy would expand at 3% for the next decade (per OMB) and it looks like they are in the process of coming to grips with that reality. Unfortunately, when everyone sees the same change at the same time, markets tend to overreact, which also seems to be happening. To me, we are just wiping out the exuberance. The question is, how far will that wipeout go? That is, how much of an overreaction will we get? Stay tuned.