All posts by joel

February Jobs Report

KEY DATA: Payrolls: +313,000; Private: +287,000; Revisions: +54,000; Construction: +61,000; Unemployment Rate: 4.1% (unchanged); Wages: +0.1%

IN A NUTSHELL: “Wow! That is the only way to describe the number of jobs added in February.”

WHAT IT MEANS: There is a saying that you should “watch what I do, not what I say”, and that is oh, so true when it comes to business hiring. You know all those complaints about firms not being able to find “qualified” workers, an issue I often discuss? Well, never mind. They seem to be able to get all the workers they need, at least if you believe the U.S. Bureau of Labor Statistics. Payrolls increased in February by the largest amount since July 2016 and the gain was way above expectations. Given that the December and January increases were revised upward sharply, the February hiring was even more impressive. Yes, there were some oddities in the data. A huge rise in construction was likely due to the warm February weather. For some reason unknown to anyone, retailers added workers as if the malls were being swamped. And teacher hiring was off the charts, which for February makes little sense. Still, even adjusting for those anomalies, the gains were so widespread that you have to consider this to be a strong report that makes clear firms are ready, willing and able to add lots of new workers.

Despite the outsized hiring, the unemployment remained at 4.1%. The reason was simple: People are flocking into the workforce like crazy. Earlier this week, I mocked the idea that the qualified couch potatoes were suddenly emailing resumes and getting hired. Well, maybe they are (though I still think firms are finally lowering their standards). The increase in the labor force was the largest in fifteen years! The labor force participation rate jumped. However, it is pretty much at the same level it has been for the past four years.

The only weak element of the report was wages, which rose minimally. I am just not certain why the wage increase was so modest. There were strong increases in high-paying jobs, with thirty percent of the total job gain in manufacturing and construction. Meanwhile, restaurants, which typically have low pay, added few new workers. Employees did work longer, so we should see a solid rise in personal income.

MARKETS AND FED POLICY IMPLICATIONS: This was a big report. No, it was a HUGE report. While investors may be comforted by the limited wage increase, that may not be the driving force for the FOMC. The Fed members are likely to read this as saying the economy is accelerating. That should be good enough to trigger a rate hike at the March 20,21 meeting, especially if trade war fears ease. And the pace of hiring is enough for the statement to reflect stronger growth and the likelihood that the Fed will continue normalizing rates. The risks right now are that wage and price inflation will accelerate as we go through the year to a pace well above the Fed’s 2% target. We have yet to see the tax cuts, either business or personal, really kick in. That should happen over the next six months. If we are getting this level of hiring now, what will the demand for workers be in the summer or fall? There just are not enough workers around to meet the demand. Indeed, It looks as if part of the corporate tax cuts are being used to fund desperately needed worker retention and attraction strategies. Larger firms now have the wherewithal to offer higher wages, bonuses, 401K subsidies and/or better benefits, and they are starting to do that. It is just that most small and mid-sized companies cannot match those increases, which is likely the reason the wage increases remain limited.

February Private Sector Jobs, Help Wanted OnLine and January Trade Deficit

KEY DATA: ADP: +235,000/ HWOL: -185,7000/ Deficit: $2.7 billion wider

A NUTSHELL: “The labor market is strong, maybe too strong.”

WHAT IT MEANS: One of the risks of the tax cuts and added government spending is that a stronger economy could put great pressure on wages. Well, it looks like that may already be happening. Friday we get the February employment report. Today, ADP released its estimate of private sector job gains for February and it looks like businesses hired like crazy. The gains were across the board, with robust payroll increases in every size of business and in just about every sector. The only decline was in information services, which has been soft for quite some time now. Meanwhile, construction was up big-time. The mild February may have played a major role in the strong hiring.

The strong payroll gains may be cutting into the backlog of open positions as the Conference Board’s Help Wanted OnLine measure was down sharply in February. Maybe. It is hardly clear why the number of want ads dropped, but they did, and the declines were widespread. Seven of the ten major occupational groupings followed showed fewer ad postings while declines were seen in every region, most states and three-quarters of the major metropolitan areas. There is still strong need for computer and math specialists, which is not a surprise given there are few people with those skills who are actually unemployed.

With tariffs and trade wars in the news, the focus is likely to shift to the trade data and today’s deficit is not likely to make the White House happy. The trade deficit widened sharply in January as exports fell while imports were largely flat. Oil was the prime driver of the deficit as rising prices led to a significant increase in the value of oil imports. Excluding oil, imports would have been down, as the major components, such as consumer goods and food, were lower. Interestingly, our purchases of foreign aluminum and most steel products declined. On the export side, we sold more vehicles and consumer goods, but less of most other goods. As for the country issue, the deficit with China surged, narrowed with the EU and Mexico but widened with Canada. That is just a one-month snapshot, but it’s today’s number, which is likely to matter to some.  

MARKETS AND FED POLICY IMPLICATIONS: The ADP estimate of private sector payroll changes is a good guide, but it can differ quite widely from the month’s government numbers. The trends are similar, though, and ADP is indicating that job gains are still quite strong. That is happening despite the fact that companies have been complaining for years that they cannot find “qualified” workers. Either tons of “qualified” workers are suddenly deciding to get off their couches, stop eating cereal and enter the workforce or the definition of “qualified” just may be changing. I opt for the second explanation. Businesses had failed to adjust to the fact that there just wasn’t the massive oversupply of labor they benefitted from in the first years after the end of the Great Recession. Reality may have finally settled in. But there are implications of hiring less qualified workers; the biggest is that productivity is likely to remain weak. The revised 2017 productivity numbers were released today and an increase of 1.2% is hardly something to celebrate. And since growth can only come from either productivity or added labor, the modest productivity increase implies that strengthening growth could put pressure not just on wages but prices as well. As for the markets, trade wars are bad and anyone who thinks otherwise has been smoking too much medical marijuana. There is reason to be concerned and until we actually see what tariff plan is implemented – and the reaction – uncertainty and wild equity price swings are likely to continue. In addition, a trade war would likely cause the Fed to rethink its interest rate normalization strategy. I still expect a rate hike at the March 20-21 FOMC meeting, but going forward, the pathway of rates will depend upon the actual, not tweeted, trade proposals.

February Consumer Confidence, January Durable Good Orders and December Home Prices

KEY DATA: Confidence: +6.5 points/ Orders: -3.7%; Excluding Aircraft: -1.2%; Capital Spending: -0.2%/ FHFA Prices (Over-Year): +6.7%/ Case Shiller (Over-Year): +6.3%

IN A NUTSHELL: “Consumers are exuberant and hopefully that will translate into more spending as firms don’t seem to be cranking up their investment activity.”

WHAT IT MEANS: There are lots of smiles on the faces of consumers these days. The Conference Board’s Consumer Confidence Index jumped in February, reaching the highest reading in over seventeen years. That was when the dot.com bubble started to burst in everyone’s face. The views on both current and future conditions were up sharply, a very positive sign. We will find out Thursday, when the January consumption numbers are released, if the good feelings are translating into better spending.

I suspect that sometime in the future, businesses will spend some of the massive increase in after-tax earnings on capital goods, but as of now, there are no signs that is actually happening. Durable goods orders crashed in January, but that was due to a huge drop off in commercial aircraft purchases. Don’t worry, Boeing is doing just fine. But aircraft was not the only weak sector. Demand was also down for machinery, electrical equipment, appliances and primary metals. Purchases of computers and communications equipment did jump and orders for vehicles edged upward. But the closely watched measure of capital spending, orders for non-aircraft, nondefense capital goods, declined for the second consecutive month and have really gone nowhere for the past three months. Maybe firms were waiting for the tax law to pass and it is taking them time to determine exactly what they should spend their profits on, but it would be nice if this measure were actually rising.

Two reports on housing prices were released today and both tell basically the same story: Housing prices are rising sharply. The Federal Housing Finance Agency’s December and fourth quarter data indicated that prices rose modestly in December but were up quite strongly over the year. The S&P CoreLogic Case-Shiller National Index was up slightly less over the year, but the difference was not huge given the way prices are measured.

MARKETS AND FED POLICY IMPLICATIONS: Feeling good is nice and having corporate coffers filled to the brim could also be good, but those two things have to actually lead to additional business and consumer spending if the economy is to grow more rapidly. So far, there is little indication that has happened. Of course, it has not been that long since the tax bill passed, so we need some patience.   Increasing capital spending only makes sense if it increases earnings and exactly how to invest is not a simple decision. Similarly, for most workers, the increase in after-tax pay will kick in slowly over the year. So don’t expect a sudden surge in either consumer or capital spending. And with the new Fed Chair making it clear that market volatility will not deter the Fed from its rate and balance sheet normalization plan, look for rates to continue to rise. When that is combined with sharply rising housing prices, the outlook for construction becomes a little clouded. In other words, growth this year should be strong, maybe even in the 3% range, but to get there, current business and consumer spending patterns have to change.  

January New Home Sales

KEY DATA: Sales: -7.8%; Over-year: -1.0%; Median Prices (Over-Year): +2.4%

IN A NUTSHELL: “Builders may be exuberant, but sales don’t seem to be supporting that attitude.”

WHAT IT MEANS: If you believe the National Association of Homebuilders, happy days are here again. The NAHB index is at a level that was exceeded only during the peak of the dot.com era. It was not even this high during the best times of the housing bubble. Housing starts were fifty percent higher than they are now. Yet in January, sales of new homes declined for the second consecutive month. There were sharp drops in sales in both the Northeast and the South. I can almost understand the 33% fall off in the Northeast. There was exceptionally cold weather, at least early in the month. However, I am not sure why demand fell by double-digits in the South. On the other hand, sales soared by over 15% in the Midwest, but rose minimally in the West. In other words, this is a report that shows no real pattern. Meanwhile, prices rose only modestly over the year. Builders are bringing more homes on to the market. Indeed, the number of homes for sale is the largest in nearly nine years. However, when adjusted for the sales pace, inventory is still not high, even with the recent backing off of contract signings.

MARKETS AND FED POLICY IMPLICATIONS: There are always strange housing numbers that pop up because extreme weather conditions occur randomly. A blizzard that hits in January could have easily happened in February. Bitter cold weather or massive rain, as we have had this year, changes the ability to get shovels in the ground or for buyers to visit sites. So don’t take the two consecutive months of declines in purchases as a clear signal the housing market is faltering. That said, both new and existing home sales did decline in both December and January and now we are facing rising mortgage rates. Yes, they are still relatively low, but they are the highest in four years. An upward trend in rates should be forcing some buyers to jump off the fence. I guess the increase has not been enough to cause any great stampede. I suspect that we will see a very strong rebound when the February numbers come out, especially since the weather, at least in the Northeast, has been incredibly mild. Even though that report will not be released before the next FOMC meeting, I don’t expect this report to deter any Fed member from voting in favor of a rate hike. As for investors, it appears it will take a push to above 3% in the 10-year Treasury note to create any real anxiety – if it actually does do anything to the exuberance currently in the equity markets. Right now, we have fifteen basis points to go to get there. If 2.85% is the new normal, it shows that an acceptable long-term rate is a moveable target. Don’t be surprised if 3% comes and goes in a similar manner. And we could get there fairly soon.

January Existing Home Sales

KEY DATA: Sales: -3.2%; Over-Year: -4.8%; Prices (Over-Year): +5.8%; Inventory (Over-Year): -9.5%

IN A NUTSHELL: “When you add rising mortgage rates to surging prices and a lack of inventory, it is hard to see that home sales will boom anytime soon.”

WHAT IT MEANS: The housing market has been solid and it remains that way, but there are holes developing in the story that residential real estate will be a leading factor in growth this year. The National Association of Realtors reported that existing home sales were off in January, the second consecutive drop. The declines came after a very strong November number, so maybe the easing in sales could have been expected. Sill, if you average the last three months, the sales pace was only slightly above the 2017 rate, which is not a sign of strength. We cannot really blame weather for the January slump as sales were off in all four regions of the country. The problem is that there are simply few homes on the market. While the inventory did rise a bit in January, it is still way off the level seen the previous January, and that was pretty low. With few homes to purchase, buyers are bidding up prices, which continue to rise sharply. They are up by about 7% or more in three of the four regions, with only the South posting a moderate increase.

MARKETS AND FED POLICY IMPLICATIONS: For months, maybe even years now, we have blamed the lack of homes on the market for the relatively low level and modest rise in the sales of homes. And those explanations still make sense. People are just not moving and it is hard for buyers to find the house that they want. And now, interest rates are starting to rise. So, what will happen to the market? First, I do not subscribe to the belief that mortgage rates above 4.5% are a death knell to demand. As I have noted before, the housing bubble formed when rates were between 5.5% and 6.5%. But back then, supply was ample. Now it isn’t. The combination of low inventory and rising rates does not bode well for prices. But not what would be expected: Prices could surge! Buyers have been comfortable biding their time, as rates have been low and stable for so long. But a clear upward trend in mortgage costs would likely cause fence sitters – both those who are already in the market as well as those considering getting into it – to take the leap. That would bid up prices. Hopefully, those higher home values will induce owners to consider selling and given the changing locational preferences of boomers, that is very possible. Without added supply, we could be in for a boom then a bust in housing prices, if mortgage rates jump. I don’t see that happening, though, until late this year or the first half of next.

January Import and Export Prices and Housing Starts and Permits

KEY DATA: Imports: +1%; Nonfuel: +0.4%; Exports: +0.8%; Farm: -0.1%/ Starts: +9.7%; 1-Family: +3.7%; Permits: +7.4%; 1-Family: -1.7%

IN A NUTSHELL: “Inflation pressures are building not just because domestic firms are raising prices but also because import costs increases are accelerating.”

WHAT IT MEANS: Another day of numbers, another sign that inflation is on the rise. This time it is from imports. The cost of foreign goods surged in January. Yes, energy prices jumped, but that was not the only reason the index was up so much. Excluding fuel, prices still rose rapidly. There was a surge in food, vehicles and a variety of industrial materials. On the positive side, consumer goods import prices were flat and capital goods costs went up modestly. Excluding fuel and even excluding food and fuel, import prices are up nearly 2%, the highest in nearly six years. On the export side, the only major sector that didn’t post a solid increase was agriculture. This sector has been struggling to find some pricing power and it just isn’t there.

Meanwhile, the December slowdown in home construction was probably due to weather issues. It is tough to seasonally adjust the data during the winter as deep-freezes and blizzards tend to come at random times. The rebound, though, in housing starts and permits in January was good to see. Both permit requests and housing starts were the highest in over nine years. Much of the gain, though, came from big jumps in the multi-family segment, which is always volatile. Regionally, construction fell in the Midwest but surged in the Northeast, South and West. While the number of homes under construction did increase, the level of activity was not a whole lot above what was going on in January 2017. It doesn’t look as if the shortage of inventory will be eased anytime soon.

One other key number came out today. The University of Michigan’s mid-month reading of consumer sentiment rebounded sharply in the early part of February. Consumers were more optimistic about the future and thought the economy was improving.

MARKETS AND FED POLICY IMPLICATIONS: Do interest rates matter? And if so, to whom do they matter? Despite rising inflation and an increase in the 10-year note of about 50 basis points and a 30 basis point jump in the 2-year note, investors don’t appear to be that concerned. The one-week retreat seems to have been shrugged off. But the inflation pressures are real and we haven’t seen any major economic acceleration from the tax cuts yet that could push up wage costs. Of course, businesses are probably looking forward to stronger, possibly excess demand, as that would give them the pricing power they have lacked for over a decade. And the ability to raise prices holds out hopes that earnings growth can be sustained at a decent level even after the post-tax cut base is put in place. But there is a downside to this thinking as the Fed will be free to raise interest rates back to more normal rates at just about any pace deemed necessary. Unfortunately, the discussion about what are “normal” rates hasn’t really begun. It needs to and soon. In two weeks the next PCE price index comes out and it could be hot. And three weeks later the FOMC meets. If the inflation data are as worrisome as I think is possible, look for the Fed to indicate it is putting inflation on the closely watched list.

January Industrial Production, Producer Prices and Weekly Jobless Claims

January Industrial Production, Producer Prices and Weekly Jobless Claims

KEY DATA: IP: -0.1%; Manufacturing: 0%/ PPI: +0.4%; Less Food and Energy: +0.4%; Goods: +0.7%; Services: +0.3%/ Claims: +7,000

IN A NUTSHELL: “Business confidence may be sky-high, but it would be better if actual business activity was growing faster.”

WHAT IT MEANS:   “Watch what I do, not what I say” is the phrase we should be thinking about right now. Surveys are showing businesses are exuberant. According to the National Federation of Independent Business Chief Economist Bill Dunkelberg, “The historically high index readings over the last year tell us small business owners have never been more positive about the economy”. Similarly, the most recent Conference Board Measure of CEO Confidence jumped. Well, what is happening in reality? Apparently, not much. Overall industrial production declined in January and manufacturing output was flat for the second consecutive month. That is hardly a sign of a booming economy. There were some strong sectors. Motor vehicle assembly rates increases, helping power a rise in metals output. There were also solid increases in the production of petroleum, textiles, electrical equipment, computers and appliances. A rebound in business equipment output implies that businesses may be ramping up investment spending. But that is still to be seen.

Meanwhile, the drumbeat of higher inflation is getting louder. The Producer Price Index jumped in January, the fifth time in sixth months the index was up by at 0.3%. Yes, energy prices soared, but excluding that sector, prices still rose solidly. Over the year, wholesale prices increased 2.7% and just about every special segment of producer costs has posted gains in excess of 2%. In other words, the price increases are spread across the entire economy.

Weekly jobless claims rebounded last week, but that was from historic lows, so the rise doesn’t mean much. Businesses want to retain workers and the incredibly low level of claims supports that view.

MARKETS AND FED POLICY IMPLICATIONS: After a short scare, investors seem more than willing to look past things such as accelerating inflation and rising interest rates and focus on what they believe will be the never-ending benefits from the tax cut legislation. But it does appear as if higher inflation is here to stay. The latest surveys by the New York and Philadelphia Federal Reserve Banks found that about half of the respondents expect to get higher prices for their goods in the next six months, while very few thought prices would fall. In the Philadelphia report, a special question on prices and compensation showed that inflation expectations increased from three months ago. This should be a concern for Fed members, who consistently argue that inflation expectation are “well anchored”. Well, maybe that anchor is started to come loose. While equity investors are shrugging off the inflation data, the bond markets are not. The ten-year Treasury note hit its highest rate in over four years while the 2-year note reached a 9½-year high. Just a few months ago, before the surge in rates, many investment “gurus” were saying the economy would crash and burn if we got to 3% on the 10-year. Yet here we are with a rate that is just a few basis points from 3% and the equity markets are rising. So, is the exuberance in the stock markets rational or irrational? Where is Alan Greenspan when we really need him? I hardly expect new Fed Chair Powell will be making any comments that could roil the markets, even if he should be asking some really hard questions.

January Retail Sales, Consumer Prices and Real Earnings

KEY DATA: Sales: -0.3%; Excluding Vehicles: 0%/ CPI: +0.5%; Less Food and Energy: +0.3%/ Real Earnings (Monthly): -0.2%; Over-Year: +0.8%

IN A NUTSHELL: “In January, consumption cooled but prices heated up, which is not a good combination.”

WHAT IT MEANS: Did the consumer go on vacation? Are households waiting for their paychecks to increase as a result of the tax cuts before they start spending? I don’t know, but the decline in retail sales in January was the largest drop in nearly a year. We knew the number was not going to be great because vehicles sales were off, but this was well below expectations. And the decline in sales is actually worse than the headline number would have you believe. Gasoline purchases soared, but that was driven by a sharp rise in gasoline prices. Shoppers did buy more clothing, but that was about it.

In the “no good economy goes unpunished” category, the Consumer Prices Index jumped in January, led by the surge in energy costs. But even excluding energy, prices still rose solidly. The higher fuel prices drove up transportation expenses. Food and shelter prices rose moderately, but eating out cost a lot more. There was also an outsized surge in apparel prices, which happens periodically. Clothing costs are still down solidly over the year. As for health care, the spotlight on medical goods price increases may be working at they fell but medical services costs rose sharply. But maybe most importantly, consumer prices are up by 2.1% since January 2017, a touch over the Fed’s 2% target. Excluding food and energy, the so-called “core” index has risen 1.8%. The Fed prefers a different inflation measure, the Personal Consumption Expenditure (PCE) deflator, and that index could be close to the magic 2% pace when the data are release in a couple of weeks.

Consumer spending power continues to go nowhere as real, or inflation-adjusted wages dropped again in January. For the entire year, workers compensation rose modestly. Actually, the data are even more disappointing when you remove supervisory employees from the numbers. Real hourly wages were essentially flat over the year and even with hours worked up a touch, the weekly income increase was limited.

MARKETS AND FED POLICY IMPLICATIONS: The initial thought is that is that consumers must have been all tapped out from their holiday shopping, which explains the weak spending to start to the year. That would be nice if it were true. Retail sales were flat in December, which means there were two consecutive months of soft demand. The reason may be simple: Labor compensation continues to go nowhere. Once again, let me repeat that it is difficult to get strong overall economic growth without strong consumer spending. To maintain solid demand, households need the income to spend. They just don’t have it. As a result, as I keep harping on, the savings rate is near record lows. That might force families to use some of the tax cuts to rebuild household balance sheets rather than purchasing new goods. And then there is inflation. Reality seems to be setting in that the days of low inflation and therefore low interest rates are likely over. It appears we are moving back toward more normal levels of inflation and that is driving the increases in rates, also toward more normal levels. We will get the February CPI and the January PCE reports before the next FOMC meeting, which will be held on March 20-21. If the inflation pressures don’t turn around, it is likely that Chair Powell will raise rates.

January NonManufacturing Activity and Employment Trends Index

KEY DATA: ISM (NonManufacturing): +3.9 points; Orders: +8.2; Employment: +5.3 points/ ETI (Over-Year): +5.4%

IN A NUTSHELL: “The non-manufacturing portion of the economy seems to be kicking it up a notch and that bodes well for growth this year.”

WHAT IT MEANS: The economy is in really good shape, which is odd given that investors seem to be suddenly worrying about things. The manufacturing sector, though not booming, is solid while the service sector is getting even better. The Institute for Supply Management’s NonManufacturing Index jumped in January, led by a resurgence in new orders. To meet the growing demand, hiring is accelerating. Even better, order books are starting to fill even further. In other words, conditions are go for this segment of the economy.

The improving condition of the economy, which was already good to start with, is driving up demand for workers. The Supply Managers’ survey was not the only one to show that. The Conference Board’s Employment Trends Index rose strongly in January and is up sharply over the year. The implications are clear: Conditions will only getter better going forward. Or, as was stated in the report, “The Employment Trends Index continues its solid path upwards and shows no sign of slowing down”.

MARKETS AND FED POLICY IMPLICATIONS: The stock markets may finally be starting to focus on the real side of the economy, which may explain some of the current correction. As I have noted, expansions don’t simply fade away. They are caused by either bubbles bursting, such as the tech and housing bubbles, or policy mistakes, such as the Fed jamming on the brakes. But while investors have celebrated, and rightly so, the massive corporate tax cuts, economists have worried that expansionary fiscal policy piled on top of a solid economy and labor shortages could be categorized as a policy mistake. And the Fed members may be seeing that as well as their focus on inflation seems to have intensified. What needs to be determined is whether the acceleration in activity is too much of a good thing and if it is, how much is the ‘too much’. The course of both inflation and wages over the past couple of years has not conformed with normal economic theory. For every theory there is a counter-argument. For example, I have heard the argument that the number of people in the 24-55 age group who are not in the workforce is unusually large and that may represent a major source of potential labor. In rebuttal, it is argued that many of those people cannot pass a drug or background check and have given up looking for work because they know they will not be hired. Which is the correct interpretation? We don’t know, because the data on the characteristics of the unemployed, at least as it comes to drug or background issues, doesn’t exist. Yet it is critical because it speaks to the extent of the actual labor shortage and the impact of the tax cuts not just on economic growth but on wage and price inflation and the potential course of interest rates. The lack of clarity about growth and inflation is likely to create a lot more volatility going forward.

 

January Employment Report

KEY DATA: Payrolls: +200,000; Private: +196,000; Revisions: -24,000; Unemployment Rate: 4.1% (Unchanged)

IN A NUTSHELL: “If the labor market is this strong and the tax cuts have yet to kick in, what will it look like when households and businesses actually start spending the money?”

WHAT IT MEANS: I know it was called the Tax Cuts and Jobs Act, but why we needed more jobs is a mystery to me. Payroll gains were strong in January and the increases were pretty much spread across the entire economy. Construction hiring was robust and manufacturers continued to add workers at a solid pace. Retail employment rebounded after a down month in December and the warehousing industry just keeps expanding to meet the needs of the delivery economy. The improving real estate sector is also hiring heavily, as did health care and restaurants. Even federal and local governments padded their payrolls, and it wasn’t even in education. In other words, this was a really broad based employment increase. Over the past three months, an average of 192,000 new positions were added. That exceeds the 181,000 monthly average posted in 2017. Keep in mind, that lower pace of job gains was still robust enough to drop the rate from 4.7% in December 2016 to 4.1% in December 2017.

On the unemployment front, the rate held steady for the fourth consecutive month. The annual revisions to the data makes it not possible to directly compare December 2017 with January 2018 on some of the figures, but suffice it to say that there really wasn’t a softening in the unemployment and labor force numbers. Indeed, there may be a tightening in labor markets. Wage gains accelerated and the increase over the year hit 2.9%, the highest since the end of the Great Recession.

MARKETS AND FED POLICY IMPLICATIONS: The tax cuts should slowly start kicking in as we move through the first half of the year. We really have no idea how much of a boost to growth will occur. On the business side, it isn’t clear how much of the surge in after-tax profits will go toward new capital spending and higher wages rather being used to increase dividends, buy-back stock and/or increase management compensation. On the household side, with the savings rate low, it is also uncertain how much of the tax cuts and bonuses/wage increases will go to new spending rather than repairing deteriorating balance sheets. All that said, there will be growing household demand for goods and services and additional investment on the part of businesses. That faster growth will require more workers. So far, and despite their claims that they cannot find qualified workers, firms seem to be doing just that: They are hiring robustly. Is that pace sustainable? If the unemployment rate declined by 0.6 percentage point last year, what will it fall to this year? Even if you don’t like the unemployment measure, it is hard to see that the current hiring pace can be sustained. Massive fiscal policy piled on top of an economy that was growing solidly and has limited labor availability has not been tried before. How this “Grand Fiscal Experiment” affects wage and price inflation is something Fed has to be worried about. The rise in the 10-year Treasury note to its highest level in four years indicates the markets are getting worried about it as well. As I like to say, “no good economy goes unpunished” and the punishment may already be starting to be meted out.