KEY DATA:  ISM (Manufacturing): -0.9%; Orders: -0.4%; Production: -5.9%; Hiring: -1.5%/ Construction: +0.6%; Private: +0.4%; Public: +0.9%

IN A NUTSHELL:  “Manufacturers did not end the year on a high note as the sector continues to contract.”

WHAT IT MEANS: Last year may have been the best of times for the equity markets but that was hardly the case for the manufacturing sector.  In December, the Institute for Supply Management’s index was in the red for the fifth consecutive month.  Continued declines in demand led to a sharp drop in production.  Indeed, the production measure was the lowest since April 2009 and lest we forget, that was during the peak of the Great Recession cut backs.  The slowdown in output has triggered a decline in payrolls.  Four of the six major industry sectors posted shrinking employment.  Only one was up.  We could see a negative number in the manufacturing segment of the employment report that will be released next Friday.  With demand, production and backlogs fading, firms are slimming down and inventories are shrinking.  Basically, this report was ugly.

While manufacturing may be fading, construction seems to be picking up.  Given how soft it had been, that is not a major surprise, though it is welcome news.  Both public and private spending was up solidly in November.  However, it is still the government that is the driving force as activity was up twice as quickly as the private sector.  Year-over-year, November total public construction rose by 12.4% compared to only 1.6% for the private sector.  The private sector weakness was largely in nonresidential building, which fell in both November and over the year.  Residential activity has picked up, but not by a whole lot.  MARKETS AND FED POLICY IMPLICATIONS:The economic data did not provide us with a very merry welcome to 2020.   The manufacturing sector is not in great shape and even the comments reported in the Supply Managers’ report were cautiously optimistic at best.  We don’t know a whole lot about the so-called phase one trade agreement with China, but it looks to be mostly centered on trying to keep the farm sector from going bankrupt. But I will hold my judgment until we see the text.  As for the markets, the shift from trade war to potential shooting war with Iran was hardly something investors wanted to see.  The ball is now in Iran’s court and it is likely something bad will be attempted.  We just don’t know how big or how long before it occurs.  That could keep investors on edge. Concerns about the trade war hardly slowed investors down in 2019, so it is not clear that a shooting war will do much this year.  Keep in mind, the economy grew at a roughly 2.25% pace last year while the major equity indices soared by well over 20% and even over 30%.That seems to imply that the economy and the markets are not closely linked.  That is something the Fed doesn’t seem to be overly concerned about as the members continue to pat themselves on their backs for doing such a great job.  Well, there goes one of my resolutions.  I promised myself I would lay off criticizing the Fed for a while and here I am in my first commentary of the year doing just that.  Oh, well, I just calls ‘em as I sees ‘em.