Monday Update: Confidence Remains High, Hiring Slows

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Dec 10, 2018 1:35:36 PM

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Monday updateLast week was a busy one on the economic front, with several key reports. This week’s data starts with prices and whether they indicate that inflation is picking up.

Last week’s news

The data flow started on Monday, when the Institute for Supply Management (ISM) Manufacturing index surprised to the upside. It rose from 57.7 to 59.3, above the expected 57.5. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, this metric remains quite strong. The increase came despite slowing global growth and the recent appreciation in the dollar, which has been increasing the costs of U.S. products to foreign buyers. Uncertainty over trade policy remains a headwind as well. Despite these concerns, the increase suggests that the damage has not yet been significant, and manufacturing will remain positive for the economy as a whole.

On Thursday, the ISM Nonmanufacturing index also surprised to the upside. It rose to 60.7 for November, up from 60.3 in October. This result takes the index closer to the more than decade high reached in September. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, the current sustained run above 60 remains very positive for the economy as a whole.

Also on Thursday, the international trade report showed the trade deficit widened further, from $54 billion to $55.5 billion. This result was worse than the expected $55 billion. The trade deficit in goods widened as export growth has now dropped back, particularly to China, even as imports have remained steady. Overall, trade will likely be a drag on fourth-quarter growth.

The University of Michigan consumer confidence survey, released on Friday, also beat expectations. Confidence held steady at 97.5 for December, the same as November, against an expected small decrease. This remains a high level, historically, and suggests that consumers are not yet worried about the effects of a trade war or financial market turbulence, given the continued strong labor market and decline in gas prices. This should continue to support consumer spending and economic growth.

Finally, on Friday, the employment report came in below expectations. It showed a gain of 155,000 in November, down from a downwardly revised October figure of 237,000. The unemployment rate stayed at a very low 3.7 percent. Wage growth ticked up a bit, from a downwardly revised 0.1 percent in October to 0.2 percent for November, on a monthly basis, with the increase on an annual basis in wage growth steady at 3.1 percent. This month’s report was likely affected by the California fires, so the weaker job growth should be taken with a grain of salt. Even so, overall, this is a reasonably healthy report and should signal continued economic growth. It will also likely support another rate hike from the Fed in December.

What to look forward to

On Tuesday, the producer price report will be released. The headline index, which includes energy and food, should stay flat for November, down from a 0.6-percent increase in October, on declines in gasoline and commodity prices. The annual change is also expected to drop, to 2.5 percent from 2.9 percent, indicating that longer-term inflation pressures remain above the Fed’s target range, though they may be moderating. The core index, which excludes energy and food, is expected to show slower growth as well. It should come in at 0.1 percent for November, down from 0.5 percent for October. Analysts anticipate that the annual figure, however, will stay steady at 2.6 percent.

On Wednesday, the consumer price reports are expected to show moderating inflation at the headline level. The headline index, which includes food and energy, should stay flat for November, down from October’s 0.3-percent uptick, on decreasing gasoline costs. The annual figure is expected to drop to 2.2 percent in November from 2.5 percent in October. The core index will likely remain steady, showing a 0.2-percent increase for November, the same as October. The annual figure is expected to rise slightly, from 2.1 percent to 2.2 percent. These numbers indicate that inflation is still running somewhat above the Fed’s target levels, which should support continued interest rate increases.

On Friday, the U.S. retail sales report is expected to show slower growth—0.2 percent for November. A decline from October’s substantial 0.8-percent rebound, the number may be attributed to lower gas prices and a slowdown in hurricane-driven replacement auto sales. Core retail sales, which exclude autos, are expected to do well, with expected growth in November of 0.3 percent, down from October’s 0.7-percent rise. But there may be some downside risk to these numbers, with the fading of the tax cut boost and recent turbulence in the financial markets. If the numbers come in as expected, they would be at healthy levels and positive for the economy.

Also on Friday, the industrial production report is expected to tick up a bit. It should go from a 0.1-percent gain in October to a 0.3-percent rise for November. There may be some upside risk here, on a weather-related increase in utility production and a rebound in oil production after a hit from Hurricane Michael. Manufacturing is also expected to do well, with growth steady at 0.3 percent for November, the same as October. There may, however, be some downside risk, as the dollar continues to rise. Again, the expected numbers would indicate continued growth and be positive for the economy.

Thanks for reading and have a great week!

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