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Although it may seem like a lame excuse, stormy weather in March, which followed mild conditions in February, caused job creation to slump in March. The economy added a lower than expected 98,000 jobs and the number of Americans who were not at work due to bad weather was 195,000 in this report, 55,000 more than the historic number of 140,000. Adding back those employees, the reading was 153,000, somewhat weaker than the 175,000 expected, but well within the general range.
Get ready for a Fed interest rate hike this week. The February jobs report showed that the US economy added a larger than expected 235,000 jobs, the unemployment rate edged down to 4.7 percent and annual wage growth bounced back from a revised 2.6 percent in January to 2.8 percent, ahead of the 2.7 percent average seen in the second half of last year. The increase in wages demonstrates that the labor market is tightening and that state-level minimum wage hikes are filtering through the economy.
As the bull market in US stocks gets set to celebrate its eighth birthday this week, it is stunning to consider how far we have come. On March 9, 2009, here was the closing level of the three major indexes:
2016 is in the record books and given the dreadful start of the year for US stock markets (in February, all major indexes corrected, falling more than 10 percent from the end of 2015,) the closing numbers were impressive. Total return results for 2016, which includes price appreciation and dividends showed the Dow up 16.5 percent and the S&P 500 ahead by 12 percent. The 2016 action occurred in three distinct phases:
The end of year rally was fueled by President-elect Trump’s pledges to reinvigorate the economy with a mix of fiscal policy changes, which include: A public-private infrastructure spending plan; corporate and personal tax reform; and the loosening of regulations across a number of sectors, including banking and energy.
The combination of these three potential initiatives could boost growth, as the economy enters the eighth year of the expansion. (In the first seven years, annual growth ranged from 1.6 to 2.6 percent.) Presuming that some form of each idea comes to fruition, most economists have penciled in growth of 2.5 to 3 percent for 2017, with two asterisks.
The first is that the plans could spark inflation, which could prompt the Fed to raise interest rates faster than anticipated and could snuff out some of the growth. The second asterisk is more dangerous—if Trump’s trade rhetoric were to escalate into a full-blown trade war, the economy would suffer dramatic negative effects, potentially leading to a toxic combination of a recession and inflation.
What lies ahead for the economy and markets in 2017 will be directly linked to the details of the broad themes that President-elect Trump and the Republican Congress are able to enact.
MARKETS: While stocks grabbed headlines, bond investors endured a wild ride in 2016. After starting the year at 2.273 percent, yields of the benchmark 10-year Treasury tumbled to 1.366% in early July-the lowest yield on record. Then in Q4, prices fell and yields increased by the largest amount in more than a decade. The total return from the so-called safe haven was DOWN 0.2 percent on the year.
THE WEEK AHEAD: The last employment report of the year is due this week. It is expected that the economy added 175,000 jobs in December and the unemployment rate will edge up to 4.7 percent from 4.6 percent. For 2016, job growth will likely be about 2.2 million, down from 2.7 million in 2015 and just over 3 million in 2014, the peak year for this cycle.
Mon 1/2: Markets Closed
Tues 1/3:
9:45 PMI Manufacturing Index
10:00 ISM Manufacturing
10:00 Construction Spending
Weds 1/4:
Light vehicle sales for December
8:15 ADP Private Sector Employment
2:00 FOMC Minutes
Thurs 1/5:
10:00 ISM non-Manufacturing Index
Friday 1/6:
8:30 Employment Report
8:30 International Trade
10:00 Factory Orders
It may not feel like it, but the US economy is at full employment. The Labor Department reported that the economy created 178,000 jobs in November, just under the 2016 average monthly creation of 180,000; and the unemployment rate fell to a nine-year low (August 2007) of 4.6 percent. According to the Federal Reserve, there is no magic unemployment rate that defines “full employment,” because that notion is largely determined by uncertain and “nonmonetary factors that affect the structure and dynamics of the job market,” which “may change over time and may not be directly measurable.” Still, in the Fed’s September 2016 Summary of Economic Projections, participants’ estimates of the longer-run normal rate of unemployment ranged from 4.5 to 5 percent and had a median value of 4.8 percent.
The 4.6 percent November print might make you think that we are indeed at full employment, but why the rate fell is also important. The slide occurred not just because of new workers finding jobs, there were also 226,000 people dropping out of the labor force. That amount surprised economists, who mostly told me, “let’s see what the coming months bring, before we come up with a reason behind the change.”
Meanwhile, the broader measure of unemployment (U-6), which includes part-timers who can’t find full-time work and discouraged jobseekers, who have given up looking for work, fell to 9.3 percent, a rate not seen since April 2008. The broad rate averaged 8.3 percent in the two years before the recession.
Besides the surprising decrease in the labor force, the other disappointment in November was the tenth of a percent slide in average hourly earnings, after a sharp rise in the prior month. Still, earnings were up at a 2.5 percent annual rate (compared with 2.8 percent in October), a decent clip with inflation remaining low.
This was the last important piece of data before the Fed’s last policy meeting of the year. While it was not sterling, it was certainly good enough to justify increasing rates by a quarter of a percent. Whether or not the central bankers will explicitly change their notion of full employment remains to be seen.
MARKETS: Investors took a breather from the post-election stock rally. Crude oil shot up over 12 percent on the week, after OPEC agreed to cut production in 2017.
THE WEEK AHEAD:
Sun 12/4: Italian Referendum: Voters will determine whether or not to change some aspects of the Italian constitution. (For more, see analysis by E.P. LiCursi at the New Yorker.) A no vote could unseat the current Prime Minister Matteo Renzi and potentially impact the weak Italian banking system and even Italy’s membership in the EU, often referred to as “Quitaly”.
Mon 12/5:
10:00 ISM Non-Manufacturing
Tues 12/6:
8:30 Q3 Revised Productivity and Costs
8:30 International Trade
Weds 12/7:
10:00 Job Openings and Labor Turnover Survey
3:00 Consumer Credit
Thurs 12/8
Friday 12/9
10:00 University of Michigan Consumer Sentiment
With Black Friday in the rear view window, it’s time to focus on Cyber Monday, a holiday first mentioned in a NRF press release in 2005. At that time, the organization noted that the sharp increase in web traffic after the Thanksgiving weekend occurred because “consumers may have faster or more secure Internet connections at work and choose to shop there.” Despite having faster connections eleven years later, consumers are still lured by Cyber Monday deals. Shoppers spent $3.19 billion last year on the day and that number is expected to rise this year - according to Adobe Digital Insights, it is expected to be the largest online shopping day in history.
If you are planning to click away, here are Network World’s 12 Tips for Safer Shopping:
In addition to Cyber Monday, the holiday weekend now extends to Giving Tuesday. Last year, over 700,000 people raised $116 million in over 70 countries and expectations are for even larger numbers this year, because post-election charitable giving has already spiked dramatically. Even before the election, Americans were known for their generosity. The U.S. is the world’s second most generous nation in the world (after Myanmar), according to the Charities Aid Foundation (CAF).
Americans gave $373.25 billion in 2015 and with changes to the tax code likely to occur next year, there could be a surge in giving before the end of 2016. Financial planners and tax preparers are urging clients to step up their charitable giving this year, because deductions are likely to be less valuable or potentially go away, in the coming years.
As you rush to complete your donations, you should be aware that earlier this year, IRS Commissioner John Koskinen said “Fake charities set up by scam artists to steal your money or personal information are a recurring problem.”
To help avoid a costly mistake, here is a four-step checklist for your charitable giving.
Step 1: Confirm that the Charity is Legitimate. One of the simplest scams perpetuated by fraudsters involves using a name that seems familiar to a nationally known organization. To help taxpayers conduct research on organizations, the IRS has established an online search tool, Exempt Organizations Select Check , which allows users to search for and select an exempt organization and check certain information about its federal tax status and filings.
Remember, there’s a big difference between “tax exempt” and “tax deductible.” Tax-exempt means the organization doesn’t have to pay taxes. Tax deductible means you can deduct your contribution on your federal income tax return. Select Check allows you to find legitimate, qualified charities to which donations may be tax-deductible. Legitimate charities will provide their Employer Identification Numbers (EIN), if requested, which can be used to verify their legitimacy through EO Select Check. The IRS notes that it “is advisable to double check using a charity's EIN.”
Step 2: Research Charity’s Financial Health. Once you have confirmed that the group is legitimate, you can also see what others say about the organization by going to the Better Business Bureau’s (BBB) Wise Giving Alliance, Charity Watch and GuideStar. You will also want to know that its finances are healthy and that it is efficient, ethical and effective. Charity Navigator provides 0 to 4-star rating system, which includes a review of each charity’s fiscal performance. The site also helps you understand what portion of your donation goes to support overhead, versus goes to the cause itself.
Step 3: Determine how you will donate to the charity. You should NEVER send cash donations or wire money to someone claiming to be a charity. And do no not provide any personal or financial information until you’ve thoroughly researched the charity. If you are making a gift of appreciated securities from a taxable investment account, you will need to get information about how to send the assets-be sure to confirm all receiving account numbers.
If you are planning to send a check, your payments must be postmarked by midnight December 31st -- just writing “December 31st” on the check does not automatically qualify you for a deduction; and pledges aren’t deductible until paid. Donations made with a credit card are deductible as of the date the account is charged, so if you are a little late in the process, you probably should stick to credit cards.
Step 4: Keep Good Records. For any cash or property valued at $250 or more, you must have a receipt (bank record, payroll deduction or written communication) identifying the organization, the date and amount of the contribution and a description of the property. For text message donations, flag the telephone bill with the name of the receiving organization, the date of the contribution, and the amount given.
MARKETS: In a holiday-shortened week, all four US stock indexes closed at new record highs and saw their third consecutive week of gains.
THE WEEK AHEAD: The Labor Department will release the final employment report before the Federal Reserve’s December 13-14 policy meeting. Barring a very strange reading (the consensus estimate for job creation in November is 170,000 and the unemployment rate should remain at 4.9 percent) or a sudden, exogenous event, a quart-point rate increase is assumed to be a done deal.
Mon 11/28:
8:30 Chicago Fed National Activity Index
Tues 11/29:
8:30 Q3 GDP-2nd Estimate
9:00 US/S&P CoreLogic Case-Shiller Indices
10:00 Consumer Confidence Index
Weds 11/30:
OPEC Meeting in Vienna
8:15 ADP Private Payrolls Report
8:30 Personal Income and Spending
9:45 Chicago PMI
10:00 Pending Home Sales
2:00 Fed Beige Book
Thurs 12/1
Motor Vehicle Sales
9:45 PMI Manufacturing Index
10:00 ISM Manufacturing
10:00 Construction Spending
Friday 12/2
8:30 November Jobs Report
The US economy added a much stronger than expected 242,000 jobs in February and the two previous months were revised higher by 30,000, pushing up year-over-year job creation to a solid 2.67 million. The unemployment rate remained at 4.9 percent, the lowest level since February 2008. The report puts the Federal Reserve in a quandary for its upcoming policy meeting. With job creation averaging 228,000 over the past three months and the labor force increasing by 555,000 in February and by 1.5 million in the last three months, the participation rate rose to a 15-month high of 62.9 percent. According to Capital Economics, the report shows that “remaining labor market slack is getting eaten up very quickly.”
If the central bankers are in fact “data dependent,” then the strong jobs report, along with rising core inflation (the Fed’s favorite inflation measure, the core PCE price index, was up 1.7 percent in January from the prior year), would add to the rationale for increasing the fed funds rate by another quarter of a percent in March.
But by now we know that the Fed likes to err on the side of caution. Officials are likely to cite some negatives from the February jobs report as a rationale for doing nothing in March. Chief among the concerns would be the drop in average earnings in February, which translated into a 2.2 percent annualized increase—that’s down from 2.5 percent in the previous month — and average weekly hours worked, which fell sharply to 34.4, from 34.6.
Part of the issue on wages may be the quality of jobs created in February. Big gains in retail and food and drinking establishments contributed to the weakness. Additionally, although the broader unemployment rate (U-6), fell to 9.7 percent, that is still about 1.5 percent ABOVE the precession level.
Bond investors put the likelihood of a March rate hike at essentially zero, believing that the slowdown in global growth will prompt the central bank to do nothing in a week and a half. But if there is continued improvement in the labor market and inflation marches towards the Fed’s desired 2 percent pace, the central bank may by eyeing April or June for the next increase.
MARKETS: HAPPY ANNIVERSARY! I hate to bring you back to a scary time, but seven years ago this week; US stock markets plunged to their worst levels of the entire bear market of 2008-2009. Although the entire financial system almost went over the cliff in September and October of 2008, it wasn’t until March 9, 2009 that stocks hit rock bottom. On that day, the Dow closed at 6547; the S&P 500 fell to 676; and the NASDAQ was at 1268. Time may not heal all wounds, but it certainly has helped investors...
THE WEEK AHEAD: A few key speeches by Fed officials could provide the last clues before the central bank’s March policy meeting. All eyes will be on the ECB—it is expected that Draghi & Co will provide more stimulus to the ailing European economy.
Mon 3/7:
3:00 Consumer Credit
Fed Governor Lael Brainard and Fed Vice Chair Stanley Fischer speak
Tues 3/8:
6:00 NFIB Small Business Optimism
Weds 3/9:
10:30 EIA Petroleum Status Report
Thursday 3/10:
ECB Policy Meeting
Friday 3/11:
8:30 Import and Export Prices
The first week of trading was the worst ever for the Dow (down 6.2 percent) and the S&P 500 (down 6 percent), but fear not: the U.S. economy is alive and well! Look no further than to the December jobs report, which came in stronger than expected. The economy added 292,000 jobs and the previous two months were revised higher, which made 2015 the second best year for job creation since the 1990’s. For all of the anxiety over markets and the global economy in 2015, there were 2.65 million jobs created, or a monthly average of 221,000, shy of the 2014 level of 260,000 per month, but solid nonetheless. The unemployment rate remained at 5 percent, the lowest level since the spring of 2008.
The top line results do not mean that all is perfect with the US employment landscape. Indeed, there are still stubborn problems that persist. For example, wages slid by a penny in December and it was only because December 2014 wages were so weak that the year over year increase came in at 2.5 percent. We’ll need to see 2016 data before understanding whether employers are paying more in compensation.
The number of long-term unemployed (those jobless for 27 weeks or more) was unchanged at a still-high 2.1 million in December and has shown little movement since June. Thankfully, there was improvement in the first half of the year, so the number of long term unemployed was down by 687,000 in 2015. It was a similar story for the 6 million part-time unemployed – there was little movement in December but over the year, their ranks shrank by 764,000.
The civilian labor force participation rate, which is the percentage of the working age population in the labor force, edged up in December to 62.6 percent, but too close to 40-year lows for anyone to feel good about it. While about half of the post-recession decline in the rate is due to demographics, the low level indicates that many Americans have left the labor force because they are frustrated.
What does this report tell us about the state of the US economy as we closed out 2015? Although growth is certainly not stellar—GDP likely advanced by 2.25 percent last year, matching the previous three years’ rate—it was strong enough to produce a slew of jobs in a variety of sectors. Annual gains were robust for in professional and business services (+605K), construction (+263K), health care (+480K), and food services and drinking places (+357K).
The weakest parts of the economy are those that are associated with energy and manufacturing. With crude oil down by over 30 percent in 2015, the mining industry lost 129,000 jobs during the year. And with the strength of the US dollar and weakness in Asian economies, manufacturing employment was little changed (+30,000), following strong growth in 2014 (+215,000).
A rotten first week for stocks notwithstanding, fears over the US economy falling over a cliff may be overblown. According to Capital Economics, while growth in the fourth quarter probably slowed to a pokey pace of 1 to 1.5 percent annualized, the stock market is a bit wobbly, the massive surge in employment in December illustrated that “there is no reason to believe that this is the start of a more serious downturn.”
MARKETS: Don’t look now, but the average stock in the S&P 500 is already in a bear market—down 22.6%, according to Bespoke Investment Group.
THE WEEK AHEAD: No rest for the weary…after the bear took a bite out of investors last week, earnings season begins!
Mon 1/11: Alcoa
Tues 1/12:
10:00 Job Openings and Labor Turnover Survey
Weds 1/13:
2:00 Fed Beige Book
Thursday 1/14:
JP Morgan Chase
8:30 Import/Export Prices
Friday 1/15:
Wells Fargo
8:30 PPI
8:30 Retail Sales
8:30 Empire State Manufacturing Index
9:15 Industrial Production
10:00 Consumer Sentiment
The government said that the U.S. economy added 211,000 jobs in November, which was the high-end of the predicted range of 160,000-220,000. There is now little doubt that the Federal Reserve will raise short-term interest rates when it meets in a week and a half. The three-month average of job creation stands at a solid 218,000 and year-over-year, 2.64 million jobs were added. Although 2015 average monthly job creation of 210,000 is less than last year’s strong pace of 260,000, it has certainly been strong enough to push down the unemployment rate from 5.8 percent a year ago, to a seven-year low of 5 percent. The broader measure of unemployment, which includes those who have stopped looking as well as those working part-time for economic reasons, edged up slightly to 9.9 percent, though remained under the key 10 percent level for a second consecutive month.
The Fed is also likely to be encouraged by the breadth of job gains, including the domestic-focused construction, retail and health care sectors. That said, two areas that continue to be under pressure are mining and manufacturing, both of which have been struggling under the triple whammy of lower oil prices, weak demand overseas and a stronger U.S. dollar. Another area of weakness is the still low level of working-age Americans who have jobs or are actively looking for work. The participation rate edged up to 62.5 percent, due to a 273,000 increase in the labor force, but because of demographics and the large number of would-be workers giving up their job searches, participation remains near 40-year lows.
Back to the good news...after a swift 2.5 percent annual increase in October, wages in November were up a still-respectable 2.3 percent from a year ago. In a separate report released by the government earlier last week, Q3 hourly compensation jumped by 4 percent in the third quarter, on an annualized basis and was up 3.6 percent compared to the same quarter a year ago. If that trend holds, hourly compensation is on track to rise by the largest amount since 2007 and when adjusted for inflation, the increase would be the fastest since 2000.
Overall, the results confirm that the economy continues to expand; the labor market is improving and workers are gaining leverage; and the Fed will soon hike interest rates for the first time in over nine years.
MARKETS: The US jobs report, along with promises of “no limit” on additional ECB stimulus measures, was enough to save what was shaping up to be a losing week.
THE WEEK AHEAD: December 9th marks the 50th anniversary of the debut of “A Charlie Brown Christmas”. The image of the sad little Christmas tree that Charlie and Linus selected may be a good symbol of the U.S. economy. At first glance, it seems a little thin and wobbly, but upon further reflection, it’s not “such a bad little tree. It's not bad at all, really. Maybe it just needs a little love.”
Mon 12/7:
Tues 12/8:
6:00 NFIB Small Business Optimism
10:00 Job Openings and Labor Turnover (JOLTS)
Weds 12/9:
Thursday 12/10:
8:30 Import/Export Prices
Friday 12/11:
8:30 Retail Sales
8:30 PPI
10:00 Business Inventories
10:00 Consumer Sentiment
Although the calendar says 33 days to go before we ring in 2016, for investors, there are exactly two days left in 2015: Friday, December 4th and Wednesday December 16th. Oh sure, there will be navel gazing over the results of the holiday shopping weekend. FYI, as it turned out, those door busters were a bit of a bust in brick and mortar stores, but they sure were effective in the digital arena. ShopperTrak reported that in-store traffic was down, but Adobe Digital index said consumers spent 14 percent more on Black Friday than last year and Thanksgiving online spending saw a 22 percent surge.
Regardless of the total holiday sales results, which will not be available for another month, there are far more important events ahead for the economy. Back to those two days…on Friday, the government will release the November jobs report. After a better than expected reading in October, when the economy added 271,000 jobs, the unemployment rate edged down to 5 percent and average hourly earnings increased by 2.5 percent from the previous year, hopes are high for follow through in November.
Economists predict nonfarm payrolls will rise by 190,000, with a range of 160,000-220,000. The unemployment rate will likely hold steady at 5 percent and earnings growth should slow from the quicker than expected pace in October, but is expected to show continued progress. .
If the jobs report comes in even at the low end of predictions, it would probably be enough ammunition for the Federal Reserve to raise interest rates at its two-day meeting, which concludes on the last important day for investors, December 16th. Janet Yellen will have two opportunities this week to pre-sell the rate hike: a speech before the Economic Club of Washington DC and testimony before the Joint Economic Committee of Congress. Although lawmakers will try to flex their muscles and attempt to prod Yellen to elaborate on the Fed’s plans, don’t expect her to give away much more than she has already stated in public.
Although these two days will be pivotal, that is not to say that there will not be volatile trading days in the month of December. As asset managers reposition their portfolios for the year-end, there is always the possibility for a low volume swing in either direction. There is also likely to be continued chatter about the narrowness of leadership in stocks. The FANG stocks (Facebook, Amazon, Netflix and Google) are said to account for gains of about 60 percent this year, while the S&P 500 and NASDAQ Composite are up 1.5 and 8.3 percent respectively.
MARKETS: While you were surfing the web on Black Friday, you may have missed a 5.5 percent drop in the Chinese stock market. The plunge was attributed to a government investigation into brokerage firms, which is part of a broader legal, regulatory and anti corruption crackdown, following a year of market swoons. Even with the late-week sell-off, the Shanghai Composite is 21 percent above its calendar year nadir on August 26th, though still remains 34 percent below its seven-year high on June 12th.
THE WEEK AHEAD:
Mon 11/30:
Cyber Monday
9:45 Chicago PMI
10:00 Pending Home Sales
10:30 Dallas Fed Manufacturing
Tues 12/1:
Giving Tuesday
Motor Vehicle Sales
9:45 PMI Manufacturing
10:00 ISM Manufacturing Index
10:00 Construction Spending
Weds 12/2:
8:15 ADP Private Employment Report
8:30 Productivity
2:00 Fed Beige Book
Fed Chair Janet Yellen speaks at the Economic Club of Washington DC
Thursday 12/3:
10:00 Factory Orders
10:00 ISM Non-Manufacturing Index
10:00 Fed Chair Janet Yellen testifies before Joint Economic Committee of Congress
Friday 12/4
8:30 November Employment Report
8:30 International Trade
