NOVEMBER EMPLOYMENT NUMBERS: In November, the U.S. economy added 155,000 new jobs, a bit lower than the consensus expectations. The unemployment rate remained 3.7%. 2.443 million jobs have been added in the last twelve months, which remains a solid rate of growth. Wage growth was encouraging as average hourly earnings increased by 6 cents to $27.35. Average hourly earnings have increased 3.1% in the last twelve months. The two graphs below show the change in payroll and the increases in earnings:
U.S. MARKETS GIVE UP LAST WEEK’S GAINS: U.S. markets slipped again this week, giving up almost all of last week’s gains. What is going on? It is not one factor driving these markets to yo yo. Here are some of the factors:
- Weaker global economic data (see below)
- Potential Fed rate hikes
- An inverted yield curve (see below)
- Trade uncertainty
- Political uncertainty
Strong corporate earnings and overall economic growth in the U.S. are often crowded out by these concerns, and thus every rebound seems to be followed by a fall, and U.S. stocks are poised for a break-even year.
THE YIELD CURVE INVERTS. NOW WHAT?: What is the yield curve, and why is it a concern for the markets? The yield curve is simply a comparison between the yields you can earn if you buy a short-term bond compared to buying a long-term bond. The normal shape of the curve between short-term and long-term is upward-sloping. Yields generally increase as maturities get longer. The slope is “inverted” when long-term yields fall below short-term yields. If the curve is inverted, it is said to reflect expectations that the economy is weakening. Last week, the yield on 5-year U.S. Treasuries fell below that of 2-years for the first time since 2007. That news clearly contributed to last week’s market performance. Here is what you should know. First, while an inverted yield curve is often followed by recession, that is not always the case. In three of the last ten times this occurred, recession did not follow. Second, when recession did follow, the average time between the inversion and the recession was about two years.
WEAKER GLOBAL ECONOMIC DATA: The International Monetary Fund expects global growth to slow to 2.5% in 2019 from 2.9% this year. The IMF has not always been right, but their predictions are highly influential on the markets. Three of the top four world economies have recently slowed. Germany shrank in the third quarter for the first time since 2015. Auto sales slowed due to new auto emissions testing rules, and exports declined due to the U.S./China trade scuffle. Japan’s economy shrank in the third quarter due largely to natural disasters and most economists believe it will bounce back quickly. China, the world’s second largest economy, is experiencing slowing consumer demand and disappointing borrowing growth. China will ramp up stimulus but we don’t know if it will work. India, on the other hand, accelerated this year, growing at a rate of 8.2%.
CONSUMERS REMAIN CONFIDENT: The University of Michigan keeps an index of U.S. consumer sentiment called the Sentiment Index. This is a closely watched index because our economy is primarily driven by consumer demand. If consumers are confident, they will spend and support economic growth. On Friday, the Sentiment Index was announced and it was unchanged from last month’s very favorable reading. This index has been registering at very strong levels since January 2017 due largely to growing jobs and incomes. This month’s reading did indicate that consumers are hearing a lot more negative news about future job prospects, but so far it has not hurt index scores.