We’re on Shaky Economic Ground

I don’t really need to tell anyone that stock volatility has been off the charts. While they have moved lower over the past few weeks, they have also seen several sharp moves back to the upside.

It’s a regular rollercoaster.

Treasury bond volatility, however, was relatively steady up until last week.

Long-term bond yields peaked in early November at 3.46% and have since fallen without any sort of higher retracement in sight. Although last Friday’s Treasury bond action changed that recent trend. The long-term Treasury yield dropped to 2.9% Thursday and rebounded to 2.96% in short order.

Yesterday, the long bond stood at 3.02%.

As I noted many times over the past year, the housing sector has faltered. The increases in mortgage rates, rising and falling prices, and the decline in sales are to blame for that.

November new home sales data wasn’t released due to the partial government shutdown. But the existing November sales showed a surprising swing to the upside on the month. On the year though, sales fell 7%.

A decline in home prices should follow. Especially if other economic indicators show weakness.

All About the Jobs

According to the Challenger jobs report last Thursday, the number of construction layoffs announced in December closely mirrored job losses following the Great Recession in February of 2017.

And despite the government shutdown, the December employment report was released last Friday. The Labor Department seems to remain funded, for now…

Consensus analyst forecast no change in the unemployment rate of 3.7%, with a slight increase in new non-farm jobs and a healthy increase in hourly earnings of 0.3%.

The jobs increase to 312,000 was a big surprise. The initial expectation of 184,000 increase was blown out of the water! Wages also ticked higher than the expected 3%, rising 3.2% on the year.

Participation rates also increased above 63% for the first time since early 2014. The only bad news in this report is that the unemployment rate jumped to 3.9% from 3.7% in December.

Yields bounced higher in response to the surprise report.

Except for slow wage growth, U.S. employment has been robust. Wages are picking up steam, but how long will that last?

The recent Challenger jobs report showed a total of 43,884 layoffs in December. That’s nearly 29% higher than last year. The 538,659 job cuts announced in 2018 were also nearly 29% higher than 2017.

And just this past Tuesday, the Job Openings and Labor Turnover Survey (JOLTS) showed a quarter million less job openings in November than the month before. The number of total hires also dropped by 218,000.

Despite conflicting data between the December employment situation – shown in last Friday’s jobs report – and the JOLTS and Challenger reports, it’s certainly worth keeping a close eye on.

Manufacturing Update

Last week’s December Institute for Supply Management (ISM) Manufacturing Index showed surprising weakness.

Even though manufacturing has expanded over the past year or so, I’ve been keeping an eye on the overall trend as it seems to have plateaued.

The ISM index is important and “market-moving” because it’s a forward-looking indicator. The composite index is calculated from five components based off a survey from about 300 manufacturing firms nationwide that looks at new orders, production, employment, supplier deliveries, and inventories.

The December index fell by more than five points, from 59.3 to 54.1, which is the lowest it’s been since November 2016, and over two points below analysts’ estimates.

New orders slowed by 10 points, hitting lows not seen since August 2016. Production also slowed by more than six points, and employment dropped by two points.

Tariffs and the trade war with China are starting to take its toll on the manufacturing sector. Falling oil prices have certainly effected firms related to the energy sector.

If these factors persist, this could get ugly.

Stay tuned…