Strategas 3.10.2019
The first quarter of 2019 looks to be an air pocket for economic growth. U.S. tax refunds have been choppy, though they finally started to pick up in recent weeks. The Atlanta Fed GDPNow tracker is at 0.5% q/q A.R. for 1Q in the U.S. There has been a package of coincident U.S. economic indicators that have all weakened recently (retail sales, industrial production, mfg sales, auto sales). The latest (and biggest) recent hit was to U.S. nonfarm payroll employment, which rose just 20,000 m/m. There was likely some seasonal noise as construction jobs fell -31,000 after a Jan surge. Still, private service-providing sectors added just 57,000 jobs m/m. There’s a lot of noise here, but this is more than just a fluke. U.S. average hourly earnings continued to trend higher with wage growth up +0.4% m/m and 3.4% y/y. This makes sense with the unemployment rate falling to 3.8% in Feb (ie, a “full employment” report). Labor force participation held at 63.2%. The U6 underemployment rate has been noisy the past three months (given the govt shutdown), but declined to 7.3% in Feb. Slack is gone. Data abroad remains weak with China exports plunging in Feb and the ECB adding more stimulus last week. Norbert Ore notes that global PMI surveys are showing weakness thru Feb, especially outside the U.S. Our global PMIs monthly net score continues to decline. Of particular note now, China has slowed enough such that the local fiscal policy response is notable. Policymakers are targeting 6-6.5% real GDP growth in China, and they are likely to get it. Even if the early stimulus in China was “pushing on a string” as the Chinese consumer saved instead of spending, the stimulus (business+consumer) continues to ramp up in 2019. Bottom line: the U.S. has joined the global slowdown in 1Q. But it’s important to keep any weakness in perspective, given that U.S. consumer confidence & housing already look to be rebounding (eg, U.S. housing permits up +1.4% m/m in Jan, new home sales up +3.7% in Dec). Even modestly lower interest rates can help here. U.S. non-mfg PMI orders bouncing in Feb is also a welcome data point. The reported Feb increase in temphelp jobs is also an encouraging leading indicator. We continue to believe a soft landing is possible. We want to be careful to emphasize the leading indicators (which are ok) over the coincident indicators (which are weak).