Commentary by Federal Open Market Committee chairman Jerome Powell last Wednesday, that the Federal Reserve would adopt more of a “wait-and-see approach regarding future policy changes,” sent the Dow Jones Industrial Average up more than 400 points.
Friday’s Employment Situation report from the Bureau of Labor Statistics showing that payroll employment increased by 304,000 in January is further indication of the persistent strength of the U.S. economy. Although the unemployment rate increased to 4.0%, another increase in the labor force participation rate to 63.2% suggests further strengthening of the labor market.
While the stock market has not yet recovered to its October highs, it is comfortably back in positive territory for the trailing twelve months – up about 3%.
Government Shutdown shows up in consumer sentiment.
The University of Michigan Index of Consumer Sentiment fell 7 points in January on lower expectations as the prolonged shutdown didn’t end quickly enough before the survey deadline. There was a similar result in the Conference Board Consumer Confidence Index. Lynn Franco, the Senior Director of Economic Indicators at The Conference Board noted: “Shock events such as government shutdowns (i.e. 2013) tend to have sharp, but temporary, impacts on consumer confidence. Thus, it appears that this month’s decline is more the result of a temporary shock than a precursor to a significant slowdown in the coming months.”
State of the Union
President Trump will deliver his third State of the Union Address to the United States Congress at approximately 9pm Eastern Time tonight. Expect to hear about 1) Immigration/The Wall, 2) Trade Deal/Tariffs/Protecting American workers, 3) Infrastructure, 4) Drug prices and 5) Foreign affairs/Putting America First. The theme, or working title, of the speech is said to be “Choosing Greatness.” Watch for the president to make mention of the Dreamers; the children of illegal immigrants. If he offers a pathway to citizenship that doesn’t involve deporting them first, Nancy Pelosi will be hard pressed not to stand up and clap. Democrats will find it difficult not to support the president on this, and he will have effectively stolen the issue away from the Dems. Also, if you want to fact-check the president in real-time, FactCheck.org will be running live stats on the president’s truthfulness and there is even an app for your smartphone called FactStream that combines the fact-checking efforts of the Washington Post, PolitiFact and FactCheck.org.
The State of the Union speech historically has had very little impact on the stock market. The average one-day change in the Dow Jones Industrial Average on the day after the SOTU speech from 1961 onward is -0.06%. The largest positive move of 1.9% came in 1991 after George H.W. Bush’s third speech to Congress. The largest one-day drop of 2.62% came nine years later after Bill Clinton’s final State of the Union in January of 2000. The Dow Jones Industrial Average rose 1.46% after Trump’s first SOTU in 2017 and 0.28% last year after his second SOTU.
Labor market remains very healthy.
- The healthy labor market got off to a strong start in 2019 with January payrolls up 304,000, well ahead of expectations. Although December was revised down to 222,000 from 312,000, November was revised higher to 196,000 from 155,000. The three-month average is now 240,600 up from 222,300 the prior three months.
- There were strong gains in manufacturing employment and construction. Additionally, retail, leisure and hospitality and transportation saw good growth.
- Although the unemployment rate ticked up to 4.0% from 3.9%, the increase in the participation rate to 63.2% from 63.1% explains most of the move. More people have chosen to join the labor force, because wages are rising and the demand for labor is still strong.
New home sales increase as prices moderate.
- New home sales increased 16.9% month over month in November. Although still 7% lower than a year ago, the reversal of the nearly year-long trend is welcome.
- Home prices have moderated as well with the median home price falling to $295,000 from $328,000.
- Meanwhile, supply backlogs remain elevated, since 36% of the homes sold have not even begun construction. Many areas still face skilled construction worker shortages, placing a speed limit on homes under construction and completions. Construction companies are also struggling to keep costs under control in light of rising material costs.
ISM Nonmanufacturing Index not overly concerning
- The ISM nonmanufacturing survey’s composite index dropped from 58 in December to 56.7 in January. It's not surprising that some of the soft data are weakening, as financial market conditions have tightened and the past boost to the index from the fiscal stimulus is fading. The ISM nonmanufacturing survey captures both sentiment and changes in economic activity.
- The business activity index fell from 61.2 to 59.7 in January. There were nine industries reporting growth in business activity in January, and among them were transportation/warehousing, healthcare, mining, accommodation/food services and utilities. Eight industries noted a decline in business activity in January, including agriculture, other services, educational services and information.
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