Light at the end of the tunnel?
After being under pressure for months because of trade tensions, the manufacturing sector is finally showing signs of recovery after trade deals with China, Mexico and Canada were signed last month. The ISM manufacturing index came in over 50 for the first time in six months (a reading over 50 indicates expansion, while a reading below 50 indicates a contraction). New orders and production both increased in January, but employment still remains muted due to a lack of skilled labor.
Moral of the story: While a trade resolution might have helped the manufacturing sector’s contraction find some sort of a bottom, I’m not yet optimistic about this sector over the next couple months. Only 8 of the industries tracked by this index expanded in January – eight others contracted again and 2 were unchanged. Additionally, given how sensitive this sector is to China, the impact of the coronavirus is still unknown.
A job for you, and a job for you, and a job for you
The US economy added 225k jobs in January, which is really quite the surprise as economists were expecting only 160k new jobs. The unusually warm weather might have had something to do with the boost in employment as we saw a big number out of the hotel and restaurant sector. There was also a lift from the construction industry as declining mortgage rates have led to higher demand for new housing. Employment in the manufacturing sector, however, fell for the third consecutive month. Despite the strong numbers in January, this report also came with a reduction of 0.5m jobs in 2018 and 2019 after the government analyzed company tax records and payroll data.
Moral of the story: Companies are still hiring at a surprisingly strong pace for being over 10 years into an economic expansion. While hiring is likely to slow later this year (mainly because companies just can’t find enough skilled workers to fill job openings), the US economy only needs to create 100k new jobs a month to absorb the new workers coming into the workforce to continue reducing the unemployment rate. Unless companies start laying off workers, this labor market should continue to fuel US economic growth.
Throughout the week, the market seemingly dispelling the coronavirus worries that had dragged stocks down last week as most indices climbed to new record highs on Thursday, boosted by China’s decision to halve tariffs on $75b US imports. But on Friday, China’s National Health Commission confirmed over 31k cases and 636 deaths from the coronavirus in the country and markets declined again as the impact on China’s economy became more topical.
Moral of the story: The Chinese economy grew by 6.1% last year and the country is effectively at a standstill right now – nobody is going out, nobody is shopping – and it could completely wipe out any GDP growth in China for the first quarter. This second largest economy in the world accounts for about 16% of global output and is deeply intertwined into the global supply chain – doesn’t take much to connect the dots to see how this could impact the US economy as well. FYI – here are some truths about the coronavirus, according to the World Health Organization.