Next Wednesday's FOMC Statement is likely to be a non-event, not much different in language from the December Statement in describing the economy and keeping future policy on a gradual path of tightening. The latest data are in line with the Fed's expectation of moderate growth and below-target inflation, but these data still show the economy growing at a slightly above-trend pace. Next week's key data -- January Mfg ISM and Employment Report -- risk being on the strong side, but not likely by enough to significantly raise the risk of a March Fed rate hike -- as they could be boosted by one-off factors and since February data will be released before the March FOMC Meeting.
The 1.9% Q416 Real GDP advance report shows the expected unwinding of the jump in Q316 exports. The unwinding subtracted 0.6% pt from Q416 Real GDP Growth, after adding 1.2% pt in Q316. Taking account of the 3.5% Q316 Real GDP Growth, Real GDP expanded 2.7% (saar) over H216. The NY Fed model's early projection of Q117 Real GDP Growth is also 2.7% (q/q, saar). This pace is above the 1.5-1.7% trend rate, so the risk is that the Unemployment Rate will fall in Q117, just as it did over H216. The pace is also above the 1.9-2.3% Fed's Central Tendency projection for 2017, so a March hike cannot be ruled out. But, the Fed may want to see if there is offsetting slower growth in Q217 as a result of a post-winter payback, before it acts.
January Payrolls risk being boosted by a couple of one-off factors. The unseasonably warm weather could lift jobs, particularly in the construction sector. Also, fewer-than-normal post-holiday layoffs, after there was only modest holiday-related hiring in Q416, could boost retail sector jobs. It is not clear whether Trump's hiring freeze of Federal workers will show up in this report. I can see an above-consensus +175k m/m Payrolls and 0.1% pt decline in the Unemployment Rate to 4.6%. Consensus is +162ks Payrolls and a steady 4.7% Unemployment Rate. Calendar considerations point to a consensus +0.2% m/m for Average Hourly Earnings, which would lower the y/y to 2.6% from 2.9% in December. Note that the Payroll data will reflect re-benchmarking and new seasonal factors, but the BLS already has released an estimate of the new benchmark that shows a small downward impact on m/m Payroll growth.
The January Mfg ISM also could be helped by the warm winter and should remain strong, close to the 54.7 level in December, even though a slight decline cannot be ruled out. While most other surveys have showed an increase this month, a couple of components of the Mfg ISM -- New Orders and Production -- were very high in December and could come off a bit. This report also will reflect new seasonal factors.
Friday, January 27, 2017
Sunday, January 22, 2017
Strong Economic Growth in Q117 and a March Fed Rate Hike?
Strong US economic growth appears to have continued into Q117, which risks raising the odds of a Fed rate hike in March. There, of course, are a lot more data to come before the March FOMC Meeting, and some of the recent strength may be transitory. But, further strength could elicit Fed-hawkish reactions in the markets -- stocks lower and Treasury yields and dollar higher, with Yellen's mid-February Semi-Annual Monetary Policy Testimony becoming the closer event that could solidify increased odds of a March hike.
Last week, Yellen was somewhat uneven in her comments on the economy. In one speech, she said that the economy appeared to be close to self-sustaining growth. In another, she repeated the Fed line that growth is expected to be moderate and that this supports gradual unwinding of monetary policy stimulus.
Further evidence of economic strength also could lessen the perceived need for some of Trump's fiscal stimulus proposals. It would not be surprising if Yellen is questioned on this aspect of the proposals at her mid-February testimony. A pullback in fiscal stimulus would be a negative for stocks. Note that the possibility that Trump may fail to provide sufficient detail about his proposals remains a downside risk to stocks, as well, as I argued last week.
The recent economic strength may reflect an upturn in the oil industry, better economic growth abroad, faster growth in labor income, and higher business confidence stemming from the pro-business focus of Trump's policy proposals. It also could reflect mild weather so far this winter -- helping economic activity, such as construction, and freeing up household monies that otherwise would be spent on heating. This weather boost is in contrast to the weather drag in the past two winters, but it would be temporary -- the larger the weather boost to Q117 GDP, the smaller the weather boost, if not a pullback, in Q2 and Q317. So, the current economic strength should not be extrapolated ahead fully. And, there may be some reversal of near-term market moves in the Spring.
Initial Unemployment Claims are the broadest measure that so far suggests a speedup in GDP Growth in Q117. While the low prints in the last week of December and first week of January could be attributed to difficult seasonal adjustment in holiday weeks, the further decline in the week after New Year's -- reported last Thursday -- ran counter to what would be expected if that were the case. Mild weather could have been behind the latest week's decline in Claims. Claims need to stay low, trending below the 257k H216 average, to point to a speedup in Q117 Real GDP Growth.
Initial Claims (level, 000s)
Jan 14 234
Jan 7 249
Dec 31 237
Q416 256
Q316 258
The ECRI Leading Index also suggests a continuation of strong growth, as it has been on a sharp uptrend since October.
ECRI Leading Index (level)
Weeks
7/16 10/16 1/17
The Fed models are projecting above-trend growth in Q416 and Q117. The Atlanta Fed model continues to forecast 2.8% (q/q, saar) in Q416, but it missed the large jump in agricultural exports in Q316, and thus may miss a pullback in these exports in Q416 -- putting downside risk to its 2.8% estimate. The NY Fed model sees 2.1% in Q416 and 2.7% in Q117, both up from the prior estimates of 1.9% and 2.1%, respectively. (Stronger Industrial Production data were responsible for the upward revisions to the NY Fed forecasts.) Consensus also is for 2.1% Q416 Real GDP Growth. All these estimates can change next Thursday, when the last pieces of data that feed into GDP are released. The actual first-print of Q416 Real GDP will be reported the next day, Friday, January 27.
A near-consensus GDP print would not likely be high enough to significantly boost market expectations of a March Fed hike. But, it would not rule the latter out, either. It would be above the 1.5-1.75% range considered to be trend, as mentioned by San Francisco President Williams in a speech last week.
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Last week, Yellen was somewhat uneven in her comments on the economy. In one speech, she said that the economy appeared to be close to self-sustaining growth. In another, she repeated the Fed line that growth is expected to be moderate and that this supports gradual unwinding of monetary policy stimulus.
Further evidence of economic strength also could lessen the perceived need for some of Trump's fiscal stimulus proposals. It would not be surprising if Yellen is questioned on this aspect of the proposals at her mid-February testimony. A pullback in fiscal stimulus would be a negative for stocks. Note that the possibility that Trump may fail to provide sufficient detail about his proposals remains a downside risk to stocks, as well, as I argued last week.
The recent economic strength may reflect an upturn in the oil industry, better economic growth abroad, faster growth in labor income, and higher business confidence stemming from the pro-business focus of Trump's policy proposals. It also could reflect mild weather so far this winter -- helping economic activity, such as construction, and freeing up household monies that otherwise would be spent on heating. This weather boost is in contrast to the weather drag in the past two winters, but it would be temporary -- the larger the weather boost to Q117 GDP, the smaller the weather boost, if not a pullback, in Q2 and Q317. So, the current economic strength should not be extrapolated ahead fully. And, there may be some reversal of near-term market moves in the Spring.
Initial Unemployment Claims are the broadest measure that so far suggests a speedup in GDP Growth in Q117. While the low prints in the last week of December and first week of January could be attributed to difficult seasonal adjustment in holiday weeks, the further decline in the week after New Year's -- reported last Thursday -- ran counter to what would be expected if that were the case. Mild weather could have been behind the latest week's decline in Claims. Claims need to stay low, trending below the 257k H216 average, to point to a speedup in Q117 Real GDP Growth.
Initial Claims (level, 000s)
Jan 14 234
Jan 7 249
Dec 31 237
Q416 256
Q316 258
The ECRI Leading Index also suggests a continuation of strong growth, as it has been on a sharp uptrend since October.
ECRI Leading Index (level)
Weeks
7/16 10/16 1/17
The Fed models are projecting above-trend growth in Q416 and Q117. The Atlanta Fed model continues to forecast 2.8% (q/q, saar) in Q416, but it missed the large jump in agricultural exports in Q316, and thus may miss a pullback in these exports in Q416 -- putting downside risk to its 2.8% estimate. The NY Fed model sees 2.1% in Q416 and 2.7% in Q117, both up from the prior estimates of 1.9% and 2.1%, respectively. (Stronger Industrial Production data were responsible for the upward revisions to the NY Fed forecasts.) Consensus also is for 2.1% Q416 Real GDP Growth. All these estimates can change next Thursday, when the last pieces of data that feed into GDP are released. The actual first-print of Q416 Real GDP will be reported the next day, Friday, January 27.
A near-consensus GDP print would not likely be high enough to significantly boost market expectations of a March Fed hike. But, it would not rule the latter out, either. It would be above the 1.5-1.75% range considered to be trend, as mentioned by San Francisco President Williams in a speech last week.
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Sunday, January 15, 2017
Trump's First Test And The Markets
The modest corrections in most major financial markets -- flattish stocks/lower dollar and Treasury yields -- since the start of the year fit with the fundamental evidence presented in my January 2 blog. In line with this blog, the markets are likely to move up this week, ahead of the Presidential inauguration and before uncertainty over Trump's policies becomes a more significant risk overhanging them.
This uncertainty has been exacerbated by Trump's tendency to backtrack from his extreme campaign pledges, making it unclear exactly what he plans to do. So, the first test for Trump will be whether he demonstrates an ability to carry through with a proposal. This test should occur within two weeks after the inauguration, as he promised to announce a specific plan to revise/replace ObamaCare during this period. If he comes up with specifics, the markets are likely to increase the odds that he will carry through with his other proposals. And, they will likely resume their post-election paths -- stocks, dollar and Treasury yields will climb. If not, and he loses some credibility, the markets may correct further.
Here are some thoughts on how to view this announcement as well as his other proposals from a market perspective.
ObamaCare Revision/Replacement
The first test of how accurate/serious is Trump's pronouncements will be within a couple of weeks after the inauguration. He has said that he will announce a plan to replace Obamacare with a "better" plan within that period. Most of the commentary following this announcement will probably be partisan, with both sides partly correct. Democrats will argue that fewer people will be covered by health insurance, while Republicans will argue that "skin in the game" incentives will help to hold down health care costs, for example.
This debate would be important with regard to healthcare, itself. But, from an overall market perspective, the most important aspect of Trump's announcement -- aside from the sectoral/company implications for stocks and corporate bonds -- would be the fact that he came through with a specific proposal. The latter would give more credibility to his other proposals, as it would stand in contrast to past announcements that appeared to fall short of delivering what he promised. The markets will be more confident that corporate tax reform, individual tax cuts and trade policy changes will be forthcoming and adjust accordingly. In contrast, if Trump fails to make a specific announcement, these other policy proposals will be less of a sure thing and the markets could further unwind their post-election moves.
Regarding the overall debate regarding healthcare, my view has been that the cost of ObamaCare is easily handled given how large the US economy is. The issue is how much society wants to spend on it. The surveys done in 2009, when ObamaCare was being debated, were not complete. They asked whether people wanted the various benefits from it, such as insurance for pre-existing conditions and family coverage for members up to the age of 26, but never asked whether they were willing to pay for these items. The cost aspect of ObamaCare appears to be what surprised and upset people -- suggesting that society is not willing to spend as much as ObamaCare requires. To be sure, the other side of the coin is whether health care can be made more efficient and thus less costly. So far, any savings apparently have not been enough to offset the higher costs of the program.
Trade Policy Changes
The worst outcome would be a trade war with China. This is well-known and thus unlikely. Trump seems to understand this, as he said the other day that "everything is on the table" with regard to trade with China, apparently backing off from his extreme campaign pledge to impose a large tariff on Chinese imports. A better outcome would be to obtain changes in Chinese policies that hold back US exports to that country. Alibaba's offer to encourage US exports to China through its website may be a hopeful harbinger of this possibility.
Restraining Chinese imports is not necessarily a positive for the US. While some companies and workers would benefit, consumers in general would be hurt by a shift away from low-priced imports to high-priced domestic production. The extent depends on how far the dollar exchange rate climbs to offset the higher costs. To be sure, a higher dollar would be a drag on US exports. So, even if the dollar climbs sufficiently, the net effect on the US standard of living would likely be negative.
Corporate Tax Cuts
There are several macro issues with regard to Trump's proposed corporate tax cuts. One issue exists with all corporate tax changes -- the split among cuts in tax credits, capital depreciation rules, etc. helps some companies and hurts others.
This disparity will be particularly an issue for Trump's proposal to tax imports and exclude exports.
A number of commentators, like Larry Summers, have highlighted significant problems with this proposal to tax imports. The drag on exports by the higher dollar that results from this tax does not appear to have been highlighted by them.
Another issue relates to the idea of a tax holiday for corporations to bring home foreign earnings held abroad. Proponents, as well as the market consensus, argue that the earnings will lead to increased capital investment in the US. This argument is not correct. Lack of financing for capital investment has not been a problem in the past few years. Instead, the absence of strong growth in demand and significant pressures on capacity made capital expansion less necessary. Generally, an investment decision is made on the basis of its expected profitability, which should not change with the repatriation of funds.
I still like the idea of using the corporate tax code to subsidize labor costs, given Trump's underlying goal of creating jobs.
This uncertainty has been exacerbated by Trump's tendency to backtrack from his extreme campaign pledges, making it unclear exactly what he plans to do. So, the first test for Trump will be whether he demonstrates an ability to carry through with a proposal. This test should occur within two weeks after the inauguration, as he promised to announce a specific plan to revise/replace ObamaCare during this period. If he comes up with specifics, the markets are likely to increase the odds that he will carry through with his other proposals. And, they will likely resume their post-election paths -- stocks, dollar and Treasury yields will climb. If not, and he loses some credibility, the markets may correct further.
Here are some thoughts on how to view this announcement as well as his other proposals from a market perspective.
ObamaCare Revision/Replacement
The first test of how accurate/serious is Trump's pronouncements will be within a couple of weeks after the inauguration. He has said that he will announce a plan to replace Obamacare with a "better" plan within that period. Most of the commentary following this announcement will probably be partisan, with both sides partly correct. Democrats will argue that fewer people will be covered by health insurance, while Republicans will argue that "skin in the game" incentives will help to hold down health care costs, for example.
This debate would be important with regard to healthcare, itself. But, from an overall market perspective, the most important aspect of Trump's announcement -- aside from the sectoral/company implications for stocks and corporate bonds -- would be the fact that he came through with a specific proposal. The latter would give more credibility to his other proposals, as it would stand in contrast to past announcements that appeared to fall short of delivering what he promised. The markets will be more confident that corporate tax reform, individual tax cuts and trade policy changes will be forthcoming and adjust accordingly. In contrast, if Trump fails to make a specific announcement, these other policy proposals will be less of a sure thing and the markets could further unwind their post-election moves.
Regarding the overall debate regarding healthcare, my view has been that the cost of ObamaCare is easily handled given how large the US economy is. The issue is how much society wants to spend on it. The surveys done in 2009, when ObamaCare was being debated, were not complete. They asked whether people wanted the various benefits from it, such as insurance for pre-existing conditions and family coverage for members up to the age of 26, but never asked whether they were willing to pay for these items. The cost aspect of ObamaCare appears to be what surprised and upset people -- suggesting that society is not willing to spend as much as ObamaCare requires. To be sure, the other side of the coin is whether health care can be made more efficient and thus less costly. So far, any savings apparently have not been enough to offset the higher costs of the program.
Trade Policy Changes
The worst outcome would be a trade war with China. This is well-known and thus unlikely. Trump seems to understand this, as he said the other day that "everything is on the table" with regard to trade with China, apparently backing off from his extreme campaign pledge to impose a large tariff on Chinese imports. A better outcome would be to obtain changes in Chinese policies that hold back US exports to that country. Alibaba's offer to encourage US exports to China through its website may be a hopeful harbinger of this possibility.
Restraining Chinese imports is not necessarily a positive for the US. While some companies and workers would benefit, consumers in general would be hurt by a shift away from low-priced imports to high-priced domestic production. The extent depends on how far the dollar exchange rate climbs to offset the higher costs. To be sure, a higher dollar would be a drag on US exports. So, even if the dollar climbs sufficiently, the net effect on the US standard of living would likely be negative.
Corporate Tax Cuts
There are several macro issues with regard to Trump's proposed corporate tax cuts. One issue exists with all corporate tax changes -- the split among cuts in tax credits, capital depreciation rules, etc. helps some companies and hurts others.
This disparity will be particularly an issue for Trump's proposal to tax imports and exclude exports.
A number of commentators, like Larry Summers, have highlighted significant problems with this proposal to tax imports. The drag on exports by the higher dollar that results from this tax does not appear to have been highlighted by them.
Another issue relates to the idea of a tax holiday for corporations to bring home foreign earnings held abroad. Proponents, as well as the market consensus, argue that the earnings will lead to increased capital investment in the US. This argument is not correct. Lack of financing for capital investment has not been a problem in the past few years. Instead, the absence of strong growth in demand and significant pressures on capacity made capital expansion less necessary. Generally, an investment decision is made on the basis of its expected profitability, which should not change with the repatriation of funds.
I still like the idea of using the corporate tax code to subsidize labor costs, given Trump's underlying goal of creating jobs.
Friday, January 6, 2017
December Employment Report Suggests Above-Trend GDP Growth in Q416
The December Employment Report is consistent with above-trend GDP Growth in Q416, even though Payrolls slowed from an upward-revised November, the Unemployment Rate ticked up, and the wage data overstated inflation risks. All told, there is little in the Report that is different from the consensus view of the economy, and it should not change expectations of gradual Fed tightening in 2017 -- subject to how fiscal policy shapes up.
The strongest evidence of above-trend growth comes from the Unemployment Rate. Although it ticked up to 4.7% from 4.6% in November, the Rate remained significantly below the 4.9% Q316 average.
The trends in the Report's other measures of overall economic activity were mixed in Q416, but none undermines the idea of above-trend growth in Q416.. The trend in Payroll Growth slowed, with the 3-month average of the m/m change falling to +165k in Q416 from +212k in Q316. The Q416 average is below the +188k average for the full year. But, the relationship between GDP Growth and Payrolls is not one-for-one, so the slowdown in job growth is more suggestive than conclusive. Indeed, Total Hours Worked rose at the same pace in Q416 as in Q316 -- both up 1.3% (q/q, saar).
3-Month Average Real GDP Growth
of M/M Change in Payrolls (000s) (q/q % change, saar)
Q416 165 na
Q3 212 3.5
Q2 146 1.4
Q1 196 0.8
While wage inflation jumped in December, it was largely a bounce-back from the very weak November -- +0.4% m/m versus -0.1% in November. Calendar quirks were likely responsible for the volatility. The same calendar configuration should serve to hold down the m/m and y/y increase in January. AHE should slow to +0.2% m/m in January, and its y/y should fall to 2.6% from 2.9%.
The strongest evidence of above-trend growth comes from the Unemployment Rate. Although it ticked up to 4.7% from 4.6% in November, the Rate remained significantly below the 4.9% Q316 average.
The trends in the Report's other measures of overall economic activity were mixed in Q416, but none undermines the idea of above-trend growth in Q416.. The trend in Payroll Growth slowed, with the 3-month average of the m/m change falling to +165k in Q416 from +212k in Q316. The Q416 average is below the +188k average for the full year. But, the relationship between GDP Growth and Payrolls is not one-for-one, so the slowdown in job growth is more suggestive than conclusive. Indeed, Total Hours Worked rose at the same pace in Q416 as in Q316 -- both up 1.3% (q/q, saar).
3-Month Average Real GDP Growth
of M/M Change in Payrolls (000s) (q/q % change, saar)
Q416 165 na
Q3 212 3.5
Q2 146 1.4
Q1 196 0.8
While wage inflation jumped in December, it was largely a bounce-back from the very weak November -- +0.4% m/m versus -0.1% in November. Calendar quirks were likely responsible for the volatility. The same calendar configuration should serve to hold down the m/m and y/y increase in January. AHE should slow to +0.2% m/m in January, and its y/y should fall to 2.6% from 2.9%.
Monday, January 2, 2017
Are Markets Headed for Sharp Corrections?
The big question is whether last week's market reversals were the start of sharp corrections. There was some acknowledgement among commentators last week that Trump's pro-growth policies may be altered or delayed in Congress -- a factor I highlighted last week as a potential trigger for market corrections -- and markets tend to be fast to react to such risks. Other potential triggers for a near-term correction are disappointing Q416 corporate earnings and softer-than-expected macroeconomic data. But, a review of the evidence suggests that these fundamental factors should not result in sharp market corrections, although they risk being on the softer-than-consensus side. In this case, we could see further modest unwinding in the markets for a couple of weeks before a pro-Trump move into the January 20th inauguration.
Q416 Corporate Earnings
Consensus appears to be north of 3% (y/y) for Q416 S&P 500 earnings, versus +1.6% in Q316. Most of the expected pickup in earnings growth is likely in the energy sector, given the sharp y/y run-up in oil prices. But, there are some negatives outside of the energy sector, including the stronger dollar, higher energy costs, and somewhat faster labor costs. This suggests the risk of disappointment for some non-energy corporations, but the negatives don't look large. Note that the slowdown in job growth in October-November (see below) could be attempts by companies to hold down labor costs in the face of higher wage rates.
(y/y percent change)
Real GDP Oil Prices Trade-Weighted Dollar Average Hourly Earnings
Q316 1.7 -3.4 2.2 2.6
Q416 1.7-1.9 +16.4 3.9 2.7
December Mfg ISM
Consensus is for an uptick to 53.5 from 53.2 in November -- putting it at the highest level for the year. The evidence from other surveys, however, is mixed. The 3 surveys that have done the best job predicting m/m increases or decreases in H216 are the Markit Mfg PMI, Chicago PM and Richmond Fed Mfg Index. Markit Mfg PMI (the preliminary print -- the final print is released on Tuesday, ahead of the Mfg ISM) and Richmond Fed predict an increase, while Chicago PM predicts a decline.
Other evidence is mixed, as well. Seasonals add a tick more to the m/m change in the December Mfg ISM than the prior year's seasonals. But, an inventory correction in the motor vehicle sector -- seen in a decline in motor vehicle assemblies in November -- could show up negatively in the December Index. And, the stronger dollar could weigh on it, as well.
Even if the Mfg ISM declines in December, its level still should be at a decently high level. So, any market reaction is likely to be muted.
December Employment Report
Consensus is:
December November (actual)
Total Payrolls 175k m/m 178k m/m
Private Payrolls 170k m/m 156k m/m
Unemployment Rate 4.7% 4.6%
Average Hourly Earnings 0.3% m/m -0.1% m/m
The consensus estimate for Payrolls risks being too high. Consensus is building in +5k for Government Workers (difference between Total and Private), but the likelihood is for an unwinding of the approximately 15k election workers hired temporarily in November. There could be an unwinding of other election-related jobs in the private sector, as well. Private Payrolls should be no greater than the 170k consensus, which is in line with the H216 and 12-month trends, and very possibly closer to the +145k October-November average. Note that Retail Jobs fell in October and November, as holiday hiring has been weaker than seasonal (consistent with the shift in holiday buying over the internet from stores). This drag could continue in December. A snapback is likely in January (due in early February), when post-holiday firing is not as great as seasonals expect.
An uptick in the Unemployment Rate is a good bet, given how much it fell in November. There is no consistent message from history that the November Rate falls in presidential election years, so last month's drop likely was to a large extent catch-up for the above-trend GDP Growth in Q316, as well as still decent growth in Q416. The NY Fed GDP model projects 1.8% for Q416, while the Atlanta Fed model projects 2.5%. There is still more to see before these models have their final estimates for the quarter. At this point, I'm leaning toward the NY Fed projection -- which is still near trend GDP growth.
A bounce-back in Average Hourly Earnings also is a good bet. Calendar considerations suggests a 0.3% print, after they suggested a weak print in November. The y/y would return to 2.8% from 2.5% in November, putting it back to its highest level since early 2006.
Q416 Corporate Earnings
Consensus appears to be north of 3% (y/y) for Q416 S&P 500 earnings, versus +1.6% in Q316. Most of the expected pickup in earnings growth is likely in the energy sector, given the sharp y/y run-up in oil prices. But, there are some negatives outside of the energy sector, including the stronger dollar, higher energy costs, and somewhat faster labor costs. This suggests the risk of disappointment for some non-energy corporations, but the negatives don't look large. Note that the slowdown in job growth in October-November (see below) could be attempts by companies to hold down labor costs in the face of higher wage rates.
(y/y percent change)
Real GDP Oil Prices Trade-Weighted Dollar Average Hourly Earnings
Q316 1.7 -3.4 2.2 2.6
Q416 1.7-1.9 +16.4 3.9 2.7
December Mfg ISM
Consensus is for an uptick to 53.5 from 53.2 in November -- putting it at the highest level for the year. The evidence from other surveys, however, is mixed. The 3 surveys that have done the best job predicting m/m increases or decreases in H216 are the Markit Mfg PMI, Chicago PM and Richmond Fed Mfg Index. Markit Mfg PMI (the preliminary print -- the final print is released on Tuesday, ahead of the Mfg ISM) and Richmond Fed predict an increase, while Chicago PM predicts a decline.
Other evidence is mixed, as well. Seasonals add a tick more to the m/m change in the December Mfg ISM than the prior year's seasonals. But, an inventory correction in the motor vehicle sector -- seen in a decline in motor vehicle assemblies in November -- could show up negatively in the December Index. And, the stronger dollar could weigh on it, as well.
Even if the Mfg ISM declines in December, its level still should be at a decently high level. So, any market reaction is likely to be muted.
December Employment Report
Consensus is:
December November (actual)
Total Payrolls 175k m/m 178k m/m
Private Payrolls 170k m/m 156k m/m
Unemployment Rate 4.7% 4.6%
Average Hourly Earnings 0.3% m/m -0.1% m/m
The consensus estimate for Payrolls risks being too high. Consensus is building in +5k for Government Workers (difference between Total and Private), but the likelihood is for an unwinding of the approximately 15k election workers hired temporarily in November. There could be an unwinding of other election-related jobs in the private sector, as well. Private Payrolls should be no greater than the 170k consensus, which is in line with the H216 and 12-month trends, and very possibly closer to the +145k October-November average. Note that Retail Jobs fell in October and November, as holiday hiring has been weaker than seasonal (consistent with the shift in holiday buying over the internet from stores). This drag could continue in December. A snapback is likely in January (due in early February), when post-holiday firing is not as great as seasonals expect.
An uptick in the Unemployment Rate is a good bet, given how much it fell in November. There is no consistent message from history that the November Rate falls in presidential election years, so last month's drop likely was to a large extent catch-up for the above-trend GDP Growth in Q316, as well as still decent growth in Q416. The NY Fed GDP model projects 1.8% for Q416, while the Atlanta Fed model projects 2.5%. There is still more to see before these models have their final estimates for the quarter. At this point, I'm leaning toward the NY Fed projection -- which is still near trend GDP growth.
A bounce-back in Average Hourly Earnings also is a good bet. Calendar considerations suggests a 0.3% print, after they suggested a weak print in November. The y/y would return to 2.8% from 2.5% in November, putting it back to its highest level since early 2006.
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