FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
January 8, 2019

IN THIS ISSUE:

1. Surprising 312,000 New Jobs Created in December

2. Stocks Soar on Fed Chairman’s Latest Remarks

3. Powell Said He Won’t Resign Even If Trump Asks Him To

4. US Economy Remains Strong, Despite Stocks’ Plunge

Overview

The economy and the stock markets got some really good news last Friday. The Labor Department reported that a surprising 312,000 new jobs were created in December. That was nearly twice the pre-report estimate of 176,000. And there was plenty of other good news in the jobs report, which I’ll summarize for you below.

Unrelated to the jobs report, there was other good news on Friday. Fed Chairman Jerome Powell assured the markets that the Fed will be “patient” when it comes to raising interest rates this year. Stocks soared over 800 points in the Dow in the hours just after Mr. Powell’s remarks. It now looks like there may be only 1-2 rate hikes this year (as I suggested in December) instead of 3-4.

In an unexpected twist in his post-speech press conference, Powell was asked if he would resign if President Trump asked him to. The Fed Chairman, who Trump appointed last year, replied bluntly, “No.” Hmmm.

Finally, we take a look at the economy as we start the New Year. While the “gloom-and-doom” crowd is predicting a new recession in late 2019, last Friday’s much stronger than expected jobs report may make them think twice. I still believe we will see 3% growth this year, or close to it. Something unexpected would have to happen to cause a recession in 2019, in my opinion.

Surprising 312,000 New Jobs Created in December

Job creation ended 2018 on a powerful note, with nonfarm payrolls surging by 312,000 in December, according to the Bureau of Labor Statistics (BLS), versus the pre-report consensus of only 176,000 new jobs last month. So, the report was much stronger than expected by forecasters.

The headline unemployment rate for December rose to 3.9%, from 3.7% in November, but for good reasons. A higher than expected 419,000 new workers entered the workforce – either by finding a new job or starting to actively look for work last month.

Job gains occurred in healthcare, food services and bars, construction, manufacturing and retail trade. As a result, the Labor Force Participation Rate increased to 63.1%. The participation level was up 0.2 percentage points from November and 0.4 percentage points compared with a year earlier.

A broader measure of unemployment that includes discouraged workers and those holding part-time jobs (because they can’t find full-time work) held steady at 7.6%. The average work week rose 0.1 hour to 34.5 hours.

In addition to the big job gains, wages jumped 3.2% from a year ago and 0.4% over the previous month. The year-over-year increase in wages is tied with October for the best since April 2009. If we look only at private sector wages and salaries, we see that pay rose 0.9% in December and 5.3% for the year. That’s great news.

In addition to the uplifting numbers above, the BLS revised its initial jobs numbers for November and October upward by a total of 58,000 net new jobs.

Finally, Friday’s stronger than expected jobs report came amid concerns over whether the US economy is part of a global deceleration, despite turning in its best year since the Great Recession. Paul Ashworth, Chief Economist at Capital Economics, noted:

"The far bigger than expected 312,000 jump in non-farm payrolls in December would seem to make a mockery of market fears of an impending recession. The US economy still has considerable forward momentum.”

Stocks Soar on Fed Chairman’s Latest Remarks

Just hours after Friday’s jobs report, Fed Chairman Jerome Powell had some comforting words for investors. Speaking at a conference in Atlanta, Mr. Powell said the Fed can be “patient” on future interest rate hikes:

“With the muted inflation readings that we’ve seen coming in, we will be patient [about raising interest rates] as we watch to see how the economy evolves. We’re always prepared to shift the stance of policy and to shift it significantly if necessary.”

That was music to the markets’ ears! Stocks rallied strongly immediately after Mr. Powell said the word “patient” with the Dow Jones gaining over 800 points in Friday’s session.

Powell’s decidedly softer comments on Friday were a welcome departure from his more hawkish suggestions as recently as November. His latest remarks about being patient bolster my suggestion on December 4 that the Fed is now probably thinking 1-2 rate hikes in 2019, rather than 3-4 as hinted several months ago.

While Powell didn’t promise anything – no Fed Chairs ever do – his calming words were deliberate, as he read from a prepared script. While comforting, let us not forget that Powell reminded us the Fed’s decisions will continue to be “data dependent,” so it still depends on how the economy does just ahead.

As I’ve written often recently, most forecasters believe the economy will slow down, perhaps significantly, this year. Yet Friday’s stronger than expected jobs report suggests the economy still has plenty of strength left. Mr. Powell said Friday that the economy has “good momentum” right now.

Powell Said He Won’t Resign Even If Trump Asks Him To

Finally, there was one other very interesting point Powell made in his remarks Friday in Atlanta. In the Q&A after the speech, a reporter asked the Fed Chairman if he would resign if President Trump asked him to. Powell’s answer was very direct: “No.”

Even though President Trump appointed Powell as the new Fed Chairman last year, he has bashed Powell repeatedly in recent weeks for raising interest rates too quickly, and blamed him for causing the recent market correction.

Some don’t believe the president has the power to fire the Fed Chairman since a Fed Governor (and Powell is one) can only be removed “for cause.” But based on what Powell said on Friday, he’s not going anywhere – even if Trump asks him to resign. This will be interesting to watch!

The US Economy Remains Strong, Despite Stocks’ Plunge

Since Fed policy will depend in large part on the economy, let’s take a look under the hood. The latest nosedive in the stock market has given new energy to the “perma-bears” (always bearish crowd). They are now more convinced than ever that the US economy is headed for the dumps this year – a new recession or even worse.

The mainstream media has tried to convince us ever since Donald Trump became president that the US economy has peaked and is headed for a new recession. Yet the fact is that the economy has consistently expanded during Trump’s two years in the White House.

The US economy, as measured by Gross Domestic Product, rose by 2.2% in 2017. In the 1Q of 2018, the economy rose by the same annual rate of 2.2%. But then in the 2Q of last year, GDP vaulted to 4.2% (annual rate) as the Trump tax cuts kicked in. In the 3Q of last year, the economy continued strong at an annual GDP growth rate of 3.5%.

We will get our first look at 4Q 2018 GDP near the end of this month, but it is expected to be above 3%. The point is, the US economy is growing at the fastest pace in years, despite President Obama telling us in 2015 and 2016 that 3% economic growth was a thing of the past.

Most forecasters tell us that economic growth will slow more this year. Most of the estimates I see suggest that economic growth will cool back into the 2.5% range this year, maybe even closer to 2.0%. I don’t see much evidence to support a slowdown to that level, but there are signs that we will see economic growth slow to around 3% or maybe just a bit lower this year.

The biggest concern is the slowdown in the housing markets. Home sales are down, housing starts are down and median home prices are lower in several markets. The ISM manufacturing index fell sharply in November but is still well above 50.0, the midpoint for signaling economic expansion versus contraction. Most other economic indicators are still positive as well.

Yet the mainstream media constantly warn that a new recession is imminent – what else is new? This is what always happens when the Republicans control the White House and/or Congress. It will be interesting to see how this changes now that the Democrats control the House of Representatives.

In any event, the US economy is expected to grow by around 3% in 2019 with no recession in sight. Sure, there’s a chance we may see a recession in the next few years, maybe as early as 2020, but the truth is, no one knows when that will occur.

Finally, the latest meltdown in the stock markets has led the gloom-and-doom crowd to intensify their predictions of economic demise. This despite the fact that the economy remains strong, corporate profits remain robust and corporate and consumer confidence remain high.

I expect the economy will have another good year in 2019. Corporate profit expectations suggest the stock market will fully recover this year. Thus, I wouldn’t buy into all the negative hype from the “perma-bear” camp.

HAPPY NEW YEAR EVERYONE!!

Best regards,

Gary D. Halbert

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