The labor market witnessed a strong finale to 2018, although some key labor indicators could still fare better. The U.S. economy added 312,000 new jobs in December and the unemployment rate trended up to 3.9% as more people re-entered the labor force. Healthcare and leisure & hospitality witnessed the largest gains adding 91,000 jobs. Additionally, manufacturing was a bright spot in the latest job report adding 32,000 jobs showing that the sector is almost unfazed by ongoing trade tensions. The increase in the labor participation rate to 63.1% was a strong sign, but it remains within bounds of what the U.S. has witnessed since late-2013. As wages continue to rise given the low unemployment rate figures the labor participation rate should budge higher as more people are enticed to re-enter the work force.
*WTI Crude Oil Spot Price. Data points through end of December 2018. Change represents month-over-month change.
Buoyed by the continued strength of U.S. consumers and positive inventory investment, GDP increased by 3.4% in 3Q18, following an impressive 4.2% increase the previous quarter. Increased government spending and private investment also contributed to the strong quarter. Net exports were the largest drag on economic growth this quarter, as the trade deficit widened into the second half of 2018. Although key economic indicators point to the further near-term growth, headwinds in the form of slowing economic growth globally, rising trade tensions, financial market volatility and the dwindling effects of recent tax cuts weigh on growth expectations moving forward.
The bloom is off the rose. Some of the negative news related to volatile equity markets, trade wars and softness in housing markets made its way to the consumers’ expectations about the future health of the economy. The confidence index dropped for the second consecutive month in December, off nearly 10 points from its cyclical peak of 137.9 in October 2018. Despite a strong labor market and a stable economy, consumers are spooked by the headlines and the realization that stimulus from tax cuts is not sustainable. The six-month MA is also likely to end its upward trend quickly but remains elevated and indicative of a consumer mindset that is still quite optimistic about the current economic cycle.
A reflection of healthy job creation and rising wages, supported by the recent fiscal stimulus and declining energy prices, retail sales continued to rise at an above-average pace through November 2018, increasing by close to 5.0% y-o-y. Looking forward, the waning effects of the tax cuts, a cooling housing market and recent financial market retrenchment will likely restrain retail sales growth relative to recent history.
The U.S. housing sector is beginning to shift as it faces a myriad of headwinds from new tax laws to affordability. Housing starts have had a volatile 2018, but remain above the current cycle average which should aide the affordability front as more inventory increases homebuying opportunity. However, the rise in interest rates, new federal tax laws affecting homeownership, and demographics have simultaneously dampened demand for existing and new family homes as evidenced by the decline in sales volume for both segments. While home prices continue to climb, they are doing so at a decelerated pace after multiple metros in the nation reached new all-time highs. The recent divergence in the declining level of housing starts to the increase in the months supply of homes on the market should be monitored closely.
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