The sharp decline in jobs in December occurred even though the economy is growing rapidly. The amazing thing is how well the economy is performing and will continue to grow despite the loss of jobs. Stay bullish.
The Week That Was
Today’s U.S. employment report shows the job market remains weak, with a decline of 140,000 payroll jobs in December. The number was driven by a decline of a half-million jobs in leisure, hospitality, and government. The amazing thing is how strong the economy is performing despite the loss of jobs in these areas.
Business surveys for manufacturing and service companies show activity remained strong in December. Manufacturing production and new orders soared, with readings in the mid-60s. Employment rose to slightly above break-even.
Service industries were also strong, with readings in the high 50s. The exception was employment, which was slightly below break-even for services.
All sectors are reporting dramatic price increases.
A Look Ahead
Next week’s economic news will include reports on inflation and retail sales for December.
Prices are rising rapidly. For the six months ending in November, consumer prices rose at a 4 percent annual rate. The Fed will correctly point out how this is a makeup for prior declines. However, in December oil prices rose by 4 percent and commodity prices were up 2 percent. The value of the dollar fell by 3 percent.
If the economy continues to soar throughout this coming year, as I expect it will, the upward pressure on prices will continue.
December retail sales are likely to have rebounded following a decline in November. Personal disposable income in November was 3 percent above its prior peak, and retails sales were 2½ percent above their prior peak. Higher inflation numbers in December and a 3 percent increase in auto sales should contribute to higher overall sales numbers.
Both new cases and deaths remain near new daily highs. Looking at the performance of different states suggests there is no evidence that lockdowns are effective in containing either new cases or deaths. Countries that have been effective in containing the virus have done it by means other than locking down their economies.
With investors anticipating the free flow of new money and new spending to prime the economy, stocks are moving sharply higher. One of Biden’s promises to Georgia was that everyone would get a $2,000 check if the Democrats won the state.
That’s just the appetizer. Watch out for the main meal. Biden’s economic advisers assure him government can spend and borrow whatever is supposedly needed to get unemployment back down to 3½ percent. However, raising the federal minimum wage will make it more difficult to reduce unemployment. The Fed has already signed on to the promise to keep the money flowing.
What could go wrong?
The spike in longer-term interest rates following the outcome in Georgia is the canary in the coal mine. The Fed will try to hold interest rates down for a while and will succeed temporarily, but the market will gradually win the tug of war with the Fed later this year.
The S&P500 is now 14 percent above its fundamental value. The more overvalued it gets, the greater the risk of a correction. Even so, stocks remain preferable to fixed-income assets. The economy is surging as we start the new year. Despite the COVID uptick and governments’ expansion of lockdowns, upcoming earnings reports and forward guidance should improve. Stay bullish.
Economic Fundamentals: positive
Stock Valuation: S&P500 over-valued 14 percent
Monetary Policy: highly expansive