the Employment Situation

The Bureau of Labor Statistics made its monthly Employment Situation report this morning:  +312,000 new jobs, +58,000 upward revision to the prior two months’ data, annual wage gains of an inflation-beating +3.2%.  Yes, it’s just one month and, yes, the margin of error is +/- 100,000 jobs, but it’s still a very strong report, indicating a robust domestic economy.

 

Despite this show of employment strength, the stock market has been on a sharply downward path since late September.  What is the market thinking/anticipating?

–the 10-year Treasury, which was yielding 3.22% in late September now yields 2.56%;  the middle of the yield curve is now mildly inverted.  This suggests bond buyers believe a marked slowdown in economic activity in the US is in the offing–one that will force the Fed to soon begin to lower short-term interest rates again.  Why would that be?

–the Trump tariff war with the rest of the world seems to be affecting publicly traded companies much more negatively than one might have imagined

–only about half the earnings of the S&P 500 come from the US.  Both the EU, dealing with Brexit and Italy, and China are slowing down

–some pundits argue from the bond market situation that the Fed is the problem, having –they think–raised short-term interest rates too far.

 

Two pieces of data from yesterday seem, on the surface at least, to reinforce the sharp slowdown narrative:  Apple (AAPL) and business investment activity.

AAPL

–AAPL announced Wednesday night that its December quarter revenues would be about 8% below the midpoint of the guidance it gave in October.  What makes this significant, besides AAPL’s size, is that the company rarely misses its quarterly estimates.

Two reasons given:  falloff in sales in “greater China” and slower than expected takeup of the newest generation of iPhones by existing customers (the smartphone market is completely saturated–there are no more “new” customers).  Neither reason is clearly a sign of broad-based consumer distress, however.

AAPL recently said it would no longer reveal unit sales of its smartphones, a decision I take to mean it intends to make revenue gains through price increases rather than unit volume gains.  Is the slowdown in replacement demand caused by economic weakness or AAPL pricing new phones so high that other, cheaper phones are suddenly more attractive?

Also, the latest issue of Foreign Affairs reports that popular sentiment in China has turned sharply against the US in the past half year or so as Washington initiated its tariff war.  Maybe, in addition to higher prices, flaunting the newest iPhone is no longer as culturally acceptable in China (think:  the century of humiliation), as having a home-grown product.

ISM

–the Institute for Supply Management issued its monthly report on US manufacturing activity yesterday.  It shows a continuing slowdown in industrial activity.  The reason most often cited in survey respondents’ comments is the administration’s tariff war.  Manufacturers are, predictably, shifting production out of the US to avoid import tariffs on raw materials and export tariffs on finished goods.

It’s important to remember, too, that manufacturing is not the key to US economic strength that it was a generation or two ago.  Spending on software is the largest investment item for most service companies.  Yes, this activity is also being shifted abroad as the administration makes it more difficult for foreign-born computer scientists to work in the US.   But I don’t think the ISP report is “new” news, so I’m not sure why it had such a negative effect on the market yesterday.

my take

In the short term, figuring out the root cause of the worries about the US economy is probably less important than trying to gauge how far along in the selling we are now.  Better to figure out when the storm will be over than debate the direction of the wind.  My guess–and it may be more of a hope–is that we made the lows on Christmas Eve when stocks broke decisively through the February 2018 lows.

Personally, I think the ultimate problem is Washington and the tariffs, not the Fed.  I’m all for protecting US intellectual property, but the levies on, say, steel and aluminum seem so arbitrary and generally harmful.  In a way, it would be a lot better if the Fed is the issue, since then the problem would be a familiar one, the market situation clearer and the fix relatively easy.