The U.S. employment report for December: Good news or bad news?

On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Research Analyst Puneet Thiara discussed Iran-U.S. geopolitical tensions, headlines from recently released economic data and the U.S. employment report for December.

Do markets care about geopolitical events?

The 3 January 2020 killing of top Iranian military commander Qasem Soleimani by the U.S., and the 8 January 2020 retaliatory strikes by Iran on military bases housing U.S. troops, led to some concern that tensions between Iran and the U.S. may escalate broadly. Those fears, however, have faded for now, as both countries appear to have stepped back from the brink, Ristuben said.

"I think both the U.S. and Iran realised that a continued escalation in tensions wasn’t in the best interests of either country," he stated, noting that major global indexes actually ended the week of 6 January up approximately 0.5% to 1.3%, as of mid-morning 10 January, Pacific time. So, why did markets chart modest gains in the face of geopolitical tensions?

"It’s simple: Geopolitical events don’t matter to markets until they matter. And when they matter, it’s fairly rare," Ristuben said. He went on to explain that in most cases, such events only weigh on markets when tensions spiral out of control - which wasn’t the case this past week.

U.S. services sector grows, CEO confidence rises

Economic data released the week of 6 January was mixed, Ristuben said. On the one hand, The Conference Board’s measure of CEO confidence during the fourth quarter of 2019 rebounded to 43 points - a big climb from its third-quarter reading of 34. However, 43 points is still below 50 points - the dividing line between optimism and pessimism among CEOs, he noted. "Importantly, other surveys of CEO sentiment also indicated an improvement in attitude among business leaders, which probably bodes well for modest increases in capital expenditures this quarter," Ristuben stated.

He noted that this could also give the struggling U.S. manufacturing sector a boost. "While the latest manufacturing PMI (purchasing managers’ index) is above 50 on a global scale, the U.S. remains a problem child, with a December reading of 47.2 - weaker than what we saw in November," Ristuben explained.

The U.S. services sector, meanwhile, remains robust, as demonstrated by the latest numbers from the Institute for Supply Management (ISM)’s non-manufacturing index. December’s reading came in at 55, a rise from November’s mark of 53.9 and indicative of continued growth in the sector, Ristuben noted. "What this tells us is that the non-manufacturing sector is no longer being as negatively impacted by manufacturing weakness," he said.

Ristuben characterised this as very good news, as the services sector makes up a majority of the U.S. economy. "This helps bolster the belief that the risk of recession in 2020 is fairly low," he concluded.

U.S. nonfarm payrolls grow by 145,000 in December

The U.S. economy added 145,000 jobs during December, Ristuben noted. While that number fell a little shy of consensus expectations, it’s more important to zoom out a bit and look at the bigger picture, he stated. Job growth on a month-to-month basis is notoriously volatile, Ristuben said, explaining that a better snapshot of U.S. employment is typically found by looking at average job gains over the past three months. From September through December of 2019, the U.S. generated an average of 184,000 new jobs a month - compared to the overall 2019 average of 176,000 jobs. "Put another way, job growth in the fourth quarter was actually a little bit better than the rest of the year," he explained.

Ristuben noted that while the U.S. unemployment rate held steady at a 50-year low of 3.5% in December, year-over-year wage growth slipped below 3% for the first time since July 2018. Again, context matters in this instance, he said. "Truth be told, December is a notoriously difficult month to assess the health of the U.S. economy by, primarily due to the holidays," Ristuben stated.

All in all, he called the December jobs report solid, explaining that monthly job gains of 100,000 or more typically put downward pressure on the unemployment rate. "Ultimately, the latest numbers support our thesis that the U.S. consumer is well-employed, confident and likely to continue to spend money this year," Ristuben concluded.

 



Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.

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