Economic Outlook – 6 January 2019


  • The production side of the US economy has slowed considerably, pulling down commodity prices and business confidence. December’s ISM Manufacturing survey tumbled 5.2 points to 54.1, the largest one-month drop in more than a decade. The drop in the headline index was driven primarily by an 11-point plunge in the new orders component, which tumbled to just 51.1 while order backlogs also declined. The decline in these two leading components suggests that output and manufacturing employment are both likely to slow further in coming months.
  • While manufacturing accounts for just 12.0% of the economy, it still accounts for the bulk of the quarterly swings in real GDP and its performance is closely watched by policymakers. The latest slide is particularly disconcerting in that it is not linked to any single industry or region, but is rather sharp and broad-based like seen prior to the onset of a recession.
  • The apparent slide in the factory sector was not evident in the employment data. Nonfarm employment surged by 312,000 in December and data for the prior two months were revised up by 58,000 jobs. Strength was broad-based, which lends credence to the headline number. Moreover, manufacturing payrolls added 32,000 jobs in December and gains were broad-based.
  • This past fall’s hurricanes hit during the September and October survey weeks, and the California wildfires and unusually wet weather along much of the East Coast depressed job growth the following month. After not changing in November, construction employment rose by 32,000 in December, with most of the increase coming in heavy and civil engineering construction, likely reflecting highway work. All of that gain, however, was due to a smaller than usual non-seasonally adjusted drop in jobs. But even after taking this into account, the stronger jobs figures and the 0.4% rise in average hourly earnings should alleviate any concerns about a more troublesome slowdown.
  • US consumer spending also appears to be holding up well. Early reports on the holiday shopping season suggest consumers splurged a bit. Motor vehicle sales also came in strong, with the Ward’s measure showing sales at a 17.5 million vehicle pace in December. Lower gas prices helped boost spending in both areas.
  • Markets welcomed comments from Fed chair Jerome Powell in which he communicated that the central bank will be patient as the economy evolves but is fully prepared to shift its policy stance significantly if necessary. Powell also said the Fed would not hesitate to adjust the pace of the balance sheet runoff if necessary, a shift in tone from his December press conference, at which he indicated that the balance sheet reduction is likely to remain on autopilot. The Fed chair said he would not resign if asked by US President Donald Trump and that no meeting with the president was scheduled.
  • Word that Apple had lowered Q1 revenue guidance by 8.0% (its first preannouncement in a decade) on significantly slower sales in China prompted Kevin Hassett, chairman of the White House Council of Economic Advisers, to warn that many other companies may face lower earnings in China until the United States secures a trade deal with China. China’s economic pain gives the US leverage in trade negotiations, Hassett said.
  • Meanwhile, a partial US government shutdown has stretched to day 13, one of the longer impasses in recent years. President Trump refuses to sign a funding bill until Congress appropriates money to partially fund a border wall. So far, there has been no willingness to budge on the issue on the part of Democratic leadership, with the party holding a majority in the House of Representatives and possessing the seven votes needed in the Senate to reach the 60-vote threshold for passing legislation. The longest shutdown in history lasted 21 days beginning in December 1995.
  • US stocks rose for a second consecutive week, although markets remained extremely volatile. The smaller-cap benchmarks, which typically see larger swings, performed the best after suffering the biggest declines in 2018 (the worst overall year for stocks in a decade). The gains left only the small-cap Russell 2000 Index in bear market territory, down roughly 21.0% from its recent high. Markets were closed last Tuesday for the New Year’s Day holiday.
  • Despite surging Friday in response to Powell’s comments and the payrolls report, Treasury yields ended the week lower as investors sought out safe-haven assets in the wake of continued volatility in equity markets and geopolitical uncertainty. The municipal market followed the rally in Treasuries, and with the start of the new issuance calendar due the following week, most activity occurred in the secondary market. The rally extended throughout the week, with longer-maturity bonds outperforming their shorter-maturity counterparts.
  • US CPI core index is due out on Friday. The index rose +0.2% month-on-month in December implying an unchanged core inflation rate at 2.2% year-on-year.
  • The ISM non-manufacturing index will be released on Monday and it remains at a very high level indicating the economy is doing fine. For the same reason, the NFIB Small Business Optimism Index in December will be interesting to follow on Tuesday.


  • Lending to British consumers grew at its slowest pace in nearly four years in November and the number of mortgage approvals fell, Bank of England (BoE) data showed, adding to signs of a pre-Brexit slowdown in the economy. The annual growth rate in unsecured consumer lending slowed to 7.1% from 7.4% in October, the BoE figures showed, the slowest increase since March 2015. There have been signs from many retailers that British consumers reined in their spending in late 2018, faced with the possibility of the country leaving the European Union without a deal to smooth the economic shock.
  • British house prices took a pre-Brexit hit in December, falling by the most in monthly terms since mid-2012 and rising by their slowest pace in nearly six years in annual terms, according to data from mortgage lender Nationwide. House prices fell by 0.7% from November, the biggest monthly fall since July 2012, Friday’s data showed. Compared with a year earlier, prices rose by just 0.5% compared with a 1.9% rise in November.
  • In the UK, the focus remains on the Brexit as the debate ahead of the vote in the House of Commons begins next week. The vote will take place in the week beginning on Monday 14 January. Unless some politicians have changed their minds over the Christmas recess, it seems as if PM Theresa May’s deal is doomed to fall.
  • The most important release is the monthly GDP estimate for November. Given the weak PMIs, it won’t be a strong number.


  • After a bearish start, the pan-European STOXX Europe 600 Index gained ground and was up about 2.0% for the week, buoyed by prospects of fresh U.S.-Chinese trade talks. Last Thursday, however, European shares were caught in the global sell-off triggered by Apple’s sales projection downgrade, which reinforced expectations that a global economic slowdown is underway. For the week, Germany’s DAX Index rose about 2.0%, France’s CAC-40 Index was up about 1.0%.
  • French President Emmanuel Macron vowed to push ahead with reform in his New Year’s Day address after weeks of protests by the so-called “yellow vests” about the unbalanced nature of Macron’s reforms. The protests and ensuing riots created the greatest challenge to Macron’s 18-month-old presidency and his reform agenda, which is aimed at boosting growth and lowering France’s high unemployment rate. Evidence has accumulated that the protests are taking a toll on economic activity and business confidence. IHS Markit PMIs released during the week indicated that activity in the manufacturing and services sectors in France contracted in December for the first time since mid-2016.
  • The ECB minutes will be released on Thursday and are the main event this week. The minutes refer to the 13 December meeting where the ECB decided to end the net asset purchases. Of particular interested will be the remarks about the discussion on the growth and inflation outlook (as well as the comments on the decade strong wage-growth numbers).


  • Mainland Chinese markets advanced in a holiday-shortened week, and the country’s central bank stepped in with more targeted stimulus measures after a mixed batch of indicators pointed to a deepening economic slowdown. For the week, the Shanghai Composite Index and the large-cap CSI 300 Index, China’s blue chip benchmark, each advanced 0.8%. After Friday’s market close, the People’s Bank of China (PBOC) cut the amount of cash that banks must hold in reserves by one percentage point. The cut in the RR (the reserve requirement ratio) expected to occur in two equal-sized cuts on January 15 and 25, will free up a net of 800 billion yuan (roughly $USD117 billion) for lending, the central bank said. The move marked the fifth RRR cut since the start of 2018 for China, which is trying to support a slowing economy that has been further weakened by US tariffs.
  • US-China trade talks at the vice-ministerial level will resume next week, China’s commerce ministry announced last week. This was one of a flurry of headlines, while China continues to fine-tune economic policy in an effort to support growth.
  • The PBOC’s stimulus came days after a report showed a contraction in factory activity last month. Last Monday, China reported that its official manufacturing PMI (a key barometer of global demand) fell in December to its lowest reading since February 2016 and its first contraction since July 2016. Later in the week, the privately compiled Caixin/Markit Manufacturing PMI confirmed the official results and showed that factory activity contracted in December for the first time in 19 months. However, the Caixin/Markit services PMI rose to a six-month high in December (an encouraging bit of data underscoring the resilience of China’s services sector).
  • The focus this week in China will be on more trade talks with the US at vice-ministerial level in Beijing. It will pave the way for more high-level negotiations later in January. An announcement on tax cuts to consumers and companies may come soon, which have been well signaled by the Chinese leaders.
  • Producer price inflation for December are due this week and may attract some attention as it is set to fall further from 2.7% year-on-year to around 1.5% year-on-year. It is expected to fall into deflationary territory during Q1 due to the big drop in commodity prices.

Sources: Wells Fargo, T. Rowe Price, Reuters, MFS Investment Management, Handelsbanken Capital Market, Danske Bank.