Today’s Employment Report

Author: David R. Kotok, Post Date: December 7, 2018
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Peter Boockvar summarized a view of this Pearl Harbor Day employment report. We agree with him.

Here’s Peter: “Bottom line, the moderation in the pace of job gains coincides with the recent uptick we’ve seen in jobless claims. It’s hard not to wonder how much of this is due to a business pause on the labor front with all the cloudiness on trade and tariffs. Construction seeing only a job gain of 5k could also be reflecting the slowdown going on in real estate, both residential and commercial. Manufacturing job gains did hang in as companies front loaded inventory builds.” (Peter Boockvar, email to subscribers, Friday, December 07, 2018 8:53 AM)

Market Commentary - Cumberland Advisors - Employment Report

In our interview with the Wall Street Journal this morning we enumerated and discussed the anecdotes we see from our client base in over 40 states. There is a slowing underway because of Trump-Navarro Trade War protectionism. It is getting worse, as one would expect. We see it in New England in the lobster industry. We see it in the Western US in construction. We see it in employment composition and businesses’ deployment of assets as they build inventories in anticipation of tariffs. And we see it in delays of capital expenditures as entrepreneurs are bewildered by Trump administration inconsistencies.

Simply put: You cannot make business decisions and investment decisions based on Twitter rampages. That doesn’t work.

The Fed’s Beige Book confirms these anecdotes in reports from the twelve Federal Reserve regions. DataTrek has a compilation out this morning. We have copied and pasted it below. The key to today’s employment report is that the data from the US national report is confirming what the survey data is saying in the Fed’s reports.

Here’s Datatrek:

That’s why we look at the Beige Book when it is released eight times a year, as it offers more color on what’s happening beneath the economic surface than the national data shows. Another word we’ve been closely monitoring in these reports: ‘tariff’. It went from no mentions in the January and March reports to the following times in future editions: April (36), May (22), July (31), September (41), October (51), and December (39).

Clearly tariffs continue to worry businesses across the US, as eleven out of twelve districts mentioned them in the latest report. Also of concern: ‘Most Districts reported that firms remained positive; however, optimism has waned in some as contacts cited increased uncertainty from impacts of tariffs, rising interest rates, and labor market constraints.’ Not dissimilar to this quarter’s market worries… Here’s some key examples of what they’re saying about each topic from the period of mid-October through late November:

Tariffs

• Boston: ‘An industrial distributor said they expected tariffs to contribute 50 to 100 basis points to price increases for their products… Looking ahead to 2019, retailers expressed significant uncertainty about the impact that tariff increases will have on prices–beyond some point, they will pass the increases on to consumers.’
• Philadelphia: ‘One firm reported that it has passed along its costs from 10 percent steel tariffs but that it expects customers to push back if the tariffs increase to 25 percent.’
• Cleveland: ‘Contacts noted that tariffs were lifting prices further down the supply chain. Selling prices rose with less intensity than they did for input costs.’
• Richmond: ‘Wholesale and retail services saw higher prices for goods affected by tariffs… Tariffs were a significant concern noted by manufacturers, as they were believed to raise costs of raw materials, thereby raising prices and lowering demand… Several retailers reported narrowing profit margins as cost of goods increased as a result of tariffs.’
• St. Louis: ‘Contacts expressed concern over the ongoing tariffs leveled at U.S. agricultural products. There are reports of storage shortages as soybeans that are normally exported to China are being stored in large quantities rather than exported.’
• Dallas: ‘Manufacturing sector slowed during the reporting period, and outlooks were less optimistic than they have been all year. Output growth softened notably in November, with the tariffs, labor constraints, and trade policy uncertainty cited as damping factors.’

‘The upshot: several districts continue to express concern and uncertainty about tariffs and potential changes in trade policy. Tariffs have already increased input costs, which many indicate they will have to pass on to consumers if they haven’t already.'” (Datatrek Morning Briefing, Dec. 6, 2018, “Beige Book: Ghost(ing) of Recession Future”)

Markets are already reacting to the outlook for slowing growth. Future Fed hiking is being repriced to fewer and fewer rate rises. There is good reason, as inflation remains subdued while the economy is slowing to a 2% or lower growth rate.

For bonds this is bullish; and for tax-free municipal bonds, which have been yielding higher than taxable Treasury bonds, this is doubly bullish.

For stocks, this removes or lessens the risk that the Fed will go too far with its hiking strategy. It remains to be seen if the stock market will see a glimmer of positive news in this weaker-than-expected jobs report. News of the arrest of a Chinese firm’s executive casts a pall over any trade negotiations.

For POTUS, this is another warning that the Trump-Navarro Trade War policy is accelerating damage to the economy. One at a time, businesses and investors are becoming disillusioned. We are in the camp that the tariffs are damaging and are spreading like a financial cancer. The Trump-Navarro policy is metastasizing.

We again reiterate that we believe the Trump policy is unsustainable. And we believe that the American business community will overcome it. We continue to use the instability in the equity markets to our advantage by selectively adding to our positions. We believe the time to buy stocks is when no one wants them and when the tape is red. If the Trump-Navarro policy leads to a full-blown cold war with China, we will be proven wrong. But if the mounting evidence reaches into policy enough to alter it, we will be right and markets may soar to new all-time highs within the next two years. Time will soon tell.

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