Despite a shaky start to the new year, the Dow Jones ultimately gained a substantial 746.94 points at the close of trade on Friday, the 4th of January, a rise of 3.29% from the previous day’s close. While Apple’s mid week report down-scaling Q1 forecasts caused widespread misery on Thursday, this was turned around the following day based on two factors – larger than expected job growth and the Fed reminding the world that chairman Jerome Powell is not indelibly committed to new rate hikes. Powell stated, “As always, there is no preset path for policy….And particularly with muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves“. In other words, the Fed will ‘wait and see’ which was effectively what Powell stated in December.
Turning to the impressive job numbers, 312,000 new jobs were created in December, thus dramatically beating out predictions of 176,000. Wages also rose by 3.2% compared with December of the previous year. But while the unexpectedly high job numbers gave a welcome boost to markets, the devil remains in the details.
While jobs were up across multiple sectors including health, hospitality, retail and public sector jobs, numbers also rose in the key area of manufacturing. But while manufacturing jobs rose in December, manufacturing output fell.
In December of 2018, the ISM Manufacturing Index fell by 5.2 points. This not only took manufacturing output to a two-year low of 54.1 but December’s 5.2 point drop represents the worst single month since October of 2008 in the heart of the Great Recession. The only time that the Manufacturing Index fell by a larger amount in the 21st century was during the Great Recession and after the sharp economic downturn after the 9/11 atrocity.
Beyond this, while industrial numbers were modestly up (by 0.6%) in November, this was largely due to an upsurge in domestic utilities due to cold weather while mining and energy also factored into this modest rise. Crucially, manufacturing remained totally stagnant in November before taking its downturn in December.
Taken in totality, this means that Donald Trump’s much vaunted claim that his trade war is sacrificing agricultural productivity in order to boost manufacturing has not transpired as the protectionist President had hoped for. With domestic demand driving modest industrial growth in November, it remains clear that while the US economy can still deliver the goods in terms of jobs and a stock market that remains in the midst of a manic-depressive cycle, all eyes should turn back to the trade war which not only has been the greatest desalinising factor in the markets (as Apple itself admitted in a relatively straightforward manner) but risks pushing up the cost of goods for ordinary consumers should the Dollar lose its strength in 2019.
Should Fed Chairman Powell lose his cool and abandon his moderately tight monetary policy designed to keep inflation low, 2019 could see the perfect storm of overheated tech stocks facing a major correction combined with a rise in the consumer price index and further panic selling if a much expected recession collides with an ongoing trade war that has objectively hurt US agricultural exports without doing much of anything to revive manufacturing.