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March 2019

Economic Notes for the Week of September 10th

by Karl Schroeder for Finance

The ISM manufacturing index for August was weaker than expected, coming in at a slight decline to 49.6 versus an expected 50.0.  New orders, production and employment were all down slightly, while supplier deliveries and inventories helped.  Construction spending fell -0.9% in July, despite calls for a slight gain of a half-percent or so.  On the other hand, auto sales rose to an annual rate of 14.52 million units for August—up from 14.1 in July—so buying conditions here are improving.

The non-manufacturing ISM rose strongly from 52.6 in July to 53.7 in August, which was largely unexpected and above a forecast of no change.  The employment index rose notably, while the new orders and general business activity pieces were a bit weaker.  This is perhaps unsurprising, as our economy has shown more strength and general growth in service sectors than it has in manufacturing (a multi-decade trend).

The U.S. Commerce Department’s productivity growth figure for the second quarter was revised up from an annualized +1.6% to +2.2%.  Nonfarm unit labor costs were revised downward from +1.7% to +1.5% for Q2, while, at the same time, costs for Q1 were revised upward from +5.6% to +6.4% (old news now).  Overall, the year-over-year number is just under 1%, despite quarter-to-quarter choppiness, which is on par with other inflation numbers.

Initial jobless claims came in at 365k, which was a drop of -12k from the prior week and a bit lower than the expected 370k for the Sept. 1 ending week.  Continuing claims for the Aug. 25 week registered at 3,322k, which was a bit higher than the expected 3,315k number.

The ADP report, which has sporadically been useful/not useful in forecasting Friday’s government jobs number, showed a gain of +201k jobs in August, which was a positive surprise versus the expected +140k.  July figures were also revised up by +10k.  Gains in employment appeared across all types of firm sizes as well as sectors, which is a positive development.  Service jobs rose by +185k, while ‘goods-producing’ jobs were up +16k, in line with the direction our economy’s going (more service positions than manufacturing).

The bigger report, the government’s monthly employment situation, resulted in a weaker gain of +96k jobs, which is a bit below the forecast +130k figure.  Manufacturing and temporary employment were both down.  Hours worked rose by 0.1 hour and hourly earnings for August were flat (year-over-year gain was +1.7%, largely in line with broader CPI inflation).

The unemployment rate fell from 8.3% to 8.1%, which is a headline positive, as was the broader U-6 measure of ‘underemployment’ fall from 15.0% to 14.7%, but the details are much weaker—the improvement being driven by a shrinking of the labor force.  Some of this is based on demographic models; some of it is just less participation, which points to some of the structural unemployment issues Bernanke alluded to in his Jackson Hole comments.

Considering the political context and focus the ‘jobs numbers’ are receiving in the months prior to the November presidential election, it might help to put these measurements into perspective.  For one, they’re estimates, and not necessarily precise ones.  For instance, the confidence interval of monthly employment figures is +/- 100,000 jobs, so the room for error is quite large.  (What this means:  if the estimate for the prior month comes in at 150,000 jobs, there is a 90% statistical chance of the true estimate falling between 50,000 and 250,000 jobs…a fairly wide range.)  But, that said, it is the best estimate we have in this short amount of time, which is why traders and politicians both react so strongly to it.  Should they?  Probably not.  However, it could be another factor in Fed officials deciding on further accommodative action.

In European news, the ECB proposed a new bond-buying plan that would essentially serve as another ‘backstop’ for individual country interest rates, by promising essentially unlimited funds to support these markets.  This has been the real question up until this point….would there be any type of backstop if things turned ugly for the peripheral nations?  The new Outright Monetary Transactions (OMT) program would buy government bonds with a maturity of three years and under, but only for those nations currently the European stability mechanism… if that isn’t convoluted enough.  So, Spain could qualify if it elects to fall under that system (it hasn’t chosen that path yet).

This is another step in the right direction, but certainly doesn’t bring uncertainty to an end quite yet.  Now it is up to the politicians to agree on whether or not this is feasible (and legal).  The German constitutional court rules this week regarding how far that nation can give up sovereign control over to the broader ECB in these stability mechanism activities (as the largest member, their participation is obviously critical).  It is a fine line these politicians are walking in terms of preserving the Euro but also not giving up too much of their own sovereignty and money—to an unknown outcome beyond their own borders.

Market Notes

Period ending 9/7/2012

1 Week (%)

YTD (%)

DJIA

1.68

11.02

S&P 500

2.28

16.09

Russell 2000

3.74

14.73

MSCI-EAFE

2.90

10.02

MSCI-EM

2.27

5.72

BarCap U.S. Aggregate

-0.27

3.58

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2011

0.02

0.25

0.83

1.89

2.89

8/31/2012

0.09

0.22

0.59

1.57

2.68

9/7/2012

0.11

0.25

0.64

1.67

2.81

We experienced a shortened Labor Day holiday week, which has traditionally brought us out of a typically low-volume summer and into a seasonally more ‘adventurous’ time of year.  The first week of the new ‘season’ was a strong one.  ‘Risk’ in all forms was strongly up, led by foreign stocks and small-caps, while large-caps were also positive.  In the S&P, the week was led by cyclical materials and financials, while utilities and consumer staples lagged—being more defensive.

Bonds were down on higher interest rates.  However, credit, including high yield, as well as foreign bonds were strongly higher—nearly performing as well as equities.

European REITs performed best, in line with other European stocks, while U.S. office/industrial and Asian REITs weren’t far behind.  U.S. retail and residential real estate was up positively, but lagged other areas.

In commodities, metals were up big—both industrial and precious—by over 5%.  Copper and silver in particular were the largest gainers on the week, led by hopes for more monetary easing in the U.S. and approval of a large infrastructure program in China.  Energy was also up, but less so, while agricultural contracts fell.

Hopefully, you received our invitation for this week’s Monthly Advisor Meeting, to be held Thursday, September 13, at 9:00 AM Pacific/12:00 PM Eastern, during which we’ll discuss the current market environment and performance of our asset allocation portfolios—in addition to an always-interesting Q&A session.

Have a good week.

Karl Schroeder

Investment Advisor Representative

Schroeder Financial Services, Inc.

480-895-0611

Sources:  FocusPoint Solutions, Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, Goldman Sachs, JPMorgan Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Thomson Reuters, Schroder’s, Standard & Poor’s, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.  Schroeder Financial Services, Inc. is a registered investment advisor.

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