The Markets (as of market close February 5, 2016)
Following a labor report that showed job growth slowed in January, stocks declined after making some positive headway the prior week. A selloff of tech stocks brought the Nasdaq down 5.44% with the Russell 2000 following close behind, falling almost 5% by week’s end. The Dow lost over 261 points to close down 1.59%, while the S&P 500 fell over 3.0%.
The price of crude oil (WTI) continued to fluctuate, closing at $31.00 a barrel, down $2.74 from the prior week’s closing price. The price of gold (COMEX) increased again, selling at $1,174.10 by late Friday afternoon, up from the prior week’s closing price of $1,118.39. The national average retail regular gasoline price decreased for the fifth week in a row to $1.822 per gallon on February 1, 2016, $0.034 below the prior week’s price and $0.246 under a year ago.
Last Week’s Headlines
The employment sector continued to show strength, although at a somewhat slower pace. Total nonfarm payroll employment rose by 151,000 in January and the unemployment rate was little changed at 4.9%, according to the latest figures from the Bureau of Labor Statistics. Job gains occurred in several industries, led by retail trade, food services and drinking places, health care, and manufacturing. Employment declined in private educational services, transportation and warehousing, and mining. January’s employment gains trailed the revised payroll numbers for December (262,000) and November (280,000). The employment participation rate rose 0.1% to 62.7%, the average workweek rose to 34.6 hours from a long-standing run at 34.5 hours, and average hourly earnings increased 12 cents to $25.39. Over the year, average hourly earnings have risen by 2.5%. This report, while favorable in general, does show some slowing in the employment sector, which may weigh on the Fed’s decision whether to raise interest rates further at its March meeting.
While the latest figures on personal income proved not as robust as those reported in November, December turned out to be another good month for consumers. According to the latest figures from the Bureau of Economic Analysis, personal income increased $42.5 billion, or 0.3%, and disposable personal income (DPI), which is the difference between personal income and personal current taxes, increased $37.8 billion, or 0.3%, in December. Consumers saved a little more than they spent in December as personal consumption expenditures (PCE) decreased $0.7 billion, or less than 0.1%. In November, personal income increased $44.3 billion, or 0.3%; DPI increased $33.4 billion, or 0.2%; and PCE increased $59.4 billion, or 0.5%, based on revised estimates. Wages and salaries increased $13.1 billion in December, compared with an increase of $37.9 billion in November. Personal current taxes increased $4.8 billion in December, compared with an increase of $10.9 billion in November.
As expected, the trade deficit widened in December to $43.4 billion, up $1.1 billion from November’s revised figures. December exports were $181.5 billion, $0.5 billion less than November exports. December imports were $224.9 billion, up $0.6 billion from November.
The manufacturing sector is contracting. The Institute for Supply Management® Report on Business® for January indicates that economic activity in the manufacturing sector contracted for the fourth consecutive month, as the January PMI came in at 48.2%, an increase of 0.2 percentage points from the seasonally adjusted December reading of 48.0%. A reading of 50% or lower indicates contraction. Weak foreign demand due to a stronger dollar and low oil prices continue to hinder manufacturing. On the plus side of the report, the New Orders Index registered 51.5%, an increase of 2.7 percentage points from the 48.8% reading in December.
Economic activity in the non-manufacturing (service) sector grew in January, but at a slower pace than the prior month, as the ISM Non-Manufacturing Index registered 53.5%–2.3 percentage points lower than the seasonally adjusted December reading of 55.8%. As with the Manufacturing Index, a reading above 50% indicates growth. Several other ISM indexes experienced slower growth, including the Business Activity Index (-5.6 percentage points), the New Orders Index (-2.4 percentage points), the Employment Index (-4.2 percentage points), the Inventories Index (-1.5 percentage points), and the Prices Index (-4.6 percentage points). Generally, this report hints at a noticeable first-quarter slowdown in the non-manufacturing (services) sector, which represents about 80% of the economy.
The Census Bureau report on construction spending for December was at a seasonally adjusted rate of $1,116.6 billion, or 0.1%, above the revised November estimate. The December figure is 8.2% above the December 2014 estimate. While spending on residential construction increased 0.9%, nonresidential construction fell a steep 2.1% below the revised November estimate. This report reflects a cutback in business spending, probably due to a lack of confidence in the economy.
Continuing a somewhat disturbing trend, factory orders in December decreased $13.5 billion, or 2.9%, following a 0.7% decrease in November. Shipments and unfilled orders are also down, while inventories increased $1.0 billion, or 0.2%. Orders for durable goods (expected to last at least three years) and nondurable goods sank 5.0% and 0.8%, respectively, in December. Weak global demand, particular in the energy sector, has contributed to the ongoing slowdown in the factory sector.
Generally, it cost more to produce less in the fourth quarter, according to the latest information from the Bureau of Labor Statistics. Nonfarm business sector labor productivity, or output per hour, decreased at a 3.0% annual rate during the fourth quarter of 2015, as output increased 0.1% and hours worked increased 3.3%. From the fourth quarter of 2014 to the fourth quarter of 2015, productivity increased 0.3%. Unit labor costs (measured as the ratio between hourly compensation and labor productivity) increased 4.5% in the fourth quarter and 2.8% over the last four quarters. Increases in hourly compensation tend to increase unit labor costs, and increases in output per hour tend to reduce them.
For the week ended January 30, there were 285,000 initial claims for unemployment insurance, an increase of 8,000 from the prior week’s revised total. For the week ended January 23, the advance number for continuing unemployment insurance claims was 2,255,000, a decrease of 18,000 from the previous week’s revised level. The advance seasonally adjusted insured unemployment rate remained at 1.7% for the week ended January 23.
Eye on the Week Ahead
The budget deficit increased in December, and this week’s Treasury report may reveal additional budget deficit expansion four months into the government’s 2016 fiscal year. The week closes with a report on retail sales for January. This report is an important indicator of consumer spending trends, as retail sales account for about one-half of total consumer spending.
Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.