Growth Moderates, Stocks Jump

After the nation’s economy surged by a 4.2 percent annualized pace in the second quarter of last year, I asked, “Will Go-Go Growth Last?” The answer is now clear: NO. The height of activity occurred in the second quarter, followed by a 3.4 percent reading in the third quarter and a 2.6 percent print for the last three months of the year. All in all, the economy grew by 2.9 percent in 2018, the best pace since 2015.

The 2018 boost was due to the tax cut and with its impact fading, the next phase of growth is expected to be closer to what we saw prior to its enactment. Q1 2019 is expected to be rough due to the government shutdown: the NY Fed Nowcasting Report predicts 0.9 percent real GDP growth and the Atlanta Fed GDPNow estimate is lower at 0.3 percent. For the whole year, growth should slow to 2.2 to 2.5 percent, “a sustainable growth pace that we experienced during most of the Obama years,” according to economist Joel Naroff. He notes “most people didn’t think that was a good growth rate, but the reality is that is what trend growth looks like.”

The trader’s mantra, “The Trend is your friend” could be helpful, though. If growth is moderating, inflation should remain under wraps and that means that the Fed probably will sit on its hands and do nothing for the foreseeable future. The central bank’s inaction, the likelihood of a U.S. China trade resolution and better than expected corporate earnings helped stocks get off to the best start of the year in 25 to 30 years. The Dow Jones Industrial Average and S&P 500 closed out February with gains of 11 percent, the best two-month start since 1987 and 1991, respectively. The NASDAQ Composite and Russell 2000 were up 14 and 17 percent, all of which is to say that those investors who were crying the blues at the end of last year, are now feeling a bit of spring in their steps.

Here comes the jobs report: On Friday, the Labor Department will release the February employment report, which is likely to show a lower job creation number (190,000) than the January reading of 304,000. The impact of the government shutdown should be reversed, as the 100,000 furloughed Federal workers who were not counted as employed in January, will now be counted, and that should push down the unemployment rate back under 4 percent. As labor market conditions remain tight, wage growth should continue to accelerate. Average hourly earnings are expected to increase by 3.2 percent from a year ago.

While not eating up every job just yet, the robots are coming. The Robotic Industries Association said robots took on a record number of jobs in North American firms last year, with 35,880 robots shipped to the U.S., Canada and Mexico, up 7 percent from the previous year. Of those shipments, 16,702 were to non-automotive companies, a year-on-year increase of 41 percent. In the U.S., robot shipments across all sectors increased by more than 15 percent, a record number.

The more noticeable brunt of the coming robot revolution will be felt in emerging countries, according to a 2018 report from the International Labor Organization. While robots can have a detrimental effect on employment growth at the global level, the impact is “more than eleven times stronger in emerging economies than in developed economies,” which has resulted in a reduction of off shoring of jobs to these areas.