Forget a seemingly miserable December for the U.S. economy or the dreary start in 2019: What really matters is whether businesses are still hiring — and they are.
By some measures the economy appears crummy. Retail sales and consumer spending nosedived in December — the decline in spending was the biggest since 2009 — and large swathes of the economy have begun to flag.
The housing market was crunched by rising mortgage rates at year end, for example, and manufacturers grew in February at the slowest pace since Donald Trump was elected in 2016.
Just some stray flotsam and jetsam?
Uh-uh. The economy has indeed shifted into a lower gear. Many economists predict 1% GDP growth or less in the first quarter.
“The bottom line is that growth has now been slowing for the past few quarters,” said chief U.S. economist Paul Ashworth of Capital Economics.
Yet some of the more negative readings on the economy are probably exaggerated, a residue of the partial 35-day government shutdown in December and January that mucked up the government’s ability to monitor what was going on.
The Federal Reserve, for its part, recently gave a big assist to the economy by announcing that further increases in U.S. interest rates are on hold. The decision fueled a huge stock [(.DJI),(.SPX)] rally and is likely to stoke home sales via lower mortgage rates.
And the one thing that counts more than any other — the labor market — is still going strong.
The economy has added 1 million new jobs since October, capped off by a frothy 304,000 increase in January.
The unemployment rate has increased slightly to 4% from a 49-year low of 3.7% late last year, but it’s rising for the right reason. More Americans are entering the labor force in search of work with job openings at an all-time high.
The pace of hiring in February, which the government reports Friday, is unlikely to match the big tab in January. The last time the U.S. posted back-to-back gains of 300,000 new jobs was in 2006. Winter weather is also a wild card early in the year.
Still, economists polled by MarketWatch think the economy will probably show another healthy increase in hiring of around 180,000 . The jobless rate is expected to stay or 4% or even fall to 3.9%.
That’s what counts most. The U.S. economy is largely driven by how much consumers spend — and consumers spend when they have secure jobs.
Even better, incomes and wages are growing at the fastest pace since the end of the 2007-2009 recession, while a broad decline in inflation has lifted the buying power of households.
If the labor market does start to falter, the first signs will show up in how many people apply for unemployment benefits each week. The latest snapshot comes a day before the U.S. jobs report.
So-called initial jobless claims, a rough measure of layoffs, are still near a 50-year low, but they no longer appear to be in decline. Indeed, they’ve risen slightly compared to last fall.
Another thing to watch is job openings. They surged to a record 7.3 million at the end of 2018 and now easily exceed the number of Americans officially classified as unemployed.
Some drop-off would not be surprising in January, but Wall Street will pay close attention for signs of major erosion in the labor market.
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