Hiring Ends Year on Strong Note, but Wage Growth Remains Sluggish Employers capped last year with impressive job growth in December, the latest sign of a stable U.S. economy in the face of international headwinds.

(…) U.S. employers added 292,000 jobs in December to bring 2015’s total job gain to 2.7 million, the Labor Department said Friday. Last year trails only 2014 as the best year for job creation since 1999. (…)

Strong hiring in construction due to unseasonably warm weather is likely to reverse in January and February. The burgeoning e-commerce industry boosted employment in transportation and warehousing during the holiday season, but those jobs could prove temporary. Even the latest Star Wars film appears to have boosted employment in the movie industry by an unusually large number, a force not likely to persist. (…)

Services firms, which range from repair shops to hospitals, accounted for almost 90% of all jobs created in the U.S. last year. Manufacturing, a sector feeling the brunt of the export slowdown tied to a stronger dollar, added 35,000 jobs in 2015 after adding more than 200,000 in 2014. The mining sector, which includes oil and gas extraction, shed nearly 130,000 jobs last year. (…)

Average hourly earnings slipped by a penny in December from November. Wages were up 2.5% from a year earlier, among the best annual gains of the current expansion, but the improvement remains below historical averages. (…)

But some economists point out that the latest data may have understated December wages because the week in which the survey was conducted didn’t include the 15th, a popular payday, as it typically does. (…)

The labor force grew by nearly a half-million people in December, a factor that helped hold the unemployment rate at 5% despite strong hiring. The labor-force participation rate ticked up to 62.6% in December, but it remains down from a year ago, and is still near a 40-year low.

A broader measure of unemployment that includes Americans stuck in part-time jobs or too discouraged to look for work stayed at 9.9% in December and has been virtually unchanged since September. (…)

• U.S. employers added a seasonally adjusted 292,000 jobs in December. The prior two months were revised up by a combined 50,000–employers added 307,000 jobs in October and 252,000 in November.
• Professional and business services led last month’s job creation, adding 73,000 jobs, followed by gains in construction, health care, food services and drinking places.  Employment in mining shrank by 8,000 in December and the industry has posted job losses every month since December 2014.

Merrill: Warm Weather “added nearly 100,000 jobs in December”

The average temperature in December was 38.6 degrees, versus the previous record of 37.7 and the historical average of 33.2. If we create a national aggregate for temperature which is weighted by state population instead of area, we see an even bigger divergence from the norm in December. The appeal of using population weights is that it will put more emphasis on the temperature in the areas which have a greater economic contribution.

Another proxy for gauging the weather in the winter is to show heating degree days, which measures the demand for energy to heat houses or businesses … the deviation from the norm for heating degree days in December and this past month was literally off the charts. (…)

Plugging in the December temperature and snowfall data to the output of the model from Bloesch and Gouri, we find that the weather can explain about 97,000 of job growth. This would imply that without the weather distortion, the economy would have added 195,000 jobs. While we don’t want to give a false sense of precision, this seems like a reasonable approximation. Before the sharp acceleration the past three months, job growth was trending at around 200,000 a month.

• Here’s How Much Slack Is Left in the U.S. Labor Market  There’s enough to keep wages from rising significantly

U.S. Consumer Credit Grew Slowly in November Americans’ outstanding debt tab grew at the second-slowest pace of the year in November—climbing at an annual 4.8% rate—as they appeared to rein in borrowing for higher education, masking a pickup in credit-card debt.

Outstanding consumer credit, a measure of all debt besides mortgages, rose by $13.95 billion, or at an annual 4.8% rate in November, the Federal Reserve said Friday. That is a tapering from October, when it rose at a downwardly revised annual rate of 5.4%, and the slowest pace since January 2015. It is a sharp drop from September’s rate of 9.9%.

Revolving credit, mostly credit cards, rose at an annual 7.4% rate, a steep increase from October’s downwardly revised rate of 0.1%. Nonrevolving credit rose at an annual 3.8% rate, its slowest pace since October 2011, and a drop from the downwardly revised 7.3% annual rate notched in October 2015.

Weak U.S. wholesale inventories point to slower fourth-quarter growth

RAIL DERAILED

The Association of American Railroads published its December monthly rail traffic indicator on Friday, providing a most up-to-date never-revised snapshot of the U.S. economy. If you had any doubt that U.S.manufacturing is in serious recession showing no signs of improvements, these up-to-date facts will change your view (my emphasis):

• December 2015 was a lousy month in a lousy quarter for U.S. rail carloads. U.S. railroads originated 1,219,443 carloads in December 2015, down 15.6% from December 2014. That’s the biggest year-over-year monthly percentage decline since August 2009. December 2015 was the 11th straight year-over-year monthly decline.
• Weekly average carloads of 243,889 in December 2015 were the lowest for any month since January 1988 when our data begin.
• Weekly average carloads in the fourth quarter of 2015 were down 11.3% from the fourth quarter of 2014, the biggest year-over-year quarterly percentage decline since the third quarter of 2009. Average weekly carloads in 2015’s fourth quarter — 260,424 — were the second lowest for any quarter since 1988, behind only the second quarter of 2009.
• Just four of the 20 carload commodity categories the AAR tracks were up in December 2015 over December 2014. That’s the fewest for any month since October 2009.
• Motor vehicles and parts were the biggest bright spot for U.S. carload traffic in 2015, with year-over-year gains in nine of the 12 months (including eight of the final nine months of 2015).
• For months, carloads of commodities related to steel have been hurting badly. That continued in December. Combined, carloads of four steel-related commodity groups were down 25.6% YoY in December 2015. Here at RTI we don’t claim to be experts on the steel industry, but we do know that the huge recent decline in the crude oil rig count has had a negative impact on steel production. (According to Baker Hughes, the U.S. oil rig count totaled 698 for the week of December 31, 2015, down 1,113 rigs (or 61.5%) from the same period in 2014 and the lowest level since the second week of September 1999.)
• Carloads of petroleum and petroleum products fell 20.5% in December 2015, probably mainly because of a decline in carloads of crude oil, which accounts for approximately half of this traffic category. Carloads peaked in the fall of 2014 and by the end of 2015 were approximately 25% below their peak. Carloads fell in nine of the 12 months of 2015, including the last seven.
• Excluding coal and grain, carloads were down 7.3% in December, also their biggest decline since October 2009.
• Carloads of industrial products, an aggregation of a variety of rail commodities used in various manufacturing industries, were down 7.4% in December 2015 from December 2014, their tenth straight year-over-year monthly decline and their biggest percentage decline since November 2009. As we said last month when talking about disappointing November rail traffic data, December’s rail data confirm, along with the PMI and manufacturing output, that manufacturing is going through a very rough patch right now, and it’s not confined to energy- and steel-related sectors.

Manufacturing accounts only for 12% of the U.S. economy but, together with Energy and Materials, it impacts nearly 20% of the S&P 500 Index. S&P Energy company earnings cratered 59% in 2015 while Materials were down 8.1% and Industrials 1.1% while the other 7 S&P sectors saw earnings growth averaging 8.3% last year. Manufacturing also impacts European equity earnings meaningfully as this GS chart shows:

Intermodal traffic is more a reflection of what’s going on in the retail end of the economy. The inventory correction is still on:

• U.S. rail intermodal originations set a new annual record in 2015, up 1.6% over 2014, the previous record. 2015 was the sixth straight annual increase for U.S. intermodal traffic.
• The year ended poorly. In December 2015, U.S. railroads originated 1,179,907 containers and trailers, down 0.7% from December 2014. Year-over-year monthly intermodal volume has fallen on U.S. railroads three months in a row, something that hasn’t happened since November 2009. In the fourth quarter of 2015, intermodal volume was down 1.1% from the fourth quarter of 2014. In the second half of 2015, intermodal volume was down 0.8% from the second half of 2014.

Oil Seen Heading to $20 by Morgan Stanley

A rapid appreciation of the U.S. dollar may send Brent oil to as low as $20 a barrel, according to Morgan Stanley.

Oil is particularly leveraged to the dollar and may fall between 10 to 25 percent if the currency gains 5 percent, Morgan Stanley analysts including Adam Longson said in a research note dated Jan. 11. A global glut may have pushed oil prices under $60 a barrel, but the difference between $35 and $55 is primarily the U.S. dollar, according to the report.

“Given the continued U.S. dollar appreciation, $20-$25 oil price scenarios are possible simply due to currency,” the analysts wrote in the report. “The U.S. dollar and non-fundamental factors continue to drive oil prices.” (…)

Morgan Stanley is not the first to forecast a drop to $20 oil, but its reasons differ from other banks. Goldman Sachs Group Inc. has said there’s a possibility storage tanks will reach their limit, pushing crude down to levels necessary to force an immediate halt to some production. (…)

• Fed’s Williams: “We Got It Wrong” “The Fed got it wrong when it predicted a drop in oil prices would be a big boon for the economy. It turned out the world had changed; the US has a lot of jobs connected to the oil industry.”

CHINA

PBOC Vows to Maintain Prudent Monetary Policy in Year Ahead

The People’s Bank of China said it would seek to keep the yuan’s exchange rates “basically stable” at reasonable and equilibrium level and work to further promote the internationalization of the currency, the monetary authority said Friday in a statement on its website. The PBOC also said it would continue to offer credit support to some key areas and lower social-financing costs with multiple tools, including the Pledged Supplemental Lending and Medium-term Lending facilities.

Intervention Is Worsening China’s Market Woes The country’s economy is open enough that the Communist Party doesn’t fully control it, but leaders can’t resist meddling, exacerbating market turbulence.

(…) Deteriorating fundamentals, not just speculation, are weighing on stocks and the currency. The economy is slowing and may undershoot the party’s informal 6.5% growth goal. The slowdown has been led by heavy industry and real estate, which are plagued by excess capacity and unsold property, in part the consequence of prior stimulus ordered up by the government that helped repel the global recession.

Economists at UBS estimate that if China’s growth slumped to 4% this year (versus their forecast 6.2%), it would slice half a percentage point off U.S. growth, 0.8 point off Europe’s and 2.6 points off Japan’s. This is why global stock and commodity prices have been so sensitive to Chinese developments.

At their Central Economic Work Conference in December, party leaders recognized some slowdown was inevitable when they prioritized reducing excess capacity. That conference also suggested that monetary and fiscal policy would be used not to prop up obsolete industries, but to stimulate demand more broadly and thereby ease the transition for workers laid off by downsizing companies into new jobs. It also indicated that bankruptcy would no longer be off limits for state-owned companies. People’s Daily Online, a party mouthpiece, quoted an “authoritative insider” as saying. “Turbulence cannot be entirely avoided, but it is worthwhile turbulence.”

Such rhetoric isn’t new. A year after becoming Communist Party chief in 2012, Xi Jinpingpledged to give markets a “decisive” role in the economy. But reality has been different. An overhaul of state-owned enterprises unveiled in September suggested bureaucrats would seek to merge companies suffering from excess capacity, rather than let such companies fail.

This may be less disruptive economically and politically in the short run because it would avoid loan defaults and minimize job cuts. But Haibin Zhu of J.P. Morgan notes that means debt will keeping mounting, productivity and growth will slide further, and rolling over loans to “zombie companies will crowd out the financing for other companies (especially from new sectors).” (…)

PBOC PUT? Li Signals No Major Stimulus While Past Suggests a Cut

(…) Policy makers wouldn’t seek strong stimulus or flood the economy with too much investment to boost demand, Beijing News cited Premier Li Keqiang as saying. The central government’s website republished that report Sunday, and the official Xinhua News Agency cited the comments on its online front page on Monday.

What’s not clear is whether that rules out near-term monetary stimulus, or just the extent of any upcoming move. (…)

“We are not going to use ‘strong stimulus’ or ‘flood irrigation’ investment to expand domestic demand,” Li was cited as saying in the Beijing News report. Instead, policies will seek to develop new business models and create new drivers for the economy, Li said according to the report. (…)

China Not Facing ‘Cataclysmic’ Economic Slow Down, Says Stiglitz

(…) “There’s always been a gap between what’s happening in the real economy and financial markets,” said Stiglitz. “What’s happening in China is a slowdown by all accounts. It’s a slow process of slowing down. But it’s not a cataclysmic” slowdown. (…)

Stiglitz said the government’s new focus on supply-side economic reforms could precipitate a deeper downturn if not accompanied by measures to boost demand.  (…)

“The focus just on supply measures doesn’t pick up what’s happening in the global economy,” said Stiglitz. “What’s going on is a shortfall in global demand. China has immersed itself in this global economy. There are domestic things that are affecting it and exacerbating it, but if they don’t have enough demand-side measures there could be a deeper downturn.” (…)

China will find it tough to achieve over 6.5 percent growth over 2016-2020: state adviser

China’s consumer inflation up just 1.6% Producer price inflation falls 5.9% year on year in December

December’s 1.6 per cent rise in consumer prices compares with 1.5 per cent in November. (…)

Yu Qiumei, an NBS statistician, attributed the slight rise in the consumer price index last month to colder weather in December, which boosted the price of fresh produce. Food prices rose by 2.7 per cent year on year in December. Ms Yu also said the weak PPI figure resulted from a fall in the price of oil, natural gas and refined petroleum products. (…)

Food prices rose 2.7% YoY while non-food prices rose 1.1%. Prices of consumer goods gained 1.5% and services advanced 2.1%.

SENTIMENT WATCH

• Worst start to market year in two decades

• U.S. Stocks Tumble, Cap Worst Five-Day Start to Year on Record

(Bespoke Investment)

• Outlook Dims After Bad Week for Stocks The Dow industrials tumbled more than 1,000 points this week, marking the worst first five days of any year, as volatility across the globe rattled investors.Traders said they are bracing for further big swings.

(…) The Dow Jones Industrial Average lost 1,078.58 points in the first week of 2016, down 6.2%. The broader S&P 500 was down 6%, also its worst five-day start to a year, and the Nasdaq Composite Index was down 7.3%. (…)

Corporate-earnings reports are widely expected to be underwhelming. The strong dollar is weighing on the competitiveness of U.S. exporters and the dollar value of companies’ overseas sales. Oil prices, which fell below $33 a barrel Friday in New York before closing at $33.16, continue to weaken. And China’s growth remains slow. (…)

• Global Bond Yields Approach Eight-Month Low on Demand for Haven

• 
  

  This Is The $3.5 Trillion “Neutron Bomb” That Keeps Kyle Bass Up At Night

• Breaking Markets – Sell Signals Flash 01-08-16

• 29 minutes that shook the world Miscalculations raise questions about competence of China leaders

• China’s 29 minutes of chaos: Stunned brokers and a race to sell

• Sprint: A Cautionary Tale for Junk Bonds Bonds’ price decline shows how quickly enthusiasm has cooled

Two years ago, the wireless carrier’s executives were celebrating the sale of $6.5 billion in junk-rated bonds—a record offering that underscored investors’ demand for riskier debt as the Federal Reserve kept interest rates low.

Those bonds sold at par—100 cents on the dollar—but are now trading near 75. Most of the losses occurred over the past two months.

The deep decline shows how quickly enthusiasm has cooled for debt rated double-B-plus or worse. Heavily indebted companies such as Sprint could face stingier investors and much higher costs when it comes time to refinance. About $120 billion of junk-rated debt comes due in 2016, a figure that grows to $430 billion in 2020, according to a report from Standard & Poor’s. (…)

The market passed a key test Thursday, asMicrosemi Corp. sold $450 million worth of debt in the first junk-bond offering of 2016. But the bonds, which mature in 2023 and will help fund an acquisition, were priced to yield 9.125%—showing how it has become more costly for low-rated companies to fund themselves. (…)

• Cash Is Back at Pensions, Funds U.S. public pension plans and mutual funds are sheltering more of their holdings in cash than they have in years, a sign of growing stress in financial markets.

(…) Large public retirement systems and open-end U.S. mutual funds have yanked nearly $200 billion from the market since mid-2014, according to a Wall Street Journal analysis of the most recent data available from Wilshire Trust Universe Comparison Service, Morningstar Inc. and the federal government.

That leaves pension funds with the highest cash levels as a percentage of assets since 2004. For mutual funds, the percentage of assets held in cash was the highest for the end of any quarter since at least 2007. (…)

Pension funds are wrestling with demographic challenges in addition to uncertain markets. Large retirement systems now have fewer active workers than retired or inactive members as Americans age, according to a Milliman Inc. report from November. That means pension officials need more money on hand to pay out benefits. (…)

Many mutual funds are facing rising requests for withdrawals from retiring Americans. About 10,000 baby boomers turn 65 every day. (…)

Still, not all asset managers are stashing away cash.

One of the nation’s largest retirement systems, the Teacher Retirement System of Texas, has just 0.2% of its assets in cash, lower than its target of 1%, according to public documents. Chief Investment Officer Britt Harris said in an email that after a decline in high-yield bonds last month, the buying opportunities were “the best we’ve seen over the past several years.”

Other portfolio managers view piles of cash as a potential drag on returns if held for too long. Elaine Stokes, who is part of a team that oversees $86.5 billion in assets at the Boston-based fund manager Loomis Sayles & Co., said she added to cash holdings in the early part of 2015, but began buying higher-quality commodity-related bonds in August.

She said she plans to buy more in the coming weeks. “It’s tough to hold cash for too long when you’re not getting paid anything on it,” Ms. Stokes said.

EARNINGS WATCH

Earnings for the fourth quarter also include data for the full year and tend to be accompanied by new management forecasts. This is the most important quarter for earnings and the most watched.

The facts from Factset:

In terms of earnings estimate revisions for the S&P 500, analysts lowered earnings estimates for Q4 2015 within average levels. Estimated EPS for the fourth quarter fell by 4.2% during the quarter. This percentage decline was larger than the trailing 5-year average (-3.8%) but smaller than the trailing 10-year average (-5.2%) for a quarter.

As a result of the downward revisions to earnings estimates, the estimated year-over-year earnings decline for Q4 2015 is –5.3% today, which is higher than the expected decline of -0.6% at the start of the quarter (September 30). If the Energy sector is excluded, the estimated earnings growth rate for the S&P 500 would jump to 0.0% from -5.3%.

As a result of downward revisions to sales estimates, the estimated sales decline for Q4 2015 is -3.3%, which is also higher than the estimated year-over-year sales decline of -1.1% at the start of the quarter. If the Energy sector is excluded, the estimated revenue growth rate for the S&P 500 would jump to 1.1% from -3.3%.

Thomson Reuters’ tally show EPS down 4.2% in Q4 with 6 of the 10 sectors recording declines..

So far, 21 S&P companies have reported their Q4 results and 76% have beaten by 4.7% combined. Twelve of these early reporters were in consumer-sensitive sectors and their beat rate was  67% with a 5.2% surprise factor.

TR calculates that 30 companies have positively pre-announced for Q4 vs 20 at the same time last year and 31 for all of Q3. Ninety-two companies negatively pre-announced, down from 100 last year and 94 in Q3.

Factset notes that the number of companies issuing negative EPS guidance in the Consumer Discretionary sector (25) is well above the 5-year average for the sector (15.9). The current record high is 22, which occurred in both Q1 2014 and Q2 2014. Thirteen of the 25 companies that have issued negative EPS guidance are in retail industries: Specialty Retail (8), Multiline Retail (3), and Internet & Catalog Retail (2). Five of the retail companies actually cited lower oil and gas prices as a negative impact on their businesses, specifically citing weaker economic conditions in regions reliant on the energy sector. The stronger U.S. dollar was cited by the highest number of companies (17 out of 25) in this sector as a negative contributor to earnings guidance for Q4. Fewer tourists and lower tourist spending are the perverse effect of a strong dollar on retailers.

Factset also note that, in total, the companies that have given EPS guidance for Q4 2015 have guided earnings 3.1% below the expectations of analysts on average. This percentage decline is much smaller than the 5-year average of -10.9%.

For all of 2015, negative guidance has been at the low end of the past 4-year experience.

In all, 2015 EPS are estimated at $117.16, down 1.4% YoY. This is per TR as Facset’s calculations show a 0.7% decline. Factset has done interesting and important dissections of the 2015 numbers:

USD impact: the dollar jumped 23% vs the euro, 15% vs the yen and 16% cs the CAD.

• For companies that generate more than 50% of sales inside the U.S., the estimated earnings growth rate is 4.7%. For companies that generate less than 50% of sales inside the U.S., the estimated earnings decline is -7.7%.
• The estimated sales decline for the S&P 500 for CY 2015 is -3.4%. For companies that generate more than 50% of sales inside the U.S., the estimated sales growth rate is 0.5%. For companies that generate less than 50% of sales inside the U.S., the estimated sales decline is -11.7%.

Oil impact: crude oil dropped 31% in 2015 (46% in Q4):

• If the Energy sector is excluded, the estimated earnings growth rate for the S&P 500 would jump to 6.2% from -0.7%, and the estimated revenue growth rate for the S&P 500 would jump to 1.5% from -3.4%.

USD + Oil: When excluding the Energy sector and also analyzing the index by revenue exposure, the combined negative impact of the stronger U.S. dollar and lower oil and gas prices can be seen more clearly.

• The estimated earnings growth rate for the S&P 500 (ex-Energy) for 2015 is 6.2%. For companies (ex-Energy) that generate more than 50% of sales inside the U.S., the estimated earnings growth rate is 10.2%. For companies (ex-Energy) that generate less than 50% of sales inside the U.S., the estimated earnings growth rate is 0.7%.
• The estimated sales growth rate for the S&P 500 (ex-Energy) for 2015 is 1.5%. For companies (ex- Energy) that generate more than 50% of sales inside the U.S., the estimated sales growth rate is 4.0%. For companies (ex-Energy) that generate less than 50% of sales inside the U.S., the estimated sales decline is -4.6%.

Facset published a preview of 2016 with these salient points:

• Industry analysts in aggregate are projecting record-level EPS in 2016 of $126.94. However, they have overestimated the final EPS for the index by 7.5% on average over the past 15 years.
• However, this 7.5% average includes three years in which there were substantial differences between the bottom-up EPS estimate at the start of the year and the final EPS number: 2001 (+36.9%), 2008 (+37.8%), and 2009 (+29.0%). If these three years are excluded, the average difference between the bottom-up EPS estimate one year prior to the end of that year and the final EPS number for that year has only been +0.7% (over the past 15 years).

• Industry analysts ($126.94) and market strategists ($126.88) had similar EPS estimates for 2016 on December 31. This marked the smallest spread between these EPS estimates at the start of a year in ten years. Over the past 10 years, the bottom-up EPS estimate has been 1.2% higher than the top down mean EPS estimate on average at the start of a year.
• Industry analysts project earnings growth of 7.5% for the index in 2016. Nine sectors are predicted to see earnings growth, led by the Consumer Discretionary sector at +14.8%. The Energy sector (-9.8%) is the only sector predicted to see a decline in earnings. However, five sectors are expected to report earnings growth of less than 3% for 2016.
• Industry analysts project revenue growth of 4.3% for the index in 2016. All ten sectors are predicted to see revenue growth, led by the Health Care sector.

The current correction is fairly similar to the August-September scare, also ignited by China-related fears. This is in spite of the fact that, according to Factset, companies in the S&P 500 in aggregate generate about 10% of sales from the Asia Pacific region, most of which comes from China and Japan. Amid all the turmoil, earnings matter.

The S&P 500 is selling at 16.4x trailing EPS of $117.16 (per TR) for 2015. The Rule of 20 P/E is now 18.3x, down 2 from its July peak, and at its lowest level since August 2013 after another China scare.

The next few weeks will be important as companies provide guidance for 2016 amid continued fears on China, oil and currently seemingly high inventories. For now, estimates are holding well with Q1 and Q2 EPS expected to rise 1.6% and 4.0% respectively. The serious problems continue to be concentrated in the commodity sensitive sectors.

The other risk to valuation is inflation which has risen from 1.5% to 2.0% during 2015 as per core CPI. Continued pressures on commodity prices and tame wage gains should contain inflation during the next 6 months. Recent PMI surveys suggest little inflation risk for the shorter term.

At 1919 on the S&P 500 Index, the upside to fair value (2110) is 10%. In my view, downside is to a Rule of 20 P/E of 16.3 or another 10% assuming continued investor angst and caution (Yielding to High Yield). It seems best to have a look at actual Q4 results and guidance before recommitting.

• Wall Street’s Big Ax Seen Reaping Best Year-End Profit Since ’06

GOOD CHART

Too bad GS did not chart U.S. equities as well but the point is well taken nonetheless. Averaging these 3 PMIs reflect the inter-relationship between these economic areas and their impact on global trends. Their combined economic momentum clearly matters to equity markets.

For reference, here are the relevant PMI charts:

China (48.2) is dragging the average down but the U.S. PMI was down 1.6 to 51.2 in December, more than offsetting the Eurozone gain of 0.4 to 53.2. The December surveys revealed weak orders in the U.S. and in China which suggest that the January readings could remain weak.

Davies: Global activity contradicts market pessimism

(…) So far, our regular monthly “nowcasts” of economic activity, which are updated in full here, have not picked up any decline in global growth, compared to the average recorded in recent quarters.

The overall growth rate in global activity is now running at roughly 3 per cent, which is actually slightly higher than than the growth rate recorded in 2015 Q3, the date of the previous global market scare. This conclusion is strengthened by the latest industrial production data, which show that the global IP growth rate has rebounded to about 2 per cent, compared to -2 per cent about a year ago.

The results for individual countries this month do not support widespread fears of a hard landing in China, but (surprisingly) they do identify a progressive slowdown in the US. This would become worrying for markets if it persisted into 2016 Q1, especially if it continued to be ignored by the Federal Reserve.

European growth remains robust (by its own tepid standards). In fact, the large gap in activity growth between the eurozone and the US is unusual, and is counter to the recent changes in monetary policy in the two blocs. This growth pattern needs to change in coming months if the Fed/ECB “divergence” in monetary policy is to take its expected course this year. (…)

But so far there is little sign of a recession starting, either in our “nowcasts”, or in hard data for industrial production and retail sales. (…)

That is not to say that downside risks have entirely disappeared. They have not. Global activity continues to grow at about half a percentage point below the long term trend, so spare capacity continues to rise. As has been the case throughout 2015, this applies particularly to the global industrial sector, which continues to grow two percentage points below trend. This is probably due to the impact of the oil shock on energy investment, and also to a significant drawdown in global inventories in the second half of 2015. Both of these effects may now have started to bottom out, which may explain the uptick in industrial data in recent months. (…)

Among the major economies, the gradual slowdown in US growth from 2.1 per cent last summer to only 1.5 per cent now is an aberration, and it runs counter to the Fed’s apparent determination to continue tightening monetary policy. The FOMC seems to view the recent slowdown as temporary, believing that it has been driven by inventory reductions and other short lived drags to the manufacturing sector from trade and energy investment.

The firm January employment report released on Friday supports the Fed’s optimistic view, and markets are unlikely to become too concerned about the US slowdown unless the labour market shows signs of weakness. That is certainly not happening yet. (…)

Finally, activity in the EMs has contradicted investor pessimism by actually improving a little in recent months. In aggregate, EM activity growth is now running at 4.5 per cent, compared to a low point of 3.5 per cent at the height of the China growth scare last September. Having said that, the growth rate in the EMs is still a full percentage point below the long term trend, so spare capacity continues to increase at a rapid rate, notably in the industrial sectors. Furthermore, downside risks from a rapid deleveraging of the credit bubble in the emerging world remain very worrying.

Among individual economies, the China “nowcast” continues to defy market fears of a hard landing, suggesting that growth has rebounded by a percentage point in recent months to about 7 per cent. Many observers continue to regard Chinese economic data as fictitious, and the official estimates of the absolute level of the growth rate are clearly dubious. However, we can be fairly confident that the direction of change in the growth rate has been in the right direction, improving noticeably since last August. Hard landing risk for the economy as a whole has therefore diminished. (…)

Ed Hyman: Halfway Through Current Expansion Cycle

Ed Hyman, Chairman of Evercore ISI, and rated the number one economist for 35 consecutive years by Institutional Investor, recently sat for Part One of a two part interview with Conseulo Mack of WealthTrack, which was aired a few days ago. Also participating in the interview was Dennis Stattman, the Portfolio Manager of Blackrock Global Allocation Fund. (…)

Uber to Drop Prices in 80 Cities in the U.S. and Canada Drivers will receive earning guarantees in affected cities. Los Angeles, San Francisco, and Houston will be among those seeing cuts.

Uber Technologies will drop prices in 80 North American cities starting on Saturday. The ride-hailing company hopes the move will increase demand in a seasonally slow month.

Uber said it will cut prices in Los Angeles and San Francisco by 10 percent, Houston by 20 percent, and Richmond, Virginia, by 15 percent. Prices in some cities, including New York and Chicago, will remain unchanged for now. Fare reductions will eventually be extended to 100 cities, the company said. “We believe in price cuts when demand slows down,” said Andrew Macdonald, a regional general manager for Uber. (…)

In January 2015, Uber dropped Seattle prices, but the demand didn’t increase enough to make up for the price cut. So Uber restored prices. “We’re a very experimental company; we don’t always know how a market is going to react,” Macdonald said. “Because of our commitment to roll back if it doesn’t work, by its nature, it’s somewhat temporary.”