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December jobs report: Fears of the US economy's demise are greatly exaggerated

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      By Andrew Szczurowski, CFA, Portfolio Manager, Global Income Group, Eaton Vance Management

      Boston - The situation today reminds me of three years ago when markets were declining in early 2016 and some were calling for an imminent recession.

      Before I get into the details of what was perhaps the strongest payroll report since the jobs recovery began in 2010, I have to get something off my chest. For the last two months, the decline in the stock market has scared investors into believing a recession is coming.

      It's true, at a certain point, that a declining stock market can erode confidence, and fears of a recession could eventually be a self-fulfilling prophecy. Yet, just because consumers in China don't want to buy a $1,150 iPhone (or 8,000 yuan), it does not mean a recession is imminent in the U.S.

      The bears also seem to get a lot more TV airtime and headlines when markets are falling. There are already calls that the Federal Reserve will actually cut interest rates this quarter! To me, this is a ridiculous notion, especially for a U.S. economy coming off its strongest year of growth this decade. Remember, pundits don't get any glory for having a consensus view. They can make outlandish statements predicting the end of the world, and when it doesn't happen, few remember. And it takes a few years for a recession to actually appear, the pundit can claim to be the first to read the tea leaves.

      Now, on to the details of the December jobs report:

      The report really was incredibly strong on all fronts. I can't find a single negative after combing through it. The U.S. economy added 312k jobs during the month of December, which is the second-highest reading over the last 30 months and well above the 200k average gains since the jobs recovery began in 2010. While I don't expect even 200k job gains to persist, it is only because we are already at an unemployment rate (3.9%) well below where economists originally projected full employment was. Eventually there just aren't that many people looking for a job, so you can't have robust job gains. There are still 7.1 million job openings and only 6.3 million people actively unemployed, meaning we don't have enough workers currently in the labor force to even fill the existing job openings. This leads to our next data point.

      Average hourly earnings continued to creep higher, rising 0.4% month over month, and 3.2% year over year. These were the strongest yearly wage gains since 2009, and I believe we should see continued increases with the tight labor market. There are also millions of low-wage workers across 21 different states who will benefit from minimum wage hikes that went into place on January 1.

      Even the labor force participation rate crept up from 62.9% to 63.1%, the highest reading since 2013. It seems higher wages might finally be pulling some workers back into the labor force.

      We also had a 58k upward revision to the last two months payroll reports, another sign of strength.

      Within sectors, an impressive 58k health care jobs were added in December, the strongest print in over three years. There is no way to stop the baby boomers from aging that I know of, so I would expect the health-care industry to continue to be a leader on the job front.

      Even the manufacturing sector added 32k jobs in December, which was the strongest print in 2018.

      Last but not least, the construction sector rebounded from a flat number in November to over 38k jobs added in December.

      Bottom line: While the U.S. economy will likely not grow above 3% like it did in 2018, the economic data which has come in recently is still showing it is growing above potential. There is a lot of area between 3% and negative growth that many pundits seem to be missing. Even if growth slows to the low-mid 2% range in 2019, that is a far cry from a recession. Right now the market is pricing in Fed rate cuts in 2019, but let's not forget the market has been wrong before and originally only predicted one hike for 2017 (we had three hikes) and 1.5 hikes for 2018 (we had four hikes). The Fed is data dependent and time will tell where the data goes, but this was a very encouraging employment report.