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December Macro Update: Employment Growth Is Decelerating
By Urban Carmel

* December 2, 2016

Summary: The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

That said, there are some signs of weakness creeping into the data. Most importantly, employment growth is decelerating, from over 2% last year to 1.6% now. Housing starts and permits have flattened over the past year. There is nothing alarming in any of this but it is noteworthy that expansions weaken before they end, and these are signs of some weakening that bear monitoring closely.

Overall, the main positives from the recent data are in employment, consumption growth and housing:

• Monthly employment gains have averaged 188,000 during the past year, with annual growth of 1.6% yoy. Full-time employment is leading.
• Recent compensation growth is near the highest in 7 years: 2.5% yoy in November.
• Most measures of demand show 3-4% nominal growth. Real personal consumption growth in October was 2.8%. Retail sales reached a new all-time high in October, growing 2.6% yoy.
• Housing sales are near a 9 year high. Starts made a new 9 year high in October.
• The core inflation rate has remained near 2% since November 2015.

The main negatives are concentrated in the manufacturing sector (which accounts for less than 10% of employment):

• Core durable goods growth rose 1.0% yoy in October. It was weak during the winter of 2015 and it has not rebounded since.
• Industrial production has also been weak, falling -1.0% yoy due to weakness in mining (oil and coal). The manufacturing component grew +0.1% yoy.

Prior macro posts from the past year are here.

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In summary, the major macro data so far suggest positive, but slow, growth. This is consistent with corporate sales growth. SPX sales growth the past year has been positive but only about 2% (nominal).

With valuations now well above average, the current pace of growth is likely to be the limiting factor for equity appreciation. This is important, as the consensus expects earnings to grow about 1% in 2016 (chart from Yardeni).



Modest growth should not be a surprise. This is the classic pattern in the years following a financial crisis like the one experienced in 2008-09. Unlike typical cyclical expansions, consumers have reduced their relative debt, and this has constrained their consumption.

There has been a tendency for macro data to underperform expectations in the first half of the year and beat expectations in the second half. For the first time since 2009, macro expectations were below zero to start the year and have been positive most of the second half of the year.



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