FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- The U.S. economy continued to churn out jobs at a solid pace. Non-farm employment grew by 1.6% over 2019, marking only a slight deceleration from the 1.7% recorded in 2018.
- The services side of the economy also continued to fare better than its manufacturing counterpart. The ISM Non-Manufacturing Index edged 1.1 points higher, to its highest level in seven months.
- The U.S. trade deficit dipped to its lowest level in three years as tariffs, among other factors, shifted trade flows.
Services Keep the Economic Engine Humming Along
The highly anticipated employment data revealed that the U.S. economy added jobs for the 10th consecutive year, despite a slower pace of hiring. Non-farm payrolls rose by 145k in December, a mild deceleration from November’s 256k. This gain was largely concentrated in the services sector, with job increases in retail trade (+41k), health care (+28k), leisure and hospitality (+40k) and construction (+20k). Manufacturing employment however was down by 12k. The unemployment rate continues to hover at its 50-year low of 3.5%, while year-on-year wage gains decelerated to 2.9% from 3.1% in November.
Despite the overall positive tenor of the report, there are warning signs on the horizon as the U.S. population in 2019 grew at the slowest pace in about a century. Though the economic impact of this development may be slow to materialize, it does have implications for the availability of workers, taxpayers and consumers to fuel future growth.
The employment numbers suggest that U.S. service sector activity has been resilient. This was echoed in sentiment, where the Institute for Supply Management’s Non-Manufacturing Index diverged from its manufacturing counterpart in December. The index edged 1.1 points higher to 55.0 – its highest level in seven months. Healthy consumer fundamentals and less exposure to trade tensions helped the services sector, which accounts for a larger proportion of the U.S. economy, remain in expansionary territory throughout 2019. This is in contrast to the manufacturing sector, where activity has been contracting for the past five months and in December slumped to its lowest level since June 2009 (Chart 1).
Geopolitical developments continued to influence market movements this week as Iran retaliated for the death of a top military leader, with an air strike against U.S. forces. Markets reacted violently to this development, with stock futures tumbling. However, by end-of-week stocks pared losses, and oil and gold retreated from earlier highs.
On the trade front, U.S. tariffs contributed to a slide in imports (down 1% month-on-month) in November while exports picked up (up 0.7% m/m), pushing the trade deficit to its lowest level since October 2016 (Chart 2). The goods and services deficit decreased by 8.2% to $43.1bn in November, down from $46.9bn in the previous month. Of note, the country’s merchandise trade deficit with China fell for a fourth consecutive month reflecting tensions between the two countries. A preliminary trade deal however, expected to be signed next week, should bring improvements in bilateral trade relations. Despite this, the impact of potential tariffs on goods from other trading partners such as the EU and Latin America cannot be discounted, and may result in further data distortions in the months ahead.
Overall, the U.S. economy has managed to exit a tumultuous 2019 relatively better-off than most other advanced economies. While U.S. growth is expected to slow in 2020 as detailed in our latest forecast, it will still lead the G7 pack, notwithstanding continued trade policy uncertainty.
Shernette McLeod, Economist | 416-415-0413
This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.