Perspectives On a Volatile Week Weekly Update – January 12, 2015

Image courtesy of FreeDigitalPhotos.net/Stuart Miles

Image courtesy of
FreeDigitalPhotos.net/Stuart Miles

Stocks ended the first full week of 2015 in the red, pulled in different directions by a mixed December jobs report, fresh oil declines, and renewed terrorist fears in the West. For the week, the S&P 500 lost 0.65%, the Dow fell 0.54%, and the Nasdaq slid 0.48%.1

The December employment report was released on Friday and it has both good news and not-so-good news. Preliminary data shows that the economy added 252,000 jobs last month, bringing the total new jobs for 2014 to 2.95 million. The headline unemployment rate dropped to 5.6%.2

While the jobs growth is good news for continued economic growth in 2015, investors are worried about a lack of wage growth, which could put a damper on consumer spending. This prolonged absence of wage growth is perplexing. As the number of available jobs rises and the pool of unemployed Americans shrink, Econ 101 teaches us that employers should be forced to raise wages to attract and keep qualified employees. However, this doesn’t seem to be happening. Inflation-adjusted hourly pay actually fell 0.2% between November and December and ended 2014 just 1.7% higher.3

Why is wage growth so slow? One theory developed by economists at the Federal Reserve Bank of San Francisco posits that “downward wage rigidity,” the reluctance of employers to reduce wages in the recession, has created a backlog of pay cuts that’s causing many employers to hold back on raises. Until the labor market tightens much more, stagnant wages are likely to remain.4

So, in the overall calculus of the economy, more new jobs = good, but frozen wages = not so good.

Oil prices continued to plunge last week. Benchmark Brent crude dropped below $49 a barrel, but closed above $50 on news that the number of U.S. drilling rigs had dropped significantly.5 The fallout from cheap oil for some North American oil producers, many of which rely heavily on debt to fund projects, is already being felt; Shell announced layoffs of up to 10% of the workforce of an Alberta tar sands project.6 A small Texas oil producer filed for bankruptcy protection last week after being turned down for financing by a lender.7 Given how reliant on credit many oil and gas producers are, more bankruptcies may follow in the weeks and months ahead. If small producers are squeezed out of the market, it could allow oil prices to climb back up to the levels preferred by OPEC nations.

On Wednesday, Charlie Hebdo, a satirical weekly newspaper in Paris, was attacked by three gunmen who killed 12 employees.8 Gunmen later attacked a kosher grocery, killing four others.9 Our thoughts are with the victims’ families and the Paris community as they grapple with the aftermath of these horrific attacks.

The week ahead is heavy with economic data, including reports on retail sales for December and business inventory spending. A significant number of earnings reports are also due to be released, giving investors something other than macro-economic headlines to consider.

ECONOMIC CALENDAR:

 

Tuesday: JOLTS, Treasury Budget

Wednesday: Retail Sales, Import and Export Prices, Business Inventories, EIA Petroleum Status Report, Beige Book

Thursday: Jobless Claims, PPI-FD, Empire State Mfg. Survey, Philadelphia Fed Survey

Friday: Consumer Price Index, Industrial Production, Consumer Sentiment, Treasury International Capital

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HEADLINES:

Automakers end 2014 with gains. Falling oil prices contributed to solid sales numbers for U.S. automakers, helping each company close out December with better results than December 2013. Trucks seem to be back in vogue as consumers take advantage of lower gas prices to buy less fuel-efficient vehicles.10

U.S. trade imbalance falls to 11-month low. The bill for U.S. imports fell in November as lower oil prices reduced transportation costs. The report caused economists to revise their estimates of fourth-quarter GDP growth to as much as 3.5%.11

Federal Reserve FOMC minutes highlight differences in opinion. The official minutes of the Federal Reserve Open Market Committee meeting in December showed that though the Fed doesn’t plan to raise interest rates until at least mid-April 2015, some committee members feel the central bank shouldn’t commit itself to any particular timeline.12

Retailers shutting stores due to demographic and competitive pressure. Retailers like RadioShack, J.C. Penney, Macy’s, and Wet Seal are laying off workers and closing stores. The companies cite increased competition from online retailers, demographic shifts away from suburbs, and changing consumer preferences as reasons for the closures.13

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