Wednesday was another crosscurrent-filled day that saw massive moves in rates, foreign exchange and oil as equities seemed like they were at a standstill, with the S&P closing up just a couple points. On top of all the volatility in the different asset classes, we have the inauguration coming up on Friday that seems to be keeping many investors on the sidelines as overall equity volume has been fairly low for the week. So while the market churns itself until the inauguration, we can stay focused on the data that will drive the market after Friday.
Wednesday gave us some solid economic data points dealing with two major themes often discussed in this space: employment and business activity.
First up is the December industrial production (IP) report, which registered a very solid 0.8% move up, bringing the index to 104.6 (100 is the base, set in 2012). The gain was mostly driven by a large jump in utilities, which posted their largest gain since December 1989.
Within the IP data, after the large gain in utilities, manufacturing had a strong performance that was driven by growth in motor vehicles, computer/electronic products and primary metals. Energy-related businesses also saw an uptick in production, as the rebound in energy prices has spurred cap-ex spending in that beleaguered sector.
While the above chart may not seem very exciting, when you look at in the context of how much the services sector of the economy has grown, for IP to still be making a comeback shows how strong total demand is in our economy. It really shows how dynamic the American economy is, to be able to support a large industrial base and an even larger services sector. Right now, IP data is moving back to levels last seen in the boom time running up to the financial crisis. And given that we have an administration coming into power that has a stated goal of increasing our manufacturing activity, we could be looking at some very robust data in upcoming months.
The IP data meshes well with the second piece of data from Wednesday that I wanted to look at, the Beige Book. The Beige Book is a somewhat underrated economic report that has gained some popularity lately, but is still underutilized in my opinion. The book is a report put together by the 12 federal reserve bank districts who summarize their regional economies and also includes data collected up to Jan. 9, so it does give us an early glance at 2017 activity.
What really stood out in this report was that nearly all of the regions reported a tight labor market. It seems like yesterday when people were fretting about not enough job creation in every nonfarm payroll report, and now the narrative has shifted to tight labor markets. In any case, the Boston, Kansas City, Dallas and San Francisco regions actually reported labor shortages in low and high skill positions. None of this is surprising, given what we have seen in the persistently low weekly claims data which is why we keep such a keen focus on that data series.
In a rather descriptive statement about the labor shortage, a respondent in the Chicago region "reported such difficulty finding high-skilled workers that they had traded in expensive, sophisticated machinery for cheaper, less sophisticated equipment that was easier to operate." This touches on a national issue of having not just a labor shortage, but also a skills shortage, which is rather troubling given the vast resources of our country. All that said, the numerous references in the BB to tight labor markets and employers raising wages to be competitive speaks volumes about the health of our labor market and economy.
Considering that the BB tends to use language to temper any type of market reaction from the data presented in it, this was a very economically bullish report. The majority of regions were optimistic about their present and future situations, while gains in manufacturing and services sectors were reported across the country. This is exactly what we want to be seeing as 2017 gets underway. Not only is increased consumption being driven by the strengthening labor market we have right now, but we could be looking at significant wage gains in the future, as employers are forced to compete even more for labor.
Bottom line here is that wages are rising and that leads to greater consumption, which is what drives our economy and ultimately the market. So, let the market crosscurrents do what they want for now, because in the end, we know that the rising tide of strong economic data will straighten everything out.