The U.S. economy added 273,000 jobs in February, bringing the unemployment rate to 3.5%. This was on the heels of an already stellar January report of 225,000 jobs, which was revised upward to 273,000. Many of the recently added jobs came in the manufacturing sector, which has been a source of weakness since trade negotiations began with China in 2018. The February manufacturing PMI came in at 50.9, the second month in expansion territory, after contracting for the previous five months. Additionally, the U.S. trade balance narrowed by $3.6B to $45.3B, bringing the trade gap with China to its lowest level since 2011.
We wish we could end this report with these healthy economic statistics. However, the coronavirus disease (COVID-19) is currently sweeping across the world with no signs of slowing (outside of China). It has brought world trade to a virtual standstill and is likely to disrupt global supply chains significantly. The U.S. has made it through many challenges before, and this time will be no different. Still unknown is the extent of the economic damage and what the path of recovery will take. Employers have remarked throughout this expansion at how difficult it is to find qualified workers. We will be watching initial jobless claims closely to see if companies retain workers through any period of weakness.
Financial markets have responded largely as one would expect – quickly and severely. The Federal Reserve cut the discount rate by 50 bps at an emergency meeting on March 3rd, and markets are pricing in another rate cut at the upcoming meeting. The U.S. Treasury curve has shifted down dramatically across all tenors. The 10-year Treasury, a bellwether of financial market conditions, is now around .4%, an all-time low going back to 1861. The S&P 500 Index is off over 18% from all-time highs, with economically sensitive sectors taking the largest hit. Traditional defensive consumer staples, health care, and utility sectors, along with mega-cap technology company shares, have fared better as investors seek relative safety. Commodity spot prices, outside of gold, are all down significantly year to date. Oil markets have been the hardest hit with prices now off over 45% after Saudi Arabia said it would not support prices with production cuts. While we would not have wished for the virus, lower gas prices and interest rates could provide a cushion for consumers and businesses to weather any ensuing economic weakness.
Bottom Line: The U.S. entered the coronavirus crisis with strong employment, rising wages, healthy consumer balance sheets, and expanding growth potential. We hear rumors of a targeted U.S. fiscal response to help businesses and possibly consumers deal with the impacts of the virus. Comments of further action from Federal Reserve officials on Friday reassured investors and led to a welcomed stock market recovery. Our hope is that fiscal and monetary support, along with governmental health agencies around the world successfully reducing the spread of the virus, will soon provide a clearer path to recovery.