This Week In The Economy: Middling US Jobs Report, US Piles On Iran Sanctions, Phase US-China Deal, Brexit Bill Just The Beginning

Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers.

Welcome to the first TWITE of 2020. Your author took an some time off to recharge, and is back raring to go. Onwards…

U.S. Economy Adds Less Jobs Than Expected, Manufacturing Sector Troubles Continue

Total non-farm employment in the United States rose by 145,000 in December, less than the +160,000 expected, while the unemployment rate was unchanged at 3.5%, the U.S. Bureau of Labor Statistics reported. Notable job gains occurred in retail trade (not surprising giving the holiday shopping season) and health care, while mining lost jobs.

It is worth pointing out that the BLS’ U-6 measure of unemployment, which also counts marginally attached workers as well those working part-time for economic reasons, remains high at 6.7% — although it dipped from 6.9% in November. Many economists view U-6 as a more accurate measure of unemployment in the United States.

Also of note, employment growth for October was revised down by 4,000 from +156,000 to +152,000, and the change for November was revised down by 10,000 from +266,000 to +256,000. With these revisions, employment gains in October and November combined were 14,000 lower than previously reported.

The labor force participation rate was unchanged at 63.2% in December, while average hourly earnings rose 2.9% compared to December 2018 — slower than the 3% pace considered to be “strong” wage growth.

The manufacturing sector — hit by the double whammy of slowing global demand and protectionist trade policies — had a 2018 to forget. U.S. goods producers shed 12,000 jobs last month, while for 2019 as while they only added 46,000 workers — compared to 264,000 jobs created in 2018. Mining employment declined by 8,000 in December. In 2019, employment in mining declined by 24,000, after rising by 63,000 in 2018.

US Government Unveils Additional Sanctions On Iran Officials and Steel Exports

While there might be a de-escalation in military tensions between Iran and the United States, the Trump administration this week ramped up its pressure on the government in Tehran — unveiling a new set of sanctions targeting government officials and the country’s prized metals industry.

According to the U.S. Treasury, the administration is sanctioning eight senior Iranian officials, as well as the largest steel, aluminum, copper, and iron manufacturers in Iran, “who collectively generate billions of dollars annually.”

The designation also targets three China- and Seychelles-based entities; and a vessel involved in the purchase, sale, and transfer of Iranian metals products, as well as in the provision of critical metals production components to Iranian metal producers.

President Trump is also signing an executive order to cut off additional revenue that Iran could use to fund its nuclear program and missile development. It authorizes the Treasury impose sanctions on anyone operating in or transacting with additional sectors of the Iranian economy, including construction, mining, manufacturing, and textiles.

Meanwhile, The U.S. House of Representatives this week voted — mostly along party lines — 224–194 for a non-binding resolution to limit further military action against Iran without congressional approval. Democrats are incensed that Trump didn’t consult with congressional leaders before ordering the assassination of top Iranian general Qasem Solmeini.

The measure now heads to the Senate, where several more Republicans are expected to split with Trump in a vote expected as early as next week. Four Republicans will need to break ranks and side with the Democrats for the resolution to pass the Senate.

China-US To Sign ‘Phase One’ Trade Agreement Next Week

Most of the manufacturing sector’s woes can be traced back to the year and a half-long trade war between China and the United States. A de-escalation in tensions now appears to be around the corner, with senior officials from Beijing expected in Washington D.C. next week to sign the ‘phase one’ trade deal both sides reached in December 2019.

The deal covers numerous areas of contention that the U.S. had with China, including intellectual property rights, forced technology transfer, agricultural purchases, financial services, and its foreign exchange regime.

China has confirmed its delegation will be led by Vice-Premier Liu He to sign the agreement on January 15. It is not clear when talks for phase two will begin, with President Trump indicating he might wait until after the November presidential elections — his gamble being that if re-elected, he’ll have a stronger hand for the next round of negotiations.

Senior Fed Official Bullish On Economic Outlook, But US CEOs More Cautious

“The U.S. economy begins the year 2020 in a good place.” Those were the words of the Federal Reserve Board Vice Chair Richard Clarida this week, during a speech in New York.

He described the interest rate cuts by the Fed last year as “well timed” and helping to keep the outlook for the U.S. economy on track. “I believe that monetary policy is in a good place and should continue to support sustained growth, a strong labor market, and inflation running close to our symmetric 2% objective,” he said.

“As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy likely will remain appropriate,” Clarida added.

However, a report released this week by the Conference Board shows Clarida’s bullish sentiment isn’t widely shared. The group’s Measure of CEO Confidence came in at 43 for the fourth quarter of 2019, an improvement from 34 in Q3 but still in negative territory. A reading above 50 is considered positive.

“While the abatement of trade and tariff issues has helped improved confidence, CEOs still remain apprehensive about global growth prospects in early 2020.” — Conference Board

Business leaders are less pessimistic about current economic conditions, with 15% saying conditions are better compared to six months ago, up from just 8% in Q3. Now, 52% say conditions are worse, down from 73% in Q3. Looking ahead, expectations regarding the economic outlook are also less pessimistic. Now, 12% anticipate economic conditions will improve over the next six months, up from just 4% in the third quarter. Meanwhile, 44% expect economic conditions will worsen, down from 67% last quarter.

UK Parliament Approves Brexit Bill, Finally

We might finally be seeing the light at the end of the tunnel for the dumpster fire that is Brexit, with the UK Parliament this week rubber-stamping the deal negotiated by the Prime Minister Boris Johnson’s government in November 2019.

The 330-231 vote brings an end to three years of political chaos and uncertainty following the 2016 referendum. The European Parliament in Brussels is expected to green-light the deal, paving the way for the UK to formally leave the EU on January 31st.

However, this is NOT the final step in the Brexit process. Following its departure, the UK will enter a transition period until 31 December 2020 during which it will try to negotiate a trade agreement with the EU.

Johnson has declared a preference for a free trade agreement similar to the recently-concluded deal between Canada and the EU, warning that the UK is willing to walk away from the table if an agreement isn’t reached by the end of the year.

The question remains, however, of how realistic it is to start and conclude trade negotiations for the entirety of the EU-UK relationship (covering goods and services, plus national security cooperation) in just 11 months.

“Without an extension of the transition period beyond 2020, you cannot expect to agree on every single aspect of our new partnership. We will have to prioritise,” EU Commission President Ursula von der Leyen warned in a speech this week.

Of particular contention will be how much regulations in the UK track with or diverge from EU law

“The European Union’s objectives in the negotiation are clear. We will work for solutions that uphold the integrity of the EU, its single market and its Customs Union. There can be no compromise on this,” she said. “The more divergence there is, the more distant the partnership has to be,”

World Bank Projecting Slower Growth In Advanced Economies

The World Bank downgraded its outlook for economic growth in advanced economies, warning in its January Global Economic Prospects report that “downward risks persist.”

The World Bank is predicting just 1.4% growth among advanced economies as a group in 2020 — “ in part due to continued softness in manufacturing” — compared to 4.1% projected growth in emerging market and developing economies.

“U.S. growth is forecast to slow to 1.8% this year, reflecting the negative impact of earlier tariff increases and elevated uncertainty. Euro Area growth is projected to slip to a downwardly-revised 1% in 2020 amid weak industrial activity,” the World Bank said.

The downside risks cited by the report include a re-escalation of trade tensions and trade policy uncertainty, a sharper-than expected downturn in major economies, and financial turmoil in emerging market and developing economies.