U.S. non-manufacturing misses, but still strong. ISM’s non-manufacturing index registered a five-month low of 57.6 for December, missing consensus forecasts for 58.5. Much of the decline in the overall reading can be attributed to a drop in inventories and employment. However, an uptick in new orders, to 62.7, shows that future activity in the sector should remain robust, overall levels of business activity remain firmly in expansionary territory (>50.0), and respondents commented that the business environment is still strong.
Small business optimism elevated but qualified workers scarce. The NFIB Small Business Optimism Index was slightly lower in December but remains near cycle highs at 104.4. The decline from November’s 104.8 reading was driven by falling expectations for both real sales growth and deteriorating business conditions over the next six months. At the same time, reports of higher worker compensation remained near record levels as employers struggle to find qualified workers to help boost inventories. Overall, the data suggest optimism among small business owners is very high but finding the right people to help drive sales growth is getting more and more difficult.
Higher yields in 2019. The environment for fixed income investors has been challenging over the last several years, and recently, the struggle for yield has only intensified. However, we see a disconnect between current rates and this year’s prospects for economic growth and inflation.