Economic Update 2-4

This morning, we received the ADP Private Employment Report for January. Private businesses added a relatively small number of jobs during the month, totaling only 22,000. This compares to a downwardly revised 37,000 net hires in December. The healthcare sector added 74,000 workers in January, while business services declined by 57,000. Under normal circumstances, we would also have the government-sponsored Bureau of Labor Statistics employment report on Friday to compare with the ADP numbers. However, due to the four-day partial government shutdown, the release has been delayed for now. Fortunately, as of last night, the shutdown has been reversed for most departments.

Late last week, we saw the third-quarter release for Nonfarm Productivity, which came in at +4.9%. This is a strong reading and compares favorably to the second-quarter level of 4.1%. In fact, this is the highest level since the third quarter of 2023. One of the key factors related to productivity is that Unit Labor Costs actually declined by 1.9% during the same third quarter of last year. This creates a positive direction for inflation this year.

We are also seeing continued improvement in the production and manufacturing sectors. The latest Factory Orders report showed a gain of 2.7% in November. We think this is a positive indication for future manufacturing growth and is even more significant given the 1.2% decline in October.

The only recent economic release of concern was the December PPI (Producer Price Index), which rose by 0.5%. This was significantly above the November level of 0.2%. On a year-over-year basis, the PPI increased by 3.0%. This remains somewhat above the Federal Reserve’s target rate of 2% and was a key factor in its decision to keep the Funds Rate unchanged last week.

Speaking of the Federal Reserve, President Trump has announced his choice for Chairman to eventually replace Jerome Powell. Kevin Warsh served on the Fed Board from 2006 to 2011 and was also an economic advisor to President George W. Bush. More recently, he has remained active on Wall Street and in educational roles. The initial reaction to his nomination has been positive.

Fortunately, the government shutdown lasted only four days and had very little impact on the economy. While some negotiations are still ongoing, primarily regarding funding for the Department of Homeland Security, the overall effect has been minimal. We remain positive about the direction of the economy and expect the financial markets to benefit from this outlook. This applies to both equity and fixed-income holdings.