I have been waiting for some final numbers to finish the 2018 year-in-review series. However, due to the Government Shutdown (remember that still?) many of the economic releases have been postponed for a few weeks, most notably Q4 GDP numbers. So I’ll do my best to show the data we do have.

The employment situation continued to improve in 2018 (Exhibit 1).  The U.S. economy added 2.6 million new jobs (220,000 a month) and that metric has re-accelerated.  Total employment increased 1.8% which was faster than the steady 0.7% population growth. In fact, we added more jobs than people last year! The unemployment rate ended the year at 3.9%, well within the range of what Fed currently considers full employment.  Likewise, U-6 rate dropped to 7.6% – it’s a broader measure defined as “Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons”. So the job market is quite solid!

Exhibit 1 – Employment

We do not have full year GDP numbers, but as of third quarter the economy was growing at a respectable 2.5% rate (Exhibit 2).  Inflation as measured by CPI dipped slightly to 1.9%, but still around the 2% Fed target. Notably, wages continued to grow strongly at 3.2%. After taking a break in 2017, U.S. dollar appreciated by 5%.

Exhibit 2 – Growth & Inflation

Public debt increased further 5% to $21.5 trillion (Exhibit 3), it also increased on a % of GDP basis. Budget deficit went up by 17% to $779bn or 3.8% of GDP. That’s the largest deficit since 2012.

Tax cuts are great… until the bill comes due… but we don’t need to talk about all that…

Federal Reserve’s balance sheet saw its first major reduction, dropping by $345 billion to a mere $3.9 trillion. Of course, the Fed blinked after the market’s December hissy fit and indicated that it might slow down the balance sheet normalization process. It did, however, shave off further $41 billion through January 30th.

Exhibit 3 – Debt & Deficit

S&P 500 earnings grew by astonishing 25%, mostly thanks to the corporate tax rate reduction (Exhibit 4).  P/E multiple, however, offset all of the earnings growth by dropping 25% to 16.1x.  The net result of all this was a drop of 6.2% (excl. dividends) for the index. 10-Year Treasury rate increased by 29 basis points during 2018 to 2.69%, and the average rate throughout the year was actually 58 basis points higher than in 2017. 30-Year Fixed Mortgage rates increased by 56 basis points ending the year at 4.55%. This last development is driving some weakness in the housing market.

Exhibit 4 – Earnings & Rates

Note: Q4:2018 S&P 500 earnings are consensus estimates as of 1/31/2019

Finally, the housing sector is still growing, albeit at a decelerating pace  (Exhibit 5).  Nationwide, both units and prices stayed positive. U.S. auto sales eked out a positive change to 17.7 million a year. This defies (or at least postpones) calls of “peak auto” by many industry observers. In the later part of the year we did see many auto companies announce layoff, restructurings and further shift from sedans to trucks/SUVs.

Exhibit 5 – Housing & Autos