Mixed Signals: U.S. Jobs Strong, Sales Weak

The U.S. economy is showing mixed signals as job growth far surpassed expectations in December, yet more companies look ready to scale back amidst weak demand.  In December, non-farm payrolls rose 292,000, versus expectations of an increase by 200,000, according to the Bureau of Labor Statistics. That sharp increase in jobs left the unemployment rate unchanged at 5 percent.

The U.S. economy is showing mixed signals as job growth far surpassed expectations in December, yet more companies look ready to scale back amidst weak demand.  In December, non-farm payrolls rose 292,000, versus expectations of an increase by 200,000, according to the Bureau of Labor Statistics. That sharp increase in jobs left the unemployment rate unchanged at 5 percent.

“Employment gains occurred in several industries, led by professional and business services, construction, health care, and food services and drinking places,” the BLS said in a statement, adding that mining continued to see a decline.

Other recent studies indicated strength in the labor market. On Thursday, studies by Gallup, the Department of Labor, and Challenger, Gray & Christmas all pointed to improvements in the labor market, with fewer unemployment claims, more good jobs, and fewer job cuts than before.

Lacking Sales

The strength in the job market has not translated into stronger sales, with U.S. companies seeing weak revenues and many publicly listed companies seeing sales declines on a year-over-year basis.  With weak demand, inventories and wholesale trade are weakening, according to the Census Bureau. Total wholesale inventories fell 0.3 percent in November, three times worse than expectations, while total sales fell 1 percent.

The inventory-to-sales ratio, which is usually a leading indicator of future sales from wholesalers and manufactures, continues to climb to its highest point since the Global Financial Crisis, at 1.32. That represents a 7.3 percent increase on a year-over-year basis, as 2015 (excluding unpublished December statistics) proved the worst year since 2009 for wholesalers.

Economists closely monitor the inventory-to-sales ratio, as it is an indirect proxy of exactly how quickly inventory is sold and how much demand for goods exists in the economy. Higher ratios suggest there is either too much inventory on hand or lower sales, or both.

Paradigm Shift

While a fall in sales and weak inventories figures were expected, many analysts caution that this is the beginning of a fundamental shift in the U.S. economy in which savings and growing purchasing power do not translate into more spending.

For instance, several economic models predicted that cheaper gas and energy costs would increase consumer spending. Although gas has reached $2 per gallon in many parts of the country, Americans show no inclination of a radical acceleration in their spending.

Some economists attribute this to greater income inequality leading to fewer dollars in hand to spend on goods and services for the majority of Americans, as well as growing job insecurity leading many to postpone large purchases and scale back on everyday items to increase their savings rate. U.S. consumer debt levels have fallen steadily since peaking before 2008.