Soft Jobs Market Clouds Outlook U.S. companies slowed the pace of hiring in April while paying workers only slightly more, signaling a softening of the labor market that knocked down economists’ expectations for a Federal Reserve interest rate increase next month.
Nonfarm payrolls rose by a seasonally adjusted 160,000 in April, the weakest gain since September, the Labor Department said Friday. Both March and February’s job gains were revised downward, resulting in 19,000 fewer jobs added than had been previously reported. The unemployment rate held steady at 5%, but the share of Americans participating in the labor force dipped after earlier signs of stabilization.
Employment gains have now averaged 192,000 a month so far this year, down from 2015’s average of 229,000 jobs added monthly. (…)
Average hourly earnings of private-sector workers advanced 0.3% in April and are up 2.5% from a year earlier. The gain is still below pre-recession raises, but it is among the best increases of the expansion. The average workweek rose by 0.1 hour to 34.5 hours in April. The total number of hours worked increased better than 2% from a year earlier. (…)
The share of Americans participating in the labor force fell to 62.8% in April from 63.0% in March. The measure bottomed out at 62.4% in September—the lowest level since 1977—but had crept up in recent months. (…)
Professional and business services added 65,000 jobs in April and health care and social assistance grew by 38,200 jobs. Those categories tend to include full-time jobs.
Leisure and hospitality, a field that includes lower-paid, part-time restaurant workers, posted the smallest increase in a year, adding 22,000 jobs in April. The retail sector cut 3,100 jobs last month after adding an average of 50,000 the prior three months. Some economists noted that an earlier Easter may have distorted retail figures.
The construction sector grew by just 1,000 last month, a sharp slowdown from 41,000 added in March. The prior month’s gain likely reflected milder-than-normal weather in much of the country.
Government employment declined by 11,000 last month, mainly due to cut backs at the U.S. Postal Service.
Manufacturers added 4,000 jobs during April, but the sector has still shed 20,000 jobs in the past year.
Employment in mining and logging, a sector that includes the coal, oil and gas industry, fell by 8,000 in April. The sector lost 136,000 jobs from a year earlier. (…)
Some more stuff on employment:
- The weakness was broad based.
- The Household survey showed –316k fewer jobs, the worst showing since Oct. 2013.
- Full-time jobs: –253k in April.
(…) The increase in employment was exactly in line with Markit’s PMI surveys*, which also provide insight as to why hiring has waned. Survey participants report that hiring has slowed in response to disappointing order book inflows and heightened uncertainty about the economic and political outlooks. In the manufacturing sector, the strength of the dollar has compounded these worries. With these concerns showing no signs of abating in April, and election uncertainty intensifying, it would be surprising if the hiring trend didn’t slow further in coming months.
The PMI surveys had also indicated that the economy slowed sharply in the first quarter, with only a very modest upturn in April, casting doubt on expectations that the first quarter slowdown will prove temporary.
(…) For a Fed that is mulling whether it should raise rates in June, the jobs report hardly counts as a deal breaker—especially with markets quiescent and the S&P 500 within 3% of its recent high. But neither is it going to instill a great deal of urgency to increase rates again.
The argument for putting off the Fed’s rate-increase plans to its late July meeting, when it should have a fairly good idea if the economy picked up speed in the second quarter, is getting stronger. An added impetus for caution: a week after the Fed’s June meeting the U.K. will hold a referendum on whether or not to stay in the European Union.
Still, investors ought not to think June is off the table just yet. If the May employment report shows the April jobs slowdown was an outlier, and markets haven’t worked themselves into a tizzy over “Brexit,” a rate increase could be a go.
The odds are tilted more in favor of the Fed holding off. But that is no sure bet.
Rising Rents Squeeze the Middle Class Rising rents in cities across the nation are hurting the poorest residents, but those who are higher on the income ladder might be bearing the brunt of the pain.
A study set to be released on Monday shows that a far bigger proportion of middle-class renters in New York were squeezed by rising rents than were the lowest-income renters.
The study by New York University’s Furman Center examined rapidly gentrifying neighborhoods such as Brooklyn’s Williamsburg section and Harlem, where rents jumped 80% and 53%, respectively, between 1990 and 2014. While the share of the poorest families struggling to afford rent in those sections increased by 7.6 percentage points from 2000 to 2014, the share of middle-income households struggling to afford rent jumped 18 percentage points.
One main reason for the disconnect, the authors suggest, is that many of the poorest residents live in public housing or receive rental subsidies for which middle-income households don’t qualify. They might also be more likely to leave neighborhoods altogether when rents rise. (…)
Gentrification has accelerated across the U.S. over the past decade. The share of less-affluent neighborhoods seeing large rent gains shot up to 25% from 2000 to 2014 from 10% between 1990 and 2000, according to a separate Furman Center study. (…)
The report looked at three groups of renters: the poorest, earning less than $41,950 a year for a family of four; lower-income renters making between $41,950 and $67,100 a year; and middle-income renters making up to $100,680 for a four-person household. The share of rent-burdened residents increased by 7.6 percentage points, 21 points and 18 points, respectively, for the three groups between 2000 and 2014. (…)
(…) New homes under $200,000 made up 19% of U.S. sales last year, down from 38% four years earlier. By contrast, homes sold between $300,000 and $500,000 accounted for 34% of new home sales last year, up from 22% in 2011.
Data from real-estate tracker Trulia shows a similar trend: The share of new homes built in the bottom third of price distribution shrank from 16% of the market in 2000 to 7.9% by 2015. New homes in the top third of the price distribution grew from 57% of total construction in 2000 to nearly 69% last year, according to an analysis by Ralph McLaughlin, the group’s chief economist.
(…) tightened lending standards in recent years have had the biggest impact on first-time buyers, effectively leaving them on the sidelines. That prompted builders to cater to demand from buyers who could afford larger, pricier homes. (…)
“The move-up market has been much more profitable per house than the entry level,” said housing economist Brad Hunter, chief economist at HomeAdvisor, an online home services marketplace. “Builders decided ‘Well, let me deploy my resources where I can get the best return.’” (…)
Donnie Evans, president of Altura Homes in the Dallas area, said increased land and permitting costs in many Dallas suburbs have taken a chunk of prospective buyers out of the market over the last two years. Homes at the lowest end that his company used to sell for $120,000 two years ago are now going for $190,000, and so on up the chain. (…)
Outstanding consumer credit, a measure of non-real estate debt, rose by a seasonally adjusted $29.67 billion in March from the prior month, the Federal Reserve said Friday. The 10.0% seasonally adjusted annual growth rate was the fastest growth pace since November 2001. (…)
Consumer credit increased at a seasonally adjusted annual rate of 6.4% in the first quarter, compared with a rate of 6.1% in the first quarter of 2015. It rose at a 4.78% pace in February, reduced from an earlier estimate.
Revolving credit outstanding, mostly credit cards, increased at a 14.16% annual pace in March, the fastest pace since July 2000. Revolving credit rose at a revised rate of 3.72% in February. (…)
Nonrevolving credit outstanding, including student and auto loans, increased at a 8.50% annual pace in March compared with February’s revised 5.17% growth rate.
Truck Orders Fall in April Orders for new Class 8 trucks plunged 39% from a year earlier and for a fourth consecutive month, reflecting a worsening freight market
Last month, trucking fleets ordered just 13,500 Class 8 trucks, the big rigs used on long-haul routes, down 16% from March and 39% from a year earlier. It was the fewest net orders in any April since 2009, FTR said.
DAT Solutions, an Oregon-based transportation data firm, reported that loads available for dry vans, the most common type of tractor-trailers used for shipping consumer goods, fell 28% in April while capacity on the market was up 1.7% on a year-over-year basis. There are signs operators are pulling back trucks, however, with capacity measured by DAT slipping back 3.6% from March to April. (…)
April’s anemic order volume suggests the truck production, which has been running at about 21,000-22,000 vehicles a month, needs to come down. Orders may continue to decline into the summer, which is a typically slow season for truck orders. (…)
Eaton Corp., the sales leader in heavy-duty truck transmissions, predicted that organic sales from its vehicles unit will fall 10%-12%, after earlier predicting that sales would drop 7% to 9%. The company lowered its outlook for the business after concluding there are at least 20,000 heavy-duty trucks built last year that are still sitting on dealer lots.
Engine maker Cummins Inc. said on Tuesday it doesn’t expect any improvement in the truck market later in the year. It now expects heavy-duty truck production in North America to be at 210,000 vehicles this year, down 5% from its earlier view and down 28% from 2015’s actual volume. Cummins’ first-quarter sales of diesel engines to the heavy-duty truck market dropped 17% from a year earlier to $631 million.
Truck manufacturers’ “backlogs are quickly shrinking and are expected to fall below 2014 levels relatively soon,” said Mr. Ake. “A big order month could stop the bleeding, but…order activity will probably get worse before it gets better.”
Sales of new private aircraft fell 16 percent in the first quarter from a year ago as demand weakened for the largest planes.
Jet airplane billings were about $3.53 billion in the first quarter, down from $4.2 billion a year earlier, according to the General Aviation Manufacturers Association. That was the biggest decline in almost five years.
Demand for large-cabin business jets has deteriorated amid a dearth of spending from the oil industry, a strengthening dollar and low commodity prices that are sapping purchases in some emerging-market countries.
Manufacturers including General Dynamics Corp.’s Gulfstream unit and Bombardier Inc. shipped 34 large jets in the quarter, down from 46 a year ago. Those jets fetch higher prices, which skew the sales amount. A Gulfstream G650, the largest purpose-built business jet that can fly from New York to Tokyo, has a list price of more than $65 million.
Shipments of medium-sized jets increased to 76 from 69, a sign that smaller U.S. companies are still returning to the market as customers. Excluding Dassault Aviation SA, which doesn’t report first-quarter shipments, 122 total business jets were delivered in the first three months of the year, down from 128.
Data published on Sunday by the General Administration of Customs showed that exports fell 1.8 per cent year on year in US dollar terms. That exceeded a consensus estimate by Trading Economics of a 0.1 per cent drop, and came after an 11.5 per cent surge in March.
Imports in April slid 10.9 per cent from the same month last year, more than double the consensus forecast for a 5 per cent drop and deepening the previous month’s 7.6 per cent decline.
China had a trade surplus in April of $46bn, versus $34bn a year earlier. (…)
“Component imports are soft, suggesting a dim outlook for manufacturing output and exports in the near term,” wrote Moody Analytics in a note. Exports of goods processed or assembled in China with foreign inputs fell 13.3 per cent year on year. (…)
A MasterCard spending survey released ahead of the official government data this afternoon shows March Hong Kong retail sales declined at the worst rate in the history of the survey.
“Overall retail sales in Hong Kong contracted by 18.5 per cent year-on-year, reflecting the deepest decline since 2014,” according to the latest MasterCard SpendingPulse Hong Kong Report.
Clothing and jewellery sales in March dropped by more than total retail sales, while only grocery outperformed overall retail sales. The March results brought the year-on-year Q1 retail sales decline to 11.7 per cent from the same period in 2015.
Sarah Quinlan, senior VP of market insights for MasterCard Advisors, said the sharp decline was a result of the contraction in spending from Mainland Chinese tourists and in discretionary spending by domestic Hong Kong consumers.
“The early Easter holiday did nothing to stimulate spending as consumer confidence remains subdued.
“Overall our outlook for Hong Kong retail sales remains weak as the slowdown in spending from Mainland China continues to negatively impact the Hong Kong retail economy,” said Quinlan.
And in mainland China:
The auto industry saw an accelerated slowdown last month while sales volumes was lower than forecasted. Overall, passenger vehicle sales in April increased slightly Y/Y, but the growth rate was significantly less compared to March and more survey respondents reported an Y/Y decline in sales. The April sales vs. expectations diffusion index fell to -64% as most car dealers failed to reach their sales goals for the month. In fact, sales were worse than expected even with already lowered expectations. (…)
Dealership survey respondents expressed a pessimistic outlook as sales have now fallen short of expectations every month since February. Dealerships expect May sales to display continued weakness (even the May Holiday promotions will not be as effective as in years past) and Y/Y sales to stay flat or increase modestly. Looking further ahead to 3Q16, the auto market looks to remain in a slump, as the effect of tax concessions on new energy vehicle purchases will subside. (CEBM)
Japan Threatens Forex Intervention Japan’s finance minister said he is “prepared to undertake intervention” in the foreign-exchange market if the yen rises more and sharply, countering speculation that U.S. opposition would constrain Tokyo’s actions.
MORE ON SELL IN MAY…
From The Short Side of Long:
From U.S. Global Investors:
(…) this is an election year, and today McClellan Financial reports that in the fourth year of a president’s second term—in other words, when he is ineligible for reelection and we must therefore choose a new president—the market has fallen 1.6 percent on average during the May-October period, based on data from 1936 to 2012. This is caused presumably by the uncertainty over who might replace the incumbent, and how his (or her) policies might affect the market.
McClellan also suggests that May might not be the most opportune time to get out of stocks in these years, as the market has typically bottomed mid-month, then rallied into June and July. That means it might pay to hold out until then to sell off, if that’s what you plan to do.
What’s more, Cornerstone Macro says that “sell in May and go away” only works when leading economic indicators are decelerating. (In such years, returns have been negative 2 percent on average.) When they’re rising, the summer months have returned an average 6 percent.
So are the leading indicators rising or lowering?
From Lance Roberts:
Take a look at the chart below which shows a $10,000 investment into markets during the“Seasonally Strong” vs. “Seasonally Weak” periods. Did you really miss anything by skipping the summer months? (…) Furthermore, when you combine seasonality with weak earnings and a Presidential Election; you have all the ingredients needed for a “sit on the sidelines” portfolio.
‘nough on that!
The Q1’16 earnings season is practically over. Conventional retailers will terminate it during the next 2 weeks.
Factset’s weekly summary
Overall, 87% of the companies in the S&P 500 have reported earnings to date for the first quarter. Of these companies, 71% have reported actual EPS above the mean EPS estimate, 7% have reported actual EPS equal to the mean EPS estimate, and 22% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is above both the 1-year (69%) average and the 5-year (67%) average.
In aggregate, companies are reporting earnings that are 4.1% above expectations. This surprise percentage is slightly below both the 1-year (+4.2%) average and the 5-year (+4.2%) average.
In terms of revenues, 53% of companies have reported actual sales above estimated sales and 47% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is above the 1-year (50%) average but below the 5-year average (56%).
In aggregate, companies are reporting sales that are 0.3% below expectations. This surprise percentage is below both the 1-year (+0.6%) average and above the 5-year (+0.7%) average.
The blended earnings decline for the first quarter is -7.1% this week, which is smaller than the blended earnings decline of -7.7% last week [but] is smaller than the estimate of -8.7% at the end of the first quarter (March 31). If the Energy sector is excluded, the blended earnings decline for the S&P 500 would improve to -1.9% from -7.1%.
The first quarter marks the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009. It also marks the largest year-over-year decline in earnings since Q3 2009 (-15.7%). Only three sectors are reporting year-over-year growth in earnings, led by the Consumer Discretionary and Telecom Service sectors. Seven sectors are reporting a year-over-year decline in earnings, led by the Energy, Materials, and Financials sectors.
The blended revenue decline for Q1 2016 is -1.6%. If the Energy sector is excluded, the blended revenue growth rate for the S&P 500 would jump to 1.3% from -1.6%.
The first quarter marks the first time the index has seen five consecutive quarters of year-over-year declines in sales since FactSet began tracking the data in Q3 2008. Five sectors are reporting year-over-year growth in revenues, led by the Telecom Services and Health Care sectors. Five sectors are reporting a year-over-year decline in revenues, led by the Energy, Utilities, and Materials sectors.
Hopes of an earnings season full of good surprises, given the big drop in estimates prior to quarter end, have vanished. For some reason, even though “earnings have surprised by 4.1%”, Factset’s tally gives full Q1 EPS down 7.1% from –8.7% on March 31. Thomson Reuters calculates EPS down 5.1% from –7.1% on April 1.
Hopes of bluer skies must now turn towards the end of July when Q2 earnings will start to be released.
At this point in time, 79 companies in the index have issued EPS guidance for Q2 2016. Of these 79 companies, 55 have issued negative EPS guidance and 24 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 70%, which is below the 5-year average of 73%. (Factset)
TR’s tally of pre-announcements is better:
Still, estimates (per TR) for the rest of the year are coming down with Q2 at –3.2% from –2.2% on April 1, Q3 at +2.5% ((+4.7%) and Q4 at +9.5% (+10.6%). In all, 2016 EPS would be up 0.9%, down from +1.8% on April 1.
If some of you want to hang their hat on the +9.5% Q4 expected surge, note that it assumes that margins return to their Q3’15 peak. Given that we have no details as to how this will be achieved in an environment of slow GDP growth, declining productivity and rising wages, it is advisable to sport a rather modest headpiece for the rest of the year.
Personally, I am currently wearing a helmet.
Check out these uninspiring charts from Ed Yardeni :