Modest U.S. Jobs Growth Keeps Labor Market Steady The U.S. economy added a modest 156,000 jobs in September—and the unemployment rate increased slightly to 5.0%— as the presidential campaign enters its final stretch and the Federal Reserve grapples with whether to raise interest rates.
Employers added 156,000 jobs in September, driven by hiring in health care, retailers and professional services such as consultancies, the Labor Department said Friday. Monthly job growth has averaged 192,000 over the past three months, weaker than last year’s robust pace of 229,000 but enough to keep up with a growing population. (…)
The labor force—the employed plus those actively seeking work—grew by 444,000 last month and 3 million over the past year, the biggest 12-month gain since the first tech boom in 2000. The labor-force participation rate, which slid for decades, climbed half a percentage point over the past year to 62.9% last month. (…)
The labor-force participation rate among 25- to 54-year-olds increased nearly a point over the past year to 81.5%, though it is still down from the late 1990s when it hovered between 84% and 85%. (…)
Wages have been sluggish throughout the expansion, but have picked up of late. Workers’ hourly earnings rose 2.6% over the past year, up from the overall trend during this expansion of roughly 2% growth. (…)
Argh! We just can’t get the numbers to end this debate one way or the other, can we? The Fed will clearly stay put in November so this debate will go on for at least another 2 months.
Fed’s Mester says U.S. economic data consistent with higher rates Cleveland Federal Reserve President Loretta Mester said current U.S. economic data, including the September payrolls report released on Friday, were consistent with the U.S. central bank considering an increase in interest rates.
(…) “We have made progress on both (of the Fed’s) mandates,” Mester, who dissented with two other Fed officials at the September policy meeting, told reporters after a speech at an event organized by the Manhattan Institute. (…)
Martin Feldstein sides with the hawks who want elbow room in case we need it…
(…) The time for debate has passed. With consumer prices on the rise and unemployment low, it’s time for the Fed to normalize short-term rates. (…)
Fed Chair Janet Yellen and Fed board members are rightly concerned that normalizing interest rates would cause the prices of overvalued assets to decline, pulling the economy down. But the longer they wait, the worse the problem of asset inflation will be and the more damaging the decline in asset prices.
Abnormally low interest rates are also inducing banks and other lenders to reach for yield by lending to lower-quality borrowers and granting loans with fewer restrictions. If an asset-price correction causes an economic decline, these high-risk loans will suffer and the banks and other lenders will be in trouble.
The current low bond rates have also removed the usual pressure on the government to deal with budget deficits. The debt-to-GDP ratio has more than doubled over the past decade, rising from 35% to 75%. Recently the Congressional Budget Office forecast that the debt ratio will rise to 86% a decade from now, even if there is no increase in the planned historically low spending on defense and nondefense discretionary programs.
The high level of government debt means the tax burden will grow. Future bond rates will rise and the cost of servicing the debt, more than half of which is held by foreign investors, will become more expensive. The current high debt-to-GDP ratio will also make it hard to persuade Congress to provide a fiscal stimulus if economic growth declines. Raising military spending in the face of an increased national-security threat will also become more difficult.
The Fed’s reluctance to raise interest rates reflects not only the fear of destabilizing financial markets but also a desire to increase employment. Although there may be little room to lower the unemployment rate, total employment can be raised by inducing an increase in labor-force participation. Such gains in employment are clearly worth having, but the continued strategy of low interest rates may lead to a burst asset bubble, a sharp downturn and far higher unemployment rates.
I suspect that the Fed leadership would like to see the inflation rate rise above the target of 2%, reaching 3% or more. That would give the central bank the ability to raise the federal-funds rate to between 3% and 4%, putting it in a position to cut the rate if the economy softens.
The Fed could rationalize overshooting 2% by noting that its target is not a ceiling but a desired average over time. But if the bond markets reject that explanation, bond rates could rise rapidly, destabilizing financial markets. (…)
…while the doves say hiking rates now will simply make sure we need the elbow room…
Here’s what we know as we enter the most important period of the year:
- The overall labor market is just ok. No major acceleration, no major deceleration.
- During Q3, job growth averaged 192k per month, up from 146k in Q2 and in line with 196k in Q1. Payroll growth averaged 229k in 2015.
- The unemployment rate has been quietly rising to 5.0% from 4.9% over the previous 3 months and 4.7% in May.
- Manufacturing jobs declined 13k in September after –16k in August. YTD: –58k.
- Services employment rose 146k (94% of all new August jobs), continuing the slowdown from +276k in June, +238k in July and +192k in August.
- Wages are not accelerating in any visible way.
- The labor force rose 1.9% YoY, its fastest growth rate since January 2007 and among the fastest on record since 1990. In actual numbers, 3 million Americans entered the labor force during the last 12 months, a spurt only seen twice since 1980.
- While these 3 million people entered the labor market, the economy created 2.4 million new jobs, up 1.7% YoY.
In all, nothing really to suggest that this is a good time to tighten. In fact, there is now even more slack in the labor market. If these new entrants decided to seek a job because their benefits had expired, they are more likely to accept a lower paying job than no job at all, potentially placing a new cap on wage growth.
We are not talking of older folks here: the participation rate in the 25-54 age group troughed at 80.6% in September 2015 and reached 81.5% this September. This is 1.65 million more people actively looking to work (blue line). This is 1.6% more available workers than one year ago, a sharp acceleration from zero one year ago and from below zero between 2009 and 2014 (red line). The truth is, the supply of prime age workers is rising at an accelerating rate.
- The good news is that of these 1.65 million additional available “young” workers since September 2015, 1.445 million (88%) have found a job. The number of employed 25-54 year-olds is up 1.5% YoY and is also accelerating:
- Importantly, of these 1.445 million prime aged Americans having found a job in the last 12 months, 1.18 million (82%) are 25-34 year old, the prime age to form households. This group of workers is up 3.6% YoY from +1.6% last December and the fastest growth rate since 1984. Yes, 1984!
- More than 78% of the new jobs created in the last year were in the relatively lower wages service sectors, preventing a commensurate acceleration in labor income and pressures on inflation.
- On the other hand, all net new jobs created last year were full time.
There is enough stuff in the numbers to keep hawks and doves well fed for a while. The debate will thus continue since the labor market is ok, nothing more, nothing less.
Economic forecasting is very far from being an exact science, but it has been exceptionally pathetic in recent years. The GDPNow model for Q3 has cratered from +3.5% to +2.1% in the last 5 weeks. The NY Fed’s Nowcast model is at +2.2% for Q3 and +1.3% for Q4. This after 3 quarters averaging +1.0%. Tightening monetary conditions in such an environment requires a lot of faith, very little memory and/or much carelessness. It sure would be nice to have more elbow room but I would rather try to make sure I stay afloat before.
Markit’s PMI surveys have proven to be the most accurate trend indicators in recent years.
Even with the latest increase the surveys are indicating that the economy is growing at an annualized rate of only 1%.
I religiously read (and post) all PMI survey reports because they are timely, real world and unrevised sources. I often wonder if economists actually read them as well. Quotes from Markit’s Services PMI reports since April:
- April: “the rate of employment growth was the weakest seen since December 2015.”
- May: “Weaker employment growth has now been recorded in three of the past four months, with the latest expansion in payroll numbers the slowest since January 2015.”
- June: “the rate of jobs growth eased to its weakest for 17 months”
- July: “The rate of job creation picked up to its fastest for three months, but remained slightly less marked than the average since the current period of expansion began in March 2010.”
- August: “the latest rise in payroll numbers was the weakest since the end of 2014.”
- September: “data signalled only a marginal increase in service sector payroll numbers, with the pace of job creation the weakest since March 2013.”
Services account for 86% of all jobs in America.
(…) During a panel discussion at the New York Historical Society back in May, the Doubleline Capital LP chief executive officer revealed that one of his top three recession indicators was when the unemployment rate breaches its 12-month moving average.
September’s non-farm payrolls report showed that the unemployment rate in the U.S. ticked up to 5 percent, while the 12-month moving average held steady at 4.9 percent:
(…) “This indicator is a necessary, but not sufficient, sign of a coming recession,” wrote Gundlach in an email to Bloomberg. “It is worth factoring into economic analysis but not a reason for sudden alarm.” (…)
The good news, however, is that indicator has given false positives before (most recently near the end of 2010), and there’s another metric that has much more predictive power, according to Gundlach.
We know we’re in big trouble once the quarterly unemployment rate breaches its three-year moving average, something that doesn’t look to be in the cards any time soon.
The Dodge Momentum Index fell 4.3% in September to 129.0 from its revised August reading of 134.8 (2000=100). The Momentum Index is a monthly measure of the first (or initial) report for nonresidential building projects in planning, which have been shown to lead construction spending for nonresidential buildings by a full year.
The decline in September was the result of a 5.3% drop in institutional planning and a 3.6% decrease in commercial planning, retreating from the strong performance in August which benefitted from an influx of large projects ($100 million +) into planning. September’s decline follows five consecutive months of gains for the Momentum Index, and resumes for now the saw-tooth pattern that’s often been present in the data since 2014.
Even with the recent volatility on a month-to-month basis, the Momentum Index continues to trend higher, signaling that developers have moved plans forward despite economic and political uncertainty. With the September release the Momentum Index is 5.1% higher than one year ago. The institutional component is 5.4% above its September 2015 reading, while the commercial component is up 4.9%.
Good thing that plans keep moving upwards. We sure need that as these Haver Analytics chart show:
Consumer credit outstanding increased $25.9 billion (6.8% y/y) during August following a $17.8 billion July improvement, revised from $17.7 billion. It was the strongest rise since September 2015, and one of the firmest of the economic expansion
Nonrevolving credit led the rise, with a $20.2 billion gain (7.0% y/y) after a $15.0 billion July increase. Revolving consumer credit increased a moderate $5.6 billion (6.2% y/y) after a $2.8 billion rise.
Consumers have been supporting the economy in 2016…borrowing from the future…
The Canadian economy recorded 67k new jobs in September after +26k in August. Full-time employment was +23k in September and +52k in August. Now that’s a strong report, especially since 12 of 16 industries showed job growth. Even manufacturing grew jobs for the third consecutive month. The Canadian labor force is also rising, reaching a 4.5 year high. NBF adds this:
Can Canada add to the stunning 62K net new jobs created in the third quarter? Probably so, according to the Bank of Canada’s Autumn surveys. The Business Outlook Survey showed an improvement in the mood of firms, particularly with regards to intentions to invest and hire.
As the chart below shows, the survey revealed the best combination of hiring and investment intentions in two years. Encouraged by the improving export outlook, firms seem keen to ramp up production. While credit conditions are tight for some firms (particularly those in the oil and gas sector) according to the Senior Loan Officer Survey, they are improving ─ the central bank says that access to capital markets increased in Q3 for all grades of borrowers.
All told, the BoC surveys suggest the economy has momentum. Canada’s third quarter GDP growth is expected to be above 3% annualized and that could be followed by growth above 2% annualized in Q4 if those improving business intentions translate into action.
Wall Street’s retreat from currency trading may be reducing risk at the banks, but it is contributing to bouts of extreme volatility in the foreign-exchange market. (…)
One reason the pound fell so sharply, these analysts say, is because Wall Street foreign-exchange desks have slimmed down in response to postcrisis financial regulations meant to limit risk-taking. Those rules forced banks to rein in a service known as market-making, by which they facilitate trading by agreeing to buy and sell currencies.
Major banks’ foreign-exchange desks have shrunk by 23%, to 1,477 traders in the first half of this year from 1,916 in 2010, according to Coalition, a London consulting firm. The top five banks also accounted for just 44.7% of the market’s volume, down from 61% in 2014, according to a Euromoney survey. (…)
Isaac Lieberman, the chief executive of quantitative hedge fund Aston Capital Management, said while electronic trading can lead to swift price moves, it also enables markets to recover more quickly. (…)
“Something fundamentally had changed with liquidity provision,” said Collin Crownover,head of currency management at State Street Global Advisors. “You can hit these liquidity air pockets more readily in an algorithm-dominated trading environment.”
(…) The yuan entered the basket of currencies backing the IMF’s special drawing rights, an international reserve currency, on Oct. 1. (…)
The FT’s Lex column:
The renminbi’s fix will now be read as a signal Beijing is comfortable with more depreciation.
Saudi Arabia’s energy minister Khalid al-Falih said that he was optimistic major oil producers could agree to cut production by November and that it wasn’t “unthinkable” that crude prices could rise another 20% this year to $60 a barrel.
The minister’s words confirmed a decisive shift in policy by the Organization of the Petroleum Exporting Countries toward a return to market intervention—a role the oil cartel seemed to abandon two years ago when it refused to step in to prop up sinking prices. (…)
“I think the role of responsible producers around the world, and Saudi Arabia considers itself to be the leading one, is to try to balance supply and demand in a very responsible way,” Mr. Falih told a conference in Istanbul this week that has become a meeting point for major oil producers to try to hammer out a tentative agreement to reduce output. (…)
Mr. Falih said accommodating these members and managing uncertainties over the supply and demand balance in the market is the reason OPEC has set itself a range for its production volume rather than a hard target. He warned that the producer group must remain flexible to avoid a supply shock as the market tightens.
“I think a band would be able to make sure the ceiling can accommodate,” Mr. Falih said, adding that because of demand uncertainties “OPEC needs to make sure we don’t kill too much and create a shock.”
Here in Istanbul, Mr. Falih is joining an effort to get non-OPEC members to participate in output cuts, including Russia, which produces more crude oil than any other country. Mr. Falih confirmed he is meeting with Russia’s energy minister this week to discuss cooperation and said non-OPEC producers should “absolutely” participate in efforts to balance the market. (…)
Mr. Falih said the time to act seems to have arrived. (…) “I think market forces have shifted significantly between 2014 and now,” Mr. Falih said.
The FT’s Nick Butler explains the failure of the Saudi strategy…
(…) The strategy has not only failed but has caused serious damage to the Saudis themselves. Prices fell much further than anyone anticipated because other participants in the market did not respond as expected. The Saudi increase in production has not destroyed the US industry – American output has fallen only marginally despite a 70 per cent drop in prices. The kingdom simply underestimated the resilience of the US producers and their ability to cut costs. (…)
…then asserts that the the Saudis will have to contribute the bulk of the necessary 2.5-3.0m b/d cuts to absorb the existing overhang and lift prices above $60, necessary if the Saudis do not want to end up with lower revenues…
…and concludes with a pessimistic view:
Unfortunately, Mr Falih is one of few people in either category who have stayed to work in the Saudi government. Most have moved to London or New York well away from the Wahhabi fundamentalism which is still the ruling creed of the country. Without their presence real change looks impossible.
(…) it is hard to see how the kingdom can make the changes necessary when those responsible for the failures of the last two years are members of the royal family.
Earnings growth turning positive?
Factset sets the hopes:
As of today, the S&P 500 is expected to report a year-over-year decline in earnings of 2.1% for the third quarter. Based on the average change in earnings growth due to companies reporting actual earnings above estimated earnings, it is likely the index will not report a decline in earnings for the third quarter.
Over the past four years on average, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 4.3%. During this same time frame, 68% of companies in the S&P 500 have reported actual EPS above the mean EPS estimates on average. As a result, from the end of the quarter through the end of the earnings season, the earnings growth rate has typically increased by 2.9 percentage points on average (over the past 4 years) due to the number and magnitude of upside earnings surprises.
If this average increase is applied to the estimated earnings decline at the end of Q3 (September 30) of -2.0%, the actual earnings growth rate for the quarter would be 0.9% (-2.0% + 2.9% = 0.9%). If the index does report growth in earnings for Q3 2016, it will mark the first time the index has recorded year-over-year growth in earnings since Q1 2015 (0.5%).
Note that excluding Energy,, the estimated earnings growth rate for the S&P 500 would improve to 1.3% from -2.1% while the estimated revenue growth rate for the S&P 500 would improve to 4.1% from 2.6%.
The Q3 earnings season officially begins this week but we already have 25 early reporters in and the beat rate is 80% on EPS and 60% on revenues.
The declining prospects of traditional business lines, high capital requirements, nonperforming loans, and regulatory offenses have battered share values. Bank equity prices in the Eurozone Stoxx index now trail last year’s high by 48%. Yet euro-denominated bonds from the banking sector carrying the modest yield of 1.15% in the Bloomberg Barclays index seem to point to sturdy balance sheets.
However, easy ECB monetary policy and the protections offered to senior bank debt may obscure the risks facing this sector. Warning signs can been seen in equity prices that value banks as less than the book value of their assets, and in European contingent convertible hybrids that are junior to other bank bonds holding a substantial risk premium with the composite yield of 7.04%. As this sector persists in contributing to global financial market uncertainty, the potential remains for negative spillovers to risk assets worldwide.
The Truly Scary Clowns: Central Bankers Central bank’s stimulative policies are having little effect in adding jobs and boosting economies. And they’re running out of steam.
Barron’s Randall Forsyth says that central bankers and monetary policies are losing their stature.
(…) The more important inference is that major trend changes are at hand. As described by Bank of America Merrill Lynch global investment strategists led by Michael Hartnett, we may be witnessing “peak liquidity.” That is, the era of excess liquidity from central banks is ending, which is consistent with shifts in ECB and BOJ policies, the U.K. Prime Minister May’s criticism of QE, and the likelihood of a Fed interest-rate hike in December.
In addition, the BofA ML strategists also point to “peak inequality,” which would spur fiscal actions, such as greater spending and income redistribution. Finally, they see “peak globalization,” as populism counters the “disinflationary free movement of capital, trade and labor.”
The sum is “peak returns” from financial assets, the BofA ML team concludes. (…)
Investors who have tilted strongly toward these investments, which have benefited from historically low interest rates, have been laughing all the way to the bank. In the future, they may be spooked by those creepy clowns, otherwise known as less-friendly central bankers.
(…) The firm projects that the S&P 500 Index and the Stoxx Europe 600 Index will each drop by about 2 percent by December.
ENDING ON A POSITIVE NOTE
All is not spooky even though we are only 3 weeks away from Halloween.
Moody’s data reveal that the high yield market is breathing better as upgrades nearly outnumbered declining downgrades in Q3. Higher oil prices, receptive equity markets and more active M&A activity have helped the energy sector.
But the improvement is also seen in other industries.
(…) In September, US commercial bankruptcy filings soared 38% from a year ago to 3,072, the 11th month in a row of year-over-year increases, according to the American Bankruptcy Institute.
For the first nine months of 2016, commercial bankruptcy filings jumped 28% compared to the same period in 2015, to 28,789.
(…) just over 100 oil and gas companies in the US and Canada have gone bankrupt since the beginning of 2015. About a dozen retail chains have filed over the past year, along with about 12 restaurant companies, representing 14 chains.
Commercial bankruptcy filings skyrocketed during the Financial Crisis and peaked in March 2010 at 9,004. Then they fell on a year-over-year basis. In March 2013, the year-over-year decline in filings reached 1,577. Filings continued to fall, but at a slower and slower pace, until November 2015, when for the first time since March 2010, bankruptcy filings rose year-over-year. That was the turning point. Note that there is no ‘plateauing’:
NOTHING TO DO?
Just in case you got some spare time. Lance Roberts outdid himself with this chart:
Despite the “Brexit,” weakening economic growth, declining profitability, terror attacks, Presidential election antics, and Deutsche Bank, the markets continue to cling to its bullish trend. Investors, like “Pavlov’s dogs,” have now been trained the Fed will always be there to bail out the markets. But then again, why shouldn’t they? The chart below shows this most clearly.
Okay…maybe not clearly…but you get the idea.
Two of the largest e-commerce-driven retail brands in the U.S. seem to be looking longingly at physical stores. Warby Parker co-founder Neil Blumenthal tells the WSJ’s Khadeeja Safdar he could envision 800 to 1,000 stores in the company’s future, while Bonobos founder Andy Dunn says he plans to have 100 stores by 2020. Mr. Dunn says he expects a “tidal wave” of e-commerce companies making similar moves, a forecast that seems to belie reports of falling foot traffic at traditional stores.
But the online sales specialists say they have an edge over established operators, without surplus stores and the excessive and poorly-positioned inventory that has filled retailer supply chains. Both Warby Parker and Bonobos are using physical locations as showrooms for their products, and those likely will provide the template for any expansion into the brick-and-mortar world.