U.S. Jobless Rate Hits Lowest Level Since Recession U.S. employers hired at a steady clip in November while the unemployment rate fell to 4.6%, the lowest level in nine years—signs of enduring labor-market growth that will likely leave Fed officials on track to raise interest rates this month.
- U.S. employers added a seasonally adjusted 178,000 jobs in November, in line with the average of the previous 3 months (+175k) and the 3 months previous (+182k).
- Job gains have averaged 180,000 a month so far this year, down from 225,000 during the same 11-month stretch in 2015.
- Private employment rose by 156,000 after a 135,000 increase the prior month.
- 4.52 million Americans who entered the labor force got jobs in November, up 575,000 from October — the biggest monthly increase in records going back to 1990. The reverse measure, people going from employed to being out of the workforce, rose by 296,000 to 4.68 million, in part reflecting retirees.
- Job growth is up 1.6% YoY, from +1.8% in September, +2.0% in March and this cycle’s high of +2.3% in February 2015.
- The jobless rate fell to a seasonally adjusted 4.6% in November from 4.9% in October. The rate is the lowest since August 2007.
- A broad measure of unemployment and underemployment known as the U-6, including Americans working part-time jobs who want full-time positions, was 9.3% in November, dropping from 9.5% from the prior month. The latest reading is the lowest since April 2008.
- 446,000 people dropped out of the labor force last month.
- The labor-force participation rate moved down to 62.7% from 62.8% in October.
- Among those in their prime working years, between 25 and 54, the labor-force participation rate fell to 81.4% in November, from 81.6% in October. One year ago, only 80.8% of people aged 25-54 were participating in the labor force. If 25- to 54-year-olds were in the labor force at the same rate as they were during the 2001-07 expansion, another two million people would be working or looking for work.
- Average hourly earnings for private-sector workers declined 3 cents from October, or 0.1%, to $25.89 in November. Earnings were up 2.5% from a year earlier, down from October’s 2.8%, which was the strongest annual wage growth since June 2009.
Investing is often a momentum affair. The economic momentum is strongly linked with consumer spending, itself strongly connected with employment momentum. Two realities for 2017: the long-term trend in employment growth is still down owing to the aging population. The short-term trend remains down as well with the YoY growth rate having declined from +2.2% in January 2015 to +1.9% in January 2016 and to +1.58% in November. Without a reacceleration in employment growth, consumer spending will slow, unless Americans dig in their savings, something no investor wants to hang its hat on.
One big headwind: goods-producing employment has been flattened by the rising dollar…
…and prospects are limited by the high cost of American manufacturing (60% of goods sector employment):
* KPMG calculated manufacturing sector costs in 2016 based on 12 representative industry-specific business operations: aerospace, agri-food, automotive, chemicals, electronics, green energy, medical device, metal components, pharmaceutical, plastics, precision manufacturing, telecommunications. NBF Economics and Strategy (data via Datastream, KPMG)
The ongoing tightening in monetary conditions should weigh on growth in H1 2017, while fiscal stimulus should boost it in H2. We take into account the ongoing pronounced tightening of monetary conditions. The rise in the trade-weighted dollar since the presidential election along with the spike in long-term interest rates has resulted in a marked tightening of monetary conditions in the US. We estimate this tightening to be equivalent to an increase of around 75 basis points in short-term rates. (…)
We believe that GDP growth will slow to some 1.7% on average in H1 2017 in the US, before picking up to 2.4% in H2. On a yearly average basis, growth should accelerate to 2.0% next year, against 1.5% in 2016.
Coming back to goods producing employment, the durable goods sector (40% of all goods-producing jobs) has been shedding workers almost every month since January 2015. Mr. Trump will be busy making calls and tweeting…especially if interest rates start rising, as now is almost certain. Note how employment in durable goods industries has often weaken just prior to recessions.
Construction jobs could also be lost as a result of rising rates. Momentum is already slowing fast there: YoY growth was +6.2% in February 2015 and is now +2.4%. Last 9 months: +0.9% annualized, although a nice pickup occurred in the last 3 months. Time will tell if this was mainly weather-related.
But what about Trumponomics? I wrote about that in STORY TIME! But maybe you are all bored reading about the various opinions on what will result from “Making America Great Again!”. If you mainly read stuff from the sell-side, you would be well-advised to take a bit more time reading these two pieces:
Paul Kasriel explains “thin-air credit” in
while Evergreen-Gavekal’s David Hay wonders if the Keynesian multiplier is not negative given the current debt load?
There is also these other headwinds:
President-elect Donald Trump on Friday established the “President’s Strategic and Policy Forum,” a group of mostly current and former business executives who he said will offer input “on how government policy impacts economic growth, job creation, and productivity.”
The forum has 16 members and will be chaired by Blackstone Group L.P. chief executive Stephen Schwartzman.
Other members include:
· Paul Atkins, CEO, Patomak Global Partners, LLC, former commissioner of the Securities and Exchange Commission;
· Mary Barra, chairman and CEO, General Motors
· Toby Cosgrove, CEO, Cleveland Clinic
· Jamie Dimon, chairman and CEO, JPMorgan Chase & Co.
· Larry Fink, chairman and CEO, BlackRock
· Bob Iger, chairman and CEO, Walt Disney
· Rich Lesser, president and CEO, Boston Consulting Group
· Doug McMillon, president and CEO, Wal-Mart Stores, Inc.
· Jim McNerney, former chairman, president, and CEO, Boeing
· Adebayo “Bayo” Ogunlesi, chairman and managing partner, Global Infrastructure Partners
· Ginni Rometty, chairman, president, and CEO, International Business Machines Corp.
· Kevin Warsh, Shepard Family Distinguished Visiting Fellow in Economics, Hoover Institute, former member of the Board of Governors of the Federal Reserve System
· Mark Weinberger, global chairman and CEO, EY
· Jack Welch, former chairman and CEO, General Electric
· Daniel Yergin, Pulitzer Prize-winner, vice chairman of IHS Markit
The members represent some of the nation’s largest companies and also some of the nation’s largest employers, touching fields such as finance, health care, manufacturing, entertainment, and technology. They will meet for the first time at the White House in early February, the Trump transition team said in a statement.
“This forum brings together CEOs and business leaders who know what it takes to create jobs and drive economic growth,” Mr. Trump said in the statement. “My administration is committed to drawing on private sector expertise and cutting the government red tape that is holding back our businesses from hiring, innovating, and expanding right here in America.”
These executive advisory councils have been tried before, with mixed results. President Barack Obama created a “President’s Council on Jobs and Competitiveness,” but it met just four times, with its last meeting in 2012. Mr. Obama’s council had 25 members. The only member to be appointed to both Mr. Obama’s and Mr. Trump’s councils is Mr. McNerney, the former chairman of Boeing.
Mr. Schwartzman played a central role in helping assemble the group, and it has members with a mix of viewpoints that likely don’t completely overlap with Mr. Trump’s economic vision. For example, several of the companies represented in the forum are multinational firms that could be impacted directly by any changes to trade policy, something Mr. Trump has said he will pursue in 2017. (…)
Investors Shrug Off Italy Referendum Result Stocks pushed higher while the euro recovered from early losses as investors largely brushed off Italian voters’ rejection of constitutional reform.
Pollsters were finally right on that one. But it does not make things any better:
Italian bank shares, however, came under pressure on Monday, amid concerns that a period of political turmoil following the vote could interfere with banks’ planned capital raising and bring an abrupt end to the government’s efforts to clean up the banking sector. (…)
So far this year, shares of Banca Monte dei Paschi di Siena are down roughly 85%, while Italian bank stocks as a group are down around 46% as they grapple with low profitability and soured loans. (…)
Still, the common currency quickly recovered as many investors expressed relief that the uncertainty around the result was out of the way, while many others were also hopeful a caretaker government in Italy would calm concerns about political stability in the country and its ongoing efforts to restore the health of the banking sector. (…)
“Stability will be the name of the game in Italy until 2018,” he said, adding “If you have no early elections and a good strong technocratic government put in place, the threat of exiting the euro recedes quite a lot.” (…)
Hmmm…not sure that story ends so easily. Here’s John Mauldin:
Italy is going to have to find at least €40 billion of private capital to refund its banks. Getting approval for that program through the dysfunctional Italian system is going to be a problem. That means the banks will probably need an ECB bailout. And by the way, that €40 billion is chump change compared to the €240 billion of Italian bank bonds that have been sold and that would be at risk. Now we’re beginning to talk about real money. A bailout might add another 15% of debt onto Italy’s already mountainous accumulation. Further, while €40 billion might fix the problem as it stands today, one thing we know about nonperforming loans in times of crisis is that they typically don’t perform any better as time passes. So while a bailout could “fix” the problem today, it could also come right back and bite them again a few years from now. (Think Greece.)
Further, if Italy were to approach the ECB for €40 billion to stabilize its funds, it would essentially have to apply to the European Stability Mechanism in the same process that Greece went through, subjecting the nation to all kinds of controls and tax increases, etc., from Brussels. I just don’t see the Italians, after having watched Greece go down, agreeing to anything like that. Renzi might be able to look Merkel and the rest of Europe in the eye and simply tell the Italian central bank to fund the debt and to get the money from the ECB and dare the ECB not to write the check. That would be the end of the euro project, and everybody knows it.
Like it or not, the Euro is still a mess.
(…) Remarking on his approach, al-Naimi said he wasn’t opposed to production cuts in 2014, as long as everyone participated. They wouldn’t, he said. “There’s not much you can do if there is no maximum cooperation between the producers.”
He also expressed skepticism that Russia, considered a wildcard during talks, would follow through on its promise to reduce output. “Will Russia cut 300,000?” he said. “I don’t know. In the past, they didn’t.” (…)
Small Insurers’ Big Collapse Reflects Deep Industry Woes Two units of Penn Treaty American are on track to be liquidated early next year, as actuarial miscalculations on long-term-care policies have proved fatal.
The Reasons to Appreciate Small Stocks Now After the recent runup of the overall market, small stocks remain slightly less expensive than their bigger brethren. Being less overpriced than the rest is about as good as it gets.
(…) According to Nili Gilbert and Stuart Kaye, portfolio managers at Matarin Capital Management in Stamford, Conn., small stocks are trading at 10.8 times the cash that their underlying businesses generate from operations, or slightly above their average since 1994. Big companies are valued even more richly, at 11.7 times their operating cash flow, also higher than their average over the past two decades.
The gap between those ratios is barely wider than normal, suggesting that small stocks remain relatively cheap even after their explosive rise in November, say Ms. Gilbert and Mr. Kaye.
(…) as always, hot performance attracts hot money. At iShares, the largest manager of exchange-traded funds, $10 billion of new money came into U.S.-listed ETFs specializing in small stocks during November alone, says Dorothy Lariviere, an analyst and product consultant at the firm.
Just in the three weeks after Election Day, says David Santschi of TrimTabs Investment Research, the assets of all U.S. small-stock ETFs grew by 7% from new money alone. Such a flood of buying by itchy-fingered traders could introduce even more volatility; the last to arrive at the party are often the first to leave in a panic.
But the long-term case for holding smaller stocks is probably still strong.
(…) smaller companies should benefit even more than large ones, argues Mr. Ellenbogen, as the Trump administration tries to achieve faster economic growth, higher inflation, lower corporate tax rates, a strong dollar and greater emphasis on domestic production.
Furthermore, small stocks badly lagged their larger brethren in 2014 and 2015. So, even after their torrid performance in November, the returns on both the Russell 2000 and the S&P SmallCap 600 indexes still trail the giants of the S&P 500 over the past three years. (…)
Hmmm…Based on Thomson Reuters data, the S&P 500 Index is selling at 22.9x trailing EPS of $35.64, a 22% premium over the S&P 500 Index P/E of 18.8. But investors are looking forward, aren’t they?
Thankfully, Ed Yardeni provides us that view: the forward P/E for the S&P 600 Index is at the very high end of its 1999-2016 range, this using forward earnings. Maybe Mr. Market has already factored in the Trump effects while analysts are still trying to figure them out, even though consensus EPS for 2018 are 20% above 2017, themselves being some 16% higher than 2016. The Trump story has been well received. It sure needs to prove reasonably accurate now given the very poor margin of safety provided by valuations.
Interestingly, earnings revisions have been more positive on large caps than on small caps since the elections. Based on TR numbers, 57% of revisions on large cap companies were positive in the last 3 weeks compared with 50% on smaller caps. During the last week, 63% of revisions on large caps were positive, 52% on smaller caps.
Regulator Will Let Online Lenders Act More Like National Banks Financial-technology firms will soon have the chance to apply for new banking charters, under a plan from a top U.S. regulator designed to let thousands of upstarts expand under federal oversight.
Firms offering online loans, smartphone payments and other financial-technology products would get new flexibility to expand and further shake up the U.S. banking industry under a proposed new federal policy.
A top regulator said Friday that his agency would for the first time start granting banking licenses to “fintech” firms, giving them greater freedom to operate across the country without seeking state-by-state permission or joining with brick-and-mortar banks. (…)
The announcement by Thomas Curry, head of the Office of the Comptroller of the Currency, was a significant move by regulators struggling to strike a balance between encouraging innovation while extending traditional protections to new financial products that have boomed since the financial crisis. (…)
Firms that receive the OCC charter would still not be able to accept government-insured deposits without separate approval from the Federal Deposit Insurance Corp.
The proposed move was cheered by the tech sector that had long been seeking such an imprimatur, but jeered by financial institutions, some consumer groups and state regulators who see threats in the upending of the old order. Small banks in particular worry about new competition, while consumer advocates and others raised the specter of weaker protections for borrowers. (…)
Mr. Curry said that between the U.S. and U.K. alone, there were now more than 4,000 such companies. Investment in the sector has increased from $1.8 billion to $24 billion world-wide in the past five years, he said. (…)
Friday’s charter proposal was broader than some expected, said Reuben Grinberg, an attorney at Davis Polk & Wardwell LLP. While lending was anticipated to be covered by the proposal, the OCC also referred to “paying checks,” a sign that the charter would potentially open up businesses for fintech firms issuing debit cards or doing peer-to-peer payments. (…)