Steady Hiring Without Wage Gains Deepens Puzzle for Fed An extended run of modest labor market gains this year has produced little acceleration in wage growth or inflation, underscoring a puzzle that complicates Federal Reserve policy decisions looming in the months ahead.
(…) Friday’s report doesn’t show a further decline in slack. Gauges of unemployment and underemployment have held steady after declining earlier this year, and the share of workers 25 to 54 years old who have jobs declined in August. This takes a little steam out of the argument of hawkish officials that the Fed should raise rates again. Instead, it gives weight to dovish officials to press their case that labor markets have more room to run before the economy overheats. (…)
Futures market traders put the probability of a Fed rate increase in December at 43% on Friday, up slightly from 39% on Wednesday, according to CME Group. That isn’t a substantial move and points to the uncertainty in the market about whether the Fed will proceed. (…)
The problem is that hiring is not really “steady”:
- Here’s the monthly changes:
- The 6-m moving average change:
- And the YoY % change which directly impacts aggregate payrolls unless wages accelerate:
- The workweek shortened, equivalent to some 350,000 job losses in August.
- Employment in the 25-54 segment, the prime working age and main economic drivers, collapsed 347k in August, erasing the gains since April. First 3 months of the year: +62k. So YtD: +64k!
- The 25-34 age group lost 190k jobs in August and employeds are up only 125k after 8 months, 15k per month on average. Total employment in that important age group rose 1.1% YoY in August, down sharply from +3.7% last December, +2.6% in Q1, and +2.3% in Q2.
- Meanwhile, 996,000 jobs were created for those 55 and over in 2017, including 124k in August. Noticing this, the sharp eyed NBF economists add that
(…) the 55+ age group now accounts for a record 23% of total U.S. employment. And this growing demographic has not been very good at negotiating wages. As today’s Hot Charts show, wages for the 55+ age group have been growing slower than those of other age groups in recent years. It may well be the case that boomers are accepting lower wage growth for the privilege of working past retirement. In the face of such demographic forces, loose monetary policy may be ineffective in pushing up wage growth and hence total inflation.
Not not all that “steady” from my lens, especially when looking at the main drivers of the economy.
Another way to look at why wages are not rising faster is to consider both extreme age groups’ increasing share of the labor force as this chart from Gary Shilling illustrates. Over the last 5 years, some 4 million younger and older people have entered the labor force which, during the same span declined 500k. Younger workers naturally command lower wage rates (especially if working in retail or restaurants) while older folks could well be compromising on wages in order to remain active and supplement low pension income.
Another factor mentioned by The Daily Shot could be the high rate of retirement of older, experienced and better-paid workers. Perhaps that’s the case in manufacturing where wages are now rising at just over 1.5% per year. We know that automakers pay much lower wages to younger workers than to those hired prior to the GFC.
The headline JPMorgan Manufacturing PMI, compiled by IHS Markit, rose from 52.7 in July to 53.1 in August, its highest since May 2011.
Output growth perked up, albeit remaining below the highs seen earlier in the year, running at a pace broadly consistent with global factory production rising at a robust annual rate of 5%.
New order growth meanwhile accelerated and was among the fastest seen for six years, buoyed by an encouraging upturn in global trade. The export orders index rose to its highest since March 2011.
Backlogs of work increased to the greatest extent for three and a half years as firms struggled to cope with higher inflows of new work. Suppliers likewise were reported to have encountered increasing difficulties meeting demand, causing lead times to lengthen to the greatest extent since May 2011.
Capacity issues were met with an upturn in factory employment, with staffing levels rising at the fastest rate since June 2011 as firms boosted operating capacity.
With increasing signs of demand exceeding supply, it was no surprise to see renewed upward price pressures. Average input costs grew at the steepest rate since April, the rate of inflation gathering momentum for a second month. Factory selling prices showed the largest monthly rise since March.
Not so rosy in the U.S.:
The headline seasonally adjusted PMI fell from 53.3 in July to 52.8, the latest reading dropping below the average seen in the year-to-date and registering one of the weakest improvements in the overall health of the sector seen over the past year.
The drop in the PMI was largely the result of a decline in the survey’s output index, which is one of five components of the PMI. The output index is an especially important sub-index to watch as it correlates closely with official factory production data. An 89% correlation is observed with the PMI’s output index tracked against the three-month rate of change in the official data (a preferred measure as the three-month trend is more stable than month-on-month changes).
Although still above the 50.0 ‘no change’ level at 52.4, indicating that the number of companies reporting an upturn in output exceeded the number reporting a decline, the current reading in fact translates into a weakening of official output data. (…)
So far for the third quarter, the July and August survey data are collectively pointing to a 0.1% decline in manufacturing output. This suggests a marked loss of growth momentum since the start of the year, when the index peaked at 56.7, indicating a 0.8% quarterly rate of expansion.
The weakened production trend is explained by slower growth of new orders compared with earlier in the year. The PMI’s new orders index, which measures volumes of new work received relative to the prior month, fell to 53.6 in August compared to a peak of 57.4 in January. (…)
The latest reading in fact points to an approximate stalling of demand as given by the official data on both new orders and durable goods orders.
The principal area of weakness in the PMI’s order book data was in new export orders, with companies reporting no overall growth during the third quarter so far. This has often been linked to the historical strength of the US dollar, which has left producers largely dependent upon domestic demand. The survey’s index of new orders for consumer goods, for example, showed a further increase in demand, led by the home market, consistent with steady retail sales growth in the third quarter so far. (…)
Based on an estimate from WardsAuto, light vehicle sales were at a 16.03 million SAAR in August. That is down 6% from August 2016, and down 3.9% from last month.
This was well below the consensus forecast of 16.7 million for August (However Hurricane Harvey pushed down sales over the last week – and there will be some bounce back).
Factset’s weekly summary:
Overall, 99.6% of the companies in the S&P 500 have reported earnings to date for the second quarter. Of these companies, 73% reported actual EPS above the mean EPS estimate, 9% reported actual EPS equal to the mean EPS estimate, and 18% reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate was above the 1-year (70%) average and above the 5-year (68%) average.
In aggregate, companies reported earnings that exceeded expectations by 5.8%. This surprise percentage was above the 1-year (+4.7%) average and above the 5-year (+4.2%) average.
In terms of revenues, 70% of companies reported actual sales above estimated sales and 30% reported actual sales below estimated sales. The percentage of companies reporting sales above estimates was well above the 1-year average (56%) and well above the 5-year average (53%). The second quarter marked the highest percentage of S&P 500 companies reporting sales above the mean estimate for a quarter since Q4 2011 (72%).
In aggregate, companies reported sales that exceeded expectations by 0.7%. This surprise percentage was above the 1-year (+0.5%) average and above the 5-year (+0.5%) average.
The blended earnings growth rate for the S&P 500 for the second quarter is 10.3% today, which is equal to the earnings growth rate of 10.3% last week. The blended earnings growth rate for Q2 2017 of 10.3% is higher than the estimate of 6.4% at the end of the second quarter (June 30).
If the Energy sector were excluded, the blended earnings growth rate for the remaining ten sectors would fall to 8.0% from 10.3%.
The blended sales growth rate for the S&P 500 for the second quarter is 5.2% today, which is equal to the sales growth rate of 5.2% last week. If the Energy sector were excluded, the blended revenue growth rate for the index would fall to 4.4% from 5.2%.
At this point in time, 115 companies in the index have issued EPS guidance for Q3 2017. Of these 115 companies, 71 have issued negative EPS guidance and 44 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 62% (71 out of 115), which is below the 5-year average of 75%.
The big surprise in Q3 pre-announcements so far is from the Consumer Discretionary group where the 11/10 neg/pos ratio compares very favourably with the 16/6 ratio for Q2 at the same time after Q1.
During the first two months of the quarter, analysts lowered earnings estimates for companies in the S&P 500 for the third quarter. The Q3 bottom-up EPS estimate (which is an aggregation of the EPS estimates for all the companies in the index) dropped by 1.7% (to $33.26 from $33.84) during this period. During the past year (4 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 2.5%. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 3.5%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 4.3%.
Also important is that the breadth of revisions. Thomson Reuters’ data shows that revisions on S&P 500 companies have been about 60% positive in August:
WISE GUYS VS WISE MEN
Good presentation by David Hay, Chief Investment Officer at Evergreen Gavekal.
In his presentation, David shows this chart from 720Global which suggests that a recession may be near:
I commented on this chart in my August 16 Daily Edge, explaining that 720Global deflated GVA with the CPI when it is more appropriate to use the GDP deflator. The recent widening gap between the CPI and the GDP deflator is responsible for the distortion.
The BEA produces its own real GVA series. We now have Q2 data showing that real GVA has actually re-accelerated on a YoY basis, alleviating the risks of recession:
One of David Hay’s major concern is the risk that profit margins decline in the near future. Using the recent GVA data, Moody’s is positive on margins:
First-quarter 2017’s core profits of nonfinancial corporations unexpectedly dipped by -6.3% year-over partly because of how the accompanying 1.6% yearly rise by nonfinancial-corporate GVA lagged the 2.9% yearly increase of nonfinancial-corporate employment costs. However, core nonfinancial-corporate profits grew by +7.7% annually in the second quarter as GVA’s 3.8% yearly increase outran employment costs’ unchanged annual growth rate of 2.9%.
In terms of moving yearlong averages, the annual growth rate of nonfinancial-corporate employment costs has slowed from Q2-2015’s current cycle peak of 5.5% to the 2.6% of the span-ended Q2-2017 despite an accompanying drop by the unemployment rate from the 5.7% of the span-ended June 2015 to the 4.7% of the span-ended June 2017. Also, the annual growth rate of nonfinancial-corporate GVA’s moving yearlong average has decelerated from Q1-2011’s current cycle peak of 5.9% to the 1.8% of Q2-2017, but at least the latter was livelier than its 1.1% uptick of the span-ended March 2017.
Moody’s nonetheless remains prudent. A consumer-led recession could be just around the corner:
Going forward, the fuller restoration of profits requires the continued faster growth of corporate GVA to employment costs. However, a now low rate of personal savings hints of a more limited upside for household expenditures. Year-to-date declines by unit sales of light motor vehicles and the latest softening by housing activity warn against becoming unduly confident about the adequacy of corporate GVA going forward. Low inflation has a darker side that stems from its linkage to an intensely competitive business sales environment.
David’s conclusion is rather puzzling from someone who is really not in the bulls camp and who sees equities as very expensive:
I would have liked to know what would be a “big market fall”…What’s big: 5%, 10% 20%?
It shows how people get more nervous in the fall.
Speaking of potential consumer-led recession, did you miss Saturday’s post: SEPTEMBER!
I don’t know if that makes me a wise man or just a wise guy!
Coincidentally, Moody’s also wrote about the economic risk from Americans’ current low savings:
The drop by the ratio of personal savings to disposable personal income from its 6.1% average of the five years-ended 2015 to the 3.8% of 2017-to-date implies Americans lack the financial wherewithal to either support or absorb significantly higher prices for long.
High rates of personal savings make it easier for consumers to absorb higher prices. When core PCE price index inflation averaged 6.4% during 1970-1981, the personal savings rate averaged 11.7%. By contrast, the averages for January-July 2017 showed a much lower 3.8% personal savings rate and a much slower 1.6% annual rate of core PCE price index inflation.
In addition, the latest drop by personal savings brings attention to the financial stress now facing many US households. Today’s more unequal distribution of income implies that a relatively greater number of today’s households save little, if any, of their after-tax income. When confronted with higher prices, these “paycheck-to-paycheck” consumers will be compelled to eventually curtail real spending at the expense of business pricing power.
Finally, even bullish technicians are worried about the coming months:
Lowry’s Research which only does technical analysis (perhaps the best in this biz) currently sees “little evidence of the prolonged rise in Supply that would suggest the bull market could be entering its final stages. While measures such as OCO New 52-week Highs suggest an aging bull market, more timely warnings of an approaching major market top remain absent. Supporting evidence of an ongoing bull market may be especially important as the stock market enters an historically weak time of year. Corrections are a normal part of a healthy bull market. Investors should keep this in mind if a pullback develops in the weeks ahead, as a market correction at this point should serve primarily as a buying opportunity.
N Korea ‘begging for war’ says US ambassador to UN Trump administration pushes for tough sanctions in effort to find diplomatic solution
Miscalculation could lead to a Korean war Donald Trump has created dangerous confusion over US policy towards Pyongyang
BTW, it happened before…
South Korea looks to choke North with oil embargo Beijing’s likely opposition highlights lack of options facing Seoul and Washington