Month: September 2015

Blurry Job Picture Poses Test for Fed U.S. employment growth slowed in August but the jobless rate fell to the lowest level since 2008, a mixed labor-market reading less than two weeks before a crucial Federal Reserve meeting.

(…) Employers slowed their hiring to add 173,000 jobs last month, the Labor Department said Friday, due to losses in two sectors—manufacturing and mining—that have been hit by a Chinese slump, a stronger dollar and falling oil prices.

But employment gains elsewhere, particularly in services such as health care and restaurants that are largely insulated from the global slowdown, drove the unemployment rate down to 5.1% from 5.3%, the lowest level since 2008, and in the range the Fed considers full employment. (…)

Over the past five years, revisions have added an average 79,000 jobs to the initial August readings. The latest report revised upward the readings for June and July by a combined 44,000 jobs, largely offsetting the disappointment for the initial August count.

The average job gain over the past three months was 221,000, a slowdown from the July three-month average of 250,000, but still a healthy pace.

Job creation in August was below the monthly average of 218,000 new jobs that prevailed for the first seven months of the year, raising concern that slower growth in some pockets of the global economy are weighing on U.S. firms. Manufacturing employers shed 17,000 jobs last month, after more than two years of monthly gains. Auto manufacturing bucked the trend, however, and added 5,700 jobs. (…)

The mining sector lost 9,000 jobs in August as lower oil prices sent shockwaves across the oil and gas industry. Since reaching a peak in December 2014, mining employment has declined by 90,000. (…)

The number of full-time workers exceeded the pre-recession peak for the first time in August and now stands at the highest level on record. (…)

Average hourly earnings of private-sector workers rose by 8 cents to $25.09 last month. That’s a 2.2% increase from a year earlier. The gain suggests a modest acceleration in workers’ pay. The average workweek also increased by 0.1 hour last month.

The labor-force participation rate stayed the same last month at 62.6%.The participation rate—the share of the population either working or actively looking for work—has been dropping for several years and is near levels last consistently recorded in the late 1970s, a time when women were entering the workforce in larger numbers. The latest reading is a result of the labor force shrinking by 41,000 last month, despite other signs of an improving jobs market.

This low participation rate is a mystery to just about everybody. If the current participation rate were the same as in 2000, there would be 10 million more workers today. Funnily (!), this equals the increase in the number of freelancers in the past 10 years as per this recent study by the Freelancers Union:

There are 53 million Americans — 34 percent of the U.S. workforce — working as freelancers. The survey defined “freelancers” as : “individuals who have engaged in supplemental, temporary, or project- or contract-based work in the past 12 months.” A 2004 study by the federal General Accountability Office found there were 42.6 million “contingent workers.”

So, who are the 53 million?

• 21.2 million Independent Contractors (40% of independent workforce)
• 14.3 million Moonlighters (27%)
• 9.3 million Diversified workers (18%)
• 5.5 million Temporary Workers (10%)
• 2.8 million Freelance Business Owners (5%)

The internet is likely an important driver here. Speaking of driver, Forbes recently had an interesting piece, The Numbers Behind Uber’s Exploding Driver Force:

• Uber’s active driver base has grown from basically zero in mid-2012 to over 160,000 at the end of 2014. The number of new drivers has more than doubled every six months for the last two years.
• 49.2% of Uber drivers are under 40 years old, vs. 28.4% of taxi drivers. Yet nearly 37% have college degrees, and 10.8% have postgraduate degrees too (vs. 14.9% and 3.9% of taxi drivers, respectively).
• Women make up nearly 14% of Uber drivers
• Drivers fall into one of three categories: those who have no other job (38%), those who continue to work full-time elsewhere (31%), and those who have a part-time job in addition to driving for Uber (30%). Nearly a quarter of drivers rely on Uber as their only source of income, and another 16% say the service is their largest income source.
• About one-third of drivers are doing so “while looking for a steady, full-time job.”
• 78% say they are very or somewhat satisfied with Uber. 69% had a more favorable opinion of the company than when they first started.

FED UP OR NOT?

• Economists React to the August Jobs Report: ‘A September Rate Hike Is Basically a Coin Flip’

• Goldman: “No Rate Hike In September”

1. Nonfarm payroll employment increased by 173k in August, less than expected by the consensus of economists. The deceleration relative to July reflected a downshift in a variety of components, including manufacturing (-17k vs +12k previously) and retail trade (+11k vs +32k previously). The mining sector continued to shed jobs (-9k in August). Overall private payrolls expanded by 140k, down from 224k in July. Firmer government payrolls provided a partial offset, with gains of 33k in August, an acceleration from +21k in July.

2. Other details in the establishment survey were a bit more encouraging. First, payroll growth over the two prior months was revised up by a net 44k. Second, average weekly hours increased to 34.6, and the index of aggregate hours (i.e. employment multiplied by average weekly hours) has now increased at an annualized rate of 3.1% over the past three months. Third, average hourly earnings growth was also slightly better than expected, rising by 0.3% month-over-month and 2.2% from a year earlier.

3. Results from the household survey were mostly positive. The U3 unemployment rate fell to 5.1% (5.112% unrounded) from 5.3% in July, and the broader U6 underemployment rate fell to 10.3% from 10.4%. Household employment increased by a decent 196k (+106k on a payrolls-consistent basis), although the trends in employment growth from this survey remain relatively soft (with three- and six-month average gains of 80k and 123k, respectively). The labor force participation rate was unchanged at 62.6%.

4. With payrolls, unemployment claims, consumer sentiment, vehicle sales, and a number of business surveys in hand, our preliminary read on the August Current Activity Indicator is +2.8%, in line with the July figure. We continue to expect the FOMC to keep policy rates unchanged at the September 16-17 meeting.

But federal-funds futures show a 28% likelihood of a rate increase at the September meeting compared with a 50% likelihood a month ago.

Time to remain rational and down to earth. Here’s the key sentence in the July FOMC statement:

The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

Keeping the stuff in bold in mind, now read what Richmond Fed President Jeffrey Lacker said Friday morning, prior to the employment report:

The Case Against Further Delay

• Economic data suggest that an increase in the Fed’s target interest rate from near zero is warranted sooner rather than later.
• With nominal short-term interest rates close to zero and inflation of at least one percent, real interest rates have been negative for the better part of the past six years. But with rising growth in personal consumption and income over the past couple of years, negative real rates are unlikely to remain appropriate.
• The unemployment rate has declined nearly to pre-recession levels, and research suggests that there is little if any excessive slack in the labor market. Consistent with the Fed’s forward guidance, many labor market indicators support the case for an increase in interest rates.
• Inflation has been below the Fed’s 2 percent target since early 2012, but has been running slightly above target over the past half year. Because inflation is a lagging indicator, maintaining low interest rates poses serious risks.
• Recent financial market volatility is unlikely to affect economic fundamentals in the United States and thus has limited implications for monetary policy.

Interesting stuff on labor slack and wage trends:

The decline in labor force participation has been driven mainly by structural and demographic factors, such as the growing number of people enrolling in college and the large baby boom generation reaching retirement age. In addition, research indicates that not all people without a job have the same propensity to return to work. For example, Richmond Fed researchers have constructed a broader measure of underutilization they call a “nonemployment index.” This index counts all people who are not working, not just those who are unemployed according to the official definition, and weights them differently based on their likelihood of becoming employed in the future.

For example, unemployed people who are actively looking for work are about three times more likely to become employed than people who say they would like to find a job but are not actively seeking one. Their research demonstrates that while there is more slack than is captured by the official unemployment rate, there seems to be no more now than is usual when the unemployment rate is around 5.3 percent.⁸ In other words, the official unemployment rate is providing a reasonably accurate guide to how the utilization of labor resources has changed over time. (…)

Some argue there must be excessive slack in labor markets if wage rates are not accelerating. But real wages are tied to productivity growth, and productivity growth has been slow for several years now. Wage growth in real terms has at least kept pace with productivity increases over that time period, which is perfectly consistent with an economy from which labor market slack has largely dissipated.

Overall, I believe the evidence indicates that labor market conditions no longer warrant continuation of exceptionally low interest rates.

…and on inflation:

The second condition the FOMC laid out for raising interest rates was that it would have to be “reasonably confident that inflation will move back to its 2 percent objective over the medium term.” The last half year of data show that inflation already has returned to our 2 percent objective. Thus both conditions that the FOMC stated earlier this year would make it appropriate to raise the target range for the federal funds rate appear to have been met.

The return of inflation to 2 percent should not be surprising. First, the deviation from the committee’s inflation goal during the past few years was not especially large. Research by economists at the San Francisco Fed and the Richmond Fed suggests that the deviation is not statistically significant once you factor in the volatility of monthly inflation rates. The fact that we have undershot our inflation goal could easily be the result of bad luck, rather than a systematic failure of monetary policy in pursuit of its target.⁹

Second, our best measures of inflation expectations have held reasonably steady at rates consistent with inflation returning to the FOMC’s goal. Survey measures have remained within the narrow bands within which they have fluctuated for some time. While measures derived from U.S. Treasury securities — the so-called TIPS inflation compensation figures — have declined of late, they are not unusually low and could well be dampened by movements in the premium investors place on the superior liquidity of nominal Treasury securities.

As a result, I believe we can be reasonably confident that inflation will continue to gravitate to 2 percent as long as we do not depart from conducting monetary policy in a manner consistent with continued expectations of price stability.

So:

The case for raising interest rates that I have described has actually been true for some time; I could have made the same arguments in June, or even April. But I’ve been willing to wait so far this year. In part, that’s because the FOMC conditioned the public not to expect liftoff before June, and deviating from the expectations we’ve actively fostered should require a significant departure from the economic conditions we anticipated, which hasn’t occurred. In contrast, the Committee has been clear since June that an increase is possible at any remaining meeting this year.

I was also willing to wait for confirmation that the factors holding down real growth and inflation late last year and early this year were transitory. It is now clear that those factors, which included harsh winter weather, the strengthening dollar, and the steep decline in energy prices, have dissipated. It was not unreasonable to seek more definitive evidence that these impediments to growth and price stability had passed, but that question has now been settled.

Progress has been slow and uneven, but the economy has worked its way back from the dislocations of the Great Recession. Unemployment is close to pre-recession levels, real GDP growth has been slow but steady, and inflation is tracking our objective. I am not arguing that the economy is perfect, but nor is it on the ropes, requiring zero interest rates to get it back into the ring. It’s time to align our monetary policy with the significant progress we have made.

After the NFP report was released, Lacker said this

I’d call this a good, right-down-the-middle-of-the-fairway jobs report

These two charts from Doug Short support the “little slack left” argument:

Let’s view the numbers as a ratio of the Civilian Labor Force which has doubled since 1967.

My sense is that the Fed will move next week and they will try to telegraph this during the next several days. Talking heads will then begin to speculate on the next move, timing and magnitude and all yaddi yaddi yadda.

As to how equities perform while the Fed hikes, the debate is still raging among the talking and writing heads. My contribution last year was to set the record straight and show the charts of each of the 15 tightening cycles since 1954 (EQUITIES AFTER FIRST RATE HIKES: THE CHARTS SINCE 1954). The conclusion:

To be brief, in layman’s terms, in reality, there seems to be no consistent nor typical pattern after the first rate hikes.

However, digging a little more into the history book, I found that in 6 of the 8 years when the S&P 500 rose during the initial rate hike, inflation was actually diminishing or stable (2004). This did not verify in 1987, although the market eventually avenged itself and in 1999 when internet speculation blinded everybody.

Maybe we got ourselves a bit of a rule here: rate hike cycles are not damaging to equities in as much as inflation is not rising at the time. Since profits are generally still rising when the Fed takes its foot off the pedal, stable or declining inflation rates help sustain P/E ratios as demonstrated by the Rule of 20.

So, SHOULD INVESTORS FEAR A FED TIGHTENING? The short answer is yes. The longer answer is watch inflation.

…and profits which, it must be remembered, are not rising at this time. Fortunately, the same can be said of inflation, even though the Fed seems ‘’reasonably confident that inflation will move back to its 2 percent objective over the medium term.’’

HOW’S BUSINESS, NOW?

The Association of American Railroads publishes its monthly stats right after month-ends, providing real world, never revised, up-to-date data on the highly economy-sensitive railroad industry:

Carloads excluding coal and grain averaged 162,462 per week in August 2015. The good news is that’s the biggest weekly average in 10 months. The bad news is that it’s down 22,990 carloads (3.4%) from August 2014, the sixth-straight year-over-year decline.

Year-to-date carloads through August 2015 were down 94,932 (1.8%) from 2014. That decline would be greatly lessened or maybe even eliminated if we could exclude lower carloads that are related in one way or another to the energy sector.

In all, Q3 is shaping up as a little worse than Q2 for railroads. Energy is not the only weak spot. Only 6 of the 20 commodities tracked by the AAR are up YoY in August from 18 in January.

The latest (Sep. 3rd) Atlanta Fed GDP Now model seems to agree:

The nowcast for third-quarter real personal consumption expenditures growth ticked up from 2.6 percent to 2.7 percent following yesterday [Sep. 2nd] afternoon’s release on August motor vehicle sales from the U.S. Bureau of Economic Analysis.

Rail data also tend to confirm that the consumer side of the economy is moderately firm. Intermodal traffic, up 4.3% in Q2, was +3.5% in July and + 3.6% in August.

U.S. small business confidence rises slightly in August

On par with the less than impressive summer optimism readings, NFIB’s Small Business Optimism Indexgained 0.5 points last month reaching 95.9 as five of the components posted gains, three fell and two remained unchanged.

Fourteen percent of the NFIB owners reported reducing their average selling prices in the past 3 months (up 1 point), and 14 percent reported price increases (down 3 points). There are no signs of inflation bubbling up on Main Street (…)

Earnings trends reversed, posting a 4 point gain, improving to a negative 15 percent. Far more owners reporting profits lower quarter to quarter than higher.

Reports of increased labor compensation were steady at a net 23 percent of all owners (seasonally adjusted), still shy of the high of 25 percent for this year. Labor costs will continue to put pressure on the bottom line. Fuel prices are falling again, that helps, but firms cannot pass rising labor costs on as they have no pricing power.

OIL

‘Strippers’ Pose Dilemma for Oil Industry Thousands of people who own oil wells producing less than five barrels a day operate largely under investors’ radar. A sharp drop in that output could take the industry by surprise.

(…) While investors are closely watching public companies for signs of when crude production is set to slow, many are ignoring the country’s 400,000 stripper wells, most of which produce less than five barrels a day. Stripper wells—so called because they “strip” the remaining oil out of the ground—are mostly aging ones that continue to produce oil, but at much lower rates than when they were drilled.

A sharp drop in stripper-well output, currently estimated at a million barrels a day, or 11% of total U.S. production, would be nearly impossible to observe as it happens, but it could still shrink the glut that continues to weigh on prices, surprising the market, analysts say. (…)

Mr. Pursell estimates that the average stripper well costs $2,000 a month to operate, mostly due to electricity and water disposal. At that price, a well that produces two barrels a day would need to earn more than $33 a barrel to make a profit.

Many stripper well operators already earn a few dollars less than the benchmark U.S. oil price, due to transportation costs. Nelson Wood, chief executive of Wood Energy Inc. in Mt. Vernon, Ill., said he earns $7 or $8 less per barrel than the Nymex price. (…)

“We could survive at $50. $40, we’re losing money,” Mr. Vogt said. Shutting wells would be a measure of last resort, as halting production costs money and the company might be unable to restart the wells if prices rebound. “Everybody’s going to have to decide whether to make the payments or close the door,” he said.

To be sure, plenty of production is still profitable at current low prices. Cantrell Energy Corp., which operates 150 stripper wells, says its wells cost between $10 and $30 a barrel to operate.

BTW:

US shale producers reported a cash outflow of more than $30bn in the first half of the year, a sign of the challenges facing the once-booming industry as the slump in oil prices begins to take effect.

The shortfall points to a rise in bankruptcies and restructurings in the sector, which has expanded rapidly in the past seven years but has never covered its capital expenditure from its cash flow. (FT)

To give you a sense of what’s happening to U.S. shale production well before official stats for August arrive in November:

In August 2015, carloads of petroleum and petroleum products were down 13.9% from August 2014, their fifth year-over- year decline in the past six months.

Importantly, this is a sharp acceleration of the decline which averaged 2.5% in Q2. June was –7.3%, July –13.6% and August –13.9%.

U.S. demand is also accelerating, thanks to Americans returning to the SUVs as this AAR chart reveals:

…and these SUVs are traveling furiously. Giddy up!

 

(Doug Short)

EUROZONE RETAIL SALES CREEP HIGHER

July data from Eurostat show that core retail sales edged up 0.1% in real terms after being unchanged in June and up 0.3% in May. Nothing spectacular but still up 1.6% annualized during the last 3 months.

For a preview of August, Markit just release its Eurozone Retail PMI for August which shows that Germany remains the main growth engine for the EU:

At 51.4, the headline Markit Eurozone Retail PMI – which tracks month-on-month changes in like-for-like retail sales across the bloc’s biggest three economies combined – indicated a rise in sales for the fourth successive month in August. However, down from July’s 54-month high of 54.2, the index pointed to a much slower rate of growth. Sales were also up on an annual basis, with the rate of increase by this measure the second-fastest since April 2011, behind July’s recent high.

Of the ‘big-three’ eurozone nations, only Germany recorded a month-on-month rise in sales in August, with France and Italy both recording modest falls in sales after gains in July. Although solid and sufficiently strong to more than offset the declines seen in France and Italy, Germany’s latest increase in sales was less marked than that in July.

China trade drops sharply Data heighten concerns over ripples from slowdown

The value of imports fell 14.3 per cent year on year in renminbi terms in August, a steeper decline than July’s 8.6 per cent fall, the 10th consecutive fall and the worst showing since May.

Exports dropped a more modest 6.1 per cent from a year ago, against an 8.9 per cent drop in July. As a result, the trade surplus jumped nearly 40 per cent month on month to Rmb368bn ($57.8bn), just below the Rmb370bn record set in February.

The mid-August devaluation of China’s currency has injected some controversy into the monthly trade figures. China issues the figures in both renminbi and dollars. According to its calculations, the trade slump in dollar terms is more benign, with exports dropping by 5.6 per cent and imports also falling less drastically, by 13.9 per cent.

However, conversion of the renminbi-based trade figures into dollars using last month’s average exchange rate reveals a more alarming picture: exports fell by almost 10 per cent and imports by more than 17 per cent.

The discrepancy is noticeable because the difference between the renminbi-denominated and the dollar-denominated figures normally closely tracks monthly average exchange rates. An official at China Customs told the Financial Times their calculation into dollars used a conversion rate set by the State Administration of Foreign Exchange, the forex regulator. (…)

Last week South Korean trade data showed a drop in exports to China in August compared with the year before amid an even steeper drop in exports to Europe and Japan, feeding worries of slumps in global demand. (…)

The data suggest global demand will slow for the rest of the year. China’s customs administration tracks the imports that are processed in China for re-export, a sector that makes up just under a third of China’s total trade.

While processing exports fell by more than 8 per cent in the first eight months of the year, imports for processing fell by almost 11 per cent, indicating a weakening order book for Chinese exporters. That is consistent with the dented purchasing managers’ index released at the beginning of the month.

Worryingly for Chinese policymakers, international demand is not the only concern. China’s apparent demand for key commodities such as crude oil and iron ore fell in August compared with July, while imports of copper — considered a leading indicator for economic growth — were flat.

In volume terms, which measures actual demand from China rather than global prices, crude oil imports are up 10 per cent in the year to date while iron ore imports are flat. But August imports were not so rosy, with iron ore import volumes down 14 per cent from July while crude import volumes fell 13 per cent.

Japan minister urges fiscal stimulus Akira Amari says extra tax revenues should be spent

Japan should consider an extra fiscal stimulus of Y2tn ($84bn) this autumn, the country’s economy minister has said, as fears grow that a Chinese slowdown will hit growth across Asia.

In an interview with foreign reporters, Akira Amari said Japan’s tax revenues had come in Y4tn higher than budgeted, and that the question was how to make use of the extra funds. (…)

“But looking at global economic trends, the Japanese economy could be negatively affected. So about half of that money could be used to boost the economy,” he said.

A Y2tn supplementary budget would be smaller than the Y3.5tn passed last year, or Y5.5tn the year before, but Mr Amari’s comments reflect growing concern among Japanese policymakers that China could derail their recovery. (…)

G-20 Countries Vow to Refrain From Currency Depreciation The world’s largest economies, including China, will renew their commitment to avoid depreciating their currencies to gain a competitive trading advantage, a senior U.S. Treasury official said Saturday.

The world’s largest economies, including China, will renew their commitment to avoid depreciating their currencies to gain a competitive trading advantage, a senior U.S. Treasury official said Saturday. (…)

“There is a clear understanding that competitive devaluation presents a threat that everyone has to be on guard against, both in their policies and their words,” the senior official said.

While they say this, in their back: 

China Cuts 2014 Growth Estimate to 7.3%

China revised its 2014 growth rate to 7.3% from 7.4% due to a weaker-than-reported contribution from the service sector, casting doubt on an economic bright spot amid concerns about the health of the world’s second-largest economy. (…)

The main reason for the change was the service industry, which the agency said grew by 7.8% rather than 8.1%. (…)

FOLLOW UP

I have been writing from time to time about Lance Roberts. Markets having corrected 10%+ he now advises to sell equities: As The Market Bounces…Sell

As shown in the chart above, there is now a clear “sell signal” in place which continues to support the premise that the previous “bull market” has likely concluded for now.

Surge In Mobile Startups Valued at Over $1 Billion Signals a Bubble The number of mobile Internet startups with valuations crossing $1 billion has jumped by a third in just eight months and that’s spelling trouble for some venture capitalists looking to cash in on their investments.

The number of mobile Internet startups with valuations crossing $1 billion has jumped by a third in just eight months and that’s spelling trouble for some venture capitalists looking to cash in on their investments.

Already, there are signs of worsening returns. The ratio of mobile Internet exits — startups that are either sold or go public — to investments has plunged over the past six quarters, excluding one outlier deal, according to consulting firm Digi-Capital.

“Mobile is frothy and bubblelike,” said Rajeev Chand, managing director and head of research at Rutberg & Co. LLC. Companies that would have gotten $8 million to $10 million in investments a few years ago are now getting as much as $50 million, he said. “There’s way too much money going into mobile delivery companies. The economics are fundamentally not sustainable.”

Investors have jumped into mobile Internet startups as services from dog walking to shopping to food delivery became available via smartphones. In 2014, global mobile data traffic was almost 30 times the size of the entire global Internet in 2000, according to Cisco Systems Inc. As a result, mobile Internet companies that crossed the $1 billion threshold — known as unicorns — have swelled to about 90 for a combined valuation of more than $800 billion, Digi-Capital said in a report last month.

It wasn’t so long ago when there might have been 10 unicorns in an entire decade, saidMatt Murphy, a managing director at Menlo Ventures. (…)