Higher Jobless Rate Suggests Economy Has Room to Run U.S. employers hired briskly in January and more Americans joined the workforce, suggesting the labor market still has room to grow after years of expansion.
Despite brisk hiring, the U.S. unemployment rate rose in January and wages grew modestly, evidence for the Trump administration and the Federal Reserve that the economy has room to grow before it risks overheating.
The backdrop of a steady but unspectacular labor market is likely to keep the Fed cautious about raising interest rates and could prevent the central bank from colliding with President Donald Trump as he aims for faster economic growth.
Employers added 227,000 jobs last month, the biggest gain since September, the Labor Department said Friday. Job growth over the past three months averaged 183,000, inline with the trend earlier in 2016.
Still, the jobless rate rose to 4.8% in January from 4.7% a month earlier, as more Americans came off the sidelines and actively looked for work, pushing up the count of unemployed. In one sense that is a positive development, suggesting increased optimism about the prospects of eventually finding work. (…)
The average hourly paycheck grew just 3 cents over the month—and 2.5% over the year—despite millions of workers receiving raises under minimum-wage laws across 19 states at the start of the year. (…)
A measure of underemployment—taking into account the jobless, part-time workers who can’t find full-time jobs, and Americans too discouraged to hunt for jobs—rose to 9.4% from 9.2% last month. January also saw a big increase in reluctant part-time workers.
The best of all worlds?
Good jobs growth, slow wage gains, higher participation. Perfect!
But is it really?
- November and December jobs numbers were revised down 39k, including –40k in November, a 20% correction 2 months ago.
- January was a warm month which helped construction (+36k).
- Retail employment rose 46k in January. Seasonal adjustments quirks?
- Using non-seasonally adjusted numbers, the YoY gain in payrolls was +1.5%, from +1.6% in November and + 1.8% in September.
- The workweek was unchanged at 34.4 hours, in line with the past several years.
- Aggregate wages rose just a little but the mix continues to put more weight on low paying jobs. Some 50% of the January increase was in temp jobs, retail, health care, and food services.
- Minimum wages rose in 19 states in January but the timing of the survey (Jan. 12) impacted the earnings data by not including the first full 2-week paycheck of the year.
- Still, average hourly earnings were up 3.2% YoY in January. The 6-m moving average is now +2.7% from +2.3% in March, +2.4% in June and + 2.6% in November. This chart shows the YoY change in seasonally adjusted hourly earnings. The January slowdown is clearly suspect.
After you read Markit’s Services PMI survey report for January below, you will understand why this chart looks very suspect””:
In all, this job report gives investors and the Fed the best combination of data at the start the year. But it would be best to wait a little before celebrating Goldilocks.
In effect:
- The seasonally adjusted final Markit U.S. Services Business Activity Index rebounded to 55.6 in January, up from December’s three-month low of 53.9. Moreover, the latest reading was comfortably above the average for Q4 2016 (54.4) and signalled the fastest rate of business activity growth since November 2015.
- Higher levels of business activity were mainly linked to improved sales growth and a more supportive economic backdrop.
- January’s survey data revealed a robust and accelerated increase in new work received by service sector companies. The rate of expansion was the fastest since July 2015. Anecdotal evidence linked the rise to greater levels of business and consumer spending at the start of 2017.
- Increased volumes of new business exerted pressure on operating capacity among service sector firms.
- Reflecting this, backlogs of work rose for the fifth time in the past six months. Survey respondents sought to alleviate capacity constraints by taking on additional staff in January. Higher levels of employment were also linked to new project starts and improved confidence regarding the business outlook. Measured overall, the rate of
job creation was only slightly weaker than December’s 15-month peak.
- Some firms noted that squeezed margins had acted as a brake on employment growth at their business units in January. The latest increase in average cost burdens was close to December’s recent peak.
- Rising input prices were attributed to higher fuel costs and greater salary payments. Meanwhile, prices charged by service sector firms increased at only a moderate pace in January.
The ISM Services survey also reveals cost inflation in services industries:
Markit Final U.S. Composite PMI™
- At 55.8 in January, up from 54.1 in December, the seasonally adjusted final Markit U.S. Composite PMI™ Output Index signalled the strongest rise in private sector business activity since November 2015. This reflected positive contributions to growth from both the manufacturing and service sectors at the start of 2017.
- The January surveys signal annualized GDP growth of approximately 2.5%, setting the scene for a solid first quarter. With January seeing the largest inflow of new business for 18 months, there’s good reason to believe that firms will be even busier in coming months.
Service-related industries account for 83% of total private employment in the U.S. The “tangible” economy has been pretty weak lately with few signs of a turn as this AAR chart shows.
(…) According to research firm DAT Solutions LLC, demand for trucking services shifted downward in recent weeks, with truck loads available on the spot market declining 14% during the week ending Jan. 21.
Executives Old Dominion Freight Line Inc., one of the biggest U.S. trucking companies with more than 17,000 full-time employees, said on an earnings conference call this week they saw demand pick up in January but want to see more consistent growth before they step up hiring. “I think we’re in pretty good shape with the work force where are and the volumes we have,” said David Congdon, chief executive officer at the Thomasville, N.C.-based company. (…)
Fiscal Hole to Test President Trump’s Agenda For an economy that isn’t in recession, the U.S. is facing one of the bleakest fiscal outlooks since World War II. One question that President Donald Trump will soon have to decide: How much is he willing to embrace even wider deficits?
(…) Unlike past periods, deficits are swelling not because of an economic downturn or a short-term boost in discretionary spending, but because of the costs of caring for an aging population. Medicare and Social Security are the biggest projected drivers of spending. Ten years ago, some 6,700 Americans turned 65 every day. The number is now 9,800 Americans, and it will rise to 11,700 by 2026.
An aging population not only pushes up federal spending on health care and retirement, it also shrinks the tax base and may lead to slower rates of growth in personal income and household spending. (…)
The Congressional Budget Office expects, under current law and assuming the economy keeps expanding modestly, deficits to rise from 2.4% in the fiscal year that starts this October to 4.2% gradually over the following four years. (…)
BTW:
Source: David Stockman, h/t Anne (via The Daily Shot)
EARNINGS WATCH
From Factset:
During the month of January, analysts lowered earnings estimates for companies in the S&P 500 for the first quarter. The Q1 bottom-up EPS estimate (which is an aggregation of the EPS estimates for all the companies in the index) dropped by 1.5% (to $30.10 from $30.57) during this period.
During the past year (4 quarters), the average decline in the bottom-up EPS estimate during the first month 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 month of a quarter has been 2.3%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has also been 2.4%.
To date, 55% of the companies in the S&P 500 have reported actual results for Q4. In terms of earnings, fewer companies (65%) are reporting actual EPS above the mean estimate compared to the 5-year average. In aggregate, companies are reporting earnings that are 2.5% above the estimates. This surprise percentage is below the 1-year (+4.4%) average and below the 5-year (+4.2%) average.
In terms of sales, fewer companies (52%) are reporting actual sales above estimates compared to the 5-year average. In aggregate, companies are reporting sales that are 0.1% below the estimates, which is also below the 5-year average.
The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) year-over-year earnings growth rate for Q4 2016 is 4.6% today, which is above the estimated earnings growth rate of 3.1% on December 31.
The blended sales growth rate for Q4 2016 is 4.6%, which is below the estimated sales growth rate of 4.9% on December 31.
At this point in time, 65 companies in the index have issued EPS guidance for Q1 2017. Of these 65 companies, 44 have issued negative EPS guidance and 21 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 68%, which is below the 5-year average of 74%.
SENTIMENT WATCH
(…)Nov. 8 [Election Day] was an extraordinarily important day, a major inflection point. It was a radical regime change. Suddenly I’m spending a lot more time writing about fiscal policy than monetary policy. This business is never dull. Before the election, I didn’t think it mattered to the market who won. The market would continue to move higher. To me it is all about P/E [stocks’ price/earnings ratio] times E [earnings estimate]. In August, Joe Abbott, our quantitative strategist, and I concluded the earnings recession was over. The picture had been dark because of the collapse in earnings and a plunge in oil prices. Now we’d have 8% to 9% earnings growth just because comparisons would be easy. In addition to energy, we saw strength in technology, industrials, and consumer discretionary.
When Trump won, he also had a majority in both houses of Congress. Suddenly we had to reread his economic policy proposals. We did some back-of-the-envelope calculations on reducing the corporate tax rate, recognizing it might go from an effective rate of about 27% after deductions to 15%. We concluded that earnings growth could be closer to 20% than 10%. We’re assuming the interest deduction disappears. We built in some cushion, in case we were too optimistic. But it still resulted in a huge increase in our Standard & Poor’s 500 earnings forecast, to $142 a share this year from $128. Frankly, I’m simply being conservative. A P/E of 17.6 gets us to 2500 by year end. If the market gets to 2500 sooner, I’ll reassess.
We are also betting tax cuts aren’t just for corporations but individuals. So economic growth will be more like 3% instead of the 2.5% we expected this year. As a result, we raised our outlook for the S&P 500 from 2300 to 2500.
I hope Trump’s protectionism is really more about moving from free trade to fair trade and bilateral agreements, rather than shutting off trade relations. But renegotiating everything on a bilateral basis can get dicey. If Trump’s America-first approach is protectionist and triggers protectionist reactions, we’re all in trouble. Certainly we’d have to worry about a global recession. But I don’t expect him to kill off globalization. Too much money is at stake.
(…) The U.S. went from an administration of—how shall I put it?—community organizers to one run by wheeler-dealers. The Trump team isn’t made up of professional politicians. But it isn’t out to destroy world trade; it is pro-growth. For example, Treasury Secretary nominee Steven Mnuchin believes sustained 3%-to-4% GDP growth is critical for the country.
The new administration is going to want to make deals. It is looking for weak points on the other side of the table and will press them. Trump changes his mind so much that it is pretty easy for him to say, “well, we got a better deal than I promised you,” and market it that way. (…)
The real risk is a resumption of the “Old Normal,” wherein booms followed busts, as opposed to the New Normal since the financial crisis. The next bear market will come, as it always has, when we have the next recession. In the old-normal business cycle, we’re at full employment and don’t need more fiscal stimulus. But if there is an economic boom, there aren’t enough workers to achieve a lot of Trump’s stated goals. Workers long for the pay they got in the good old days, but many are already employed. If wages take off and are seen as price inflation, the Fed will have no choice but to tighten more aggressively. I’m back to being an old-fashioned business-cycle economist who thinks we need to watch wage pressures. (…)
One month into the year, the balance of risks is somewhat less positive in our view, for three reasons.
First, the recent difficulty congressional Republicans have had in moving forward on Obamacare repeal does not bode well for reaching a quick agreement on tax reform or infrastructure funding, and reinforces our view that a fiscal boost, if it happens, is mostly a 2018 story.
Second, while bipartisan cooperation looked possible on some issues following the election, the political environment appears to be as polarized as ever, suggesting that issues that require bipartisan support may be difficult to address.
Third, some of the recent administrative actions by the Trump Administration serve as a reminder that the president is likely to follow through on campaign promises on trade and immigration, some of which could be disruptive for financial markets and the real economy.
What modesty? For U.S. workers’ real wages to have risen 1.8% in 2016, nominal wages wages would have had to increase 3.9% vs the actual 2.5% gain…
