Month: June 2017

Jobless Rate Falls to 16-Year Low, But Hiring Slows The unemployment rate fell to its lowest level in 16 years in May, a fresh sign the slow and long-running U.S. economic expansion has entered a new stage that has left businesses struggling to find qualified workers.

At 4.3%, the jobless rate is at point it hasn’t seen since May 2001, the Labor Department said Friday, and is below the trough it reached in the previous economic expansion, from 2001 to 2007.

Job creation, though, has cooled. Employers added a seasonally adjusted 138,000 jobs from the prior month. After a robust start to the year, the economy has added an average 121,000 jobs over the past three months. That is about two-thirds of the growth rate recorded last year. (…)

“There’s a real shortage of available workers, especially in skilled trades” such as carpenters and plumbers, said Barton Malow President Ryan Maibach.

Mr. Maibach said hourly wages have increased only a bit, but some workers are earning 10% to 25% more a week due to increased overtime hours as the company takes on more work.

“Trying to find an additional 15 or 20 people is no small feat,” he said. (…)

Average hourly earnings for private-sector workers increased by 0.2% in May from a month earlier. The small gain may be shaded by a calendar quirk: When the government survey falls early in the month, wage gains tend to be depressed. Adjusted for that effect, several economists say, the gain would have been 0.3%.

Still, from a year earlier wages rose 2.5%, the same annual rate they have been stuck near since late 2015. That is weak compared with history.

When the unemployment rate was 4.4% in May 2007, wages for nonmanagerial workers were growing better than 4% annually. In May 2001, those wages were up 4% from a year earlier. Nonmanagement wages rose just 2.4% last month from a year earlier. (…)

Workers are voluntarily quitting jobs this year near the highest rate since the recession ended, according to separate Labor Department data. An elevated pace of voluntary departures indicates workers have confidence in the job market. But like wages, the quitting rate has remained relatively stable over the past year, failing to accelerate in line with falling unemployment. The rate of voluntary departures was higher in 2001 than this year, when the jobless rate was a similar level. (…)

So far in this expansion, job growth has tilted toward lower-wage fields including work at restaurants and retail stores. Minimum-wage increases in many states have boosted pay in those sectors. But employment growth in those fields drags on overall wage gains, potentially skewing national wage data down. (…)

There are many other negatives in this report:

• The slowdown is relentless:

• The diffusion index was 54.8% vs 61.3% in April. Most of the cyclical sectors were flat.
• Revisions to the previous jobs figures have been to the downside.

 



Source: FTN Financial (via The Daily Shot)

But some other facts also need a mention:

• The labor market has similarities with housing: the lack of supply seems to be hampering growth. But house prices are rising pretty fast, unlike wages.
• That said, comparing current wage growth with 2001 and 2007 needs to consider that inflation in 2001 and 2007 was 1.0% higher than now. In real terms, the current annual wage gains of +0.5% are only 0.5% lower than in 2001 and 2007 when the unemployment rate was similar.
• Employment growth remains well above the 100k minimum growth needed to keep the unemployment rate steady.
• Full-time employment continues to rise while temp jobs have been stagnating since 2014. Full time jobs rose 1.9% YoY in May and during the last 3 months, accelerating from +1.3% during the previous 3-month period. Meanwhile, temp jobs declined 0.6% in May, 0.8% between March and May, decelerating sharply from +3.2% between December and February.

 

• The “Payrolls Index” proxy (hourly earnings x weekly hours x employment) has been pretty steady during the last year in spite of the deceleration in employment growth. It is up 4.1% YoY in May, from +3.6% in January. The recent setback in inflation is keeping real income rising.

In all, it is highly unlikely that the Fed will freeze this month. The consumer remains the pillar of the economy and, after the weak January-February, growth in real expenditures resumed pretty much along the 2015-17 trend line of 2.5-3.0% annual rate.

The other big discussion matter is the apparent absence of wage pressures as hourly earnings rose 2.4% YoY in May after averaging +2.5% since January 2016.

Without pretending having all the answers on this complex issue, we must understand that the U.S. economy is experiencing several highly unusual sectorial inflation trends that importantly impact certain industries:

• The collapse in oil and coal prices made 245,000 high salaried workers lose their jobs during 2015-16. Only 48,000 of these jobs have been recovered through May of this year. Unsurprisingly, “Mining and logging” salaries have been stagnating since 2013. They are up 0.7% YoY in May.
• Manufacturers of durable goods have been in deflation mode for more than 4 years now, partly due to the collapse in energy prices and partly because of the 35% jump the the U.S. dollar since mid-2011. Durable goods prices are down 7% since their post recession peak in mid-2011 forcing employers to tightly manage their costs to protect margins. Durable goods manufacturers directly employ 7.7 million Americans, up 11% from the 2010 trough but still 1.3 million fewer (14 %) than at the 2006 peak. These also above average salaries are up only 1.4% YoY in May.
• Retail employment rose smartly since 2010 but peaked in January 2017 as more and more retailers face the reality: the combination of growing online retailing with deflating goods prices makes it impossible to maintain profits at a good enough level to sustain so may square feet of selling space. Retail employment declined 81,000 jobs since February while transportation and warehousing only added 16,000 new jobs.
• Lately, the supermarket industry has gone through a very rare deflationary period as food-at-home prices declined some 3% since the end of 2015 making it almost impossible for merchants to grow their top line. Supermarket employment is now negative YoY, a rare phenomenon in this stable industry.
• Retail wages, which had been rising at a 3-4% clip in 2015, have stabilized and are now rising 1.0-1.5% YoY mainly as a result of recent raises in minimum wages across the U.S.. Supermarket wages were rising 6-8% YoY between mid-2015 and mid-2016 but have recently flattened and are up only 1.0% YoY since December 2016.

Altogether, these industries employ 24.3 million people, down 1.3 million from their respective peaks, victims of commodity deflation, a strong dollar and rising robotization, the latter being accelerated by the formers. Their drag on aggregate U.S. wages is significant and could continue for a while, offsetting more normal cyclical pressures and keeping wage inflation lower than normal.

This is not to say that corporate America’s margins will not suffer as a result. As said, the relationship between inflation on revenues and inflation on costs varies greatly between industries in 2017. See on this:

• PROFIT MARGINS: THE SQUEEZE IS UNDERWAY
• “This Time Seems Very, Very Different.” Really?

Eurozone economic growth steadies in May as Germany and France expand at fastest rates in six years

• Final Eurozone Composite Output Index: 56.8 (Flash: 56.8, April Final: 56.8)
• Final Eurozone Services Business Activity Index: 56.3 (Flash: 56.2, April Final: 56.4)

The latest expansion of output was supported by strong growth of incoming new business. New orders increased at an identical pace to April, one of the steepest gains signalled for six years. (…)

Strong new order inflows tested capacity, leading to rising volumes of outstanding business. This in turn led to faster job creation, with employment rising at one of the
quickest rates seen over the past decade.

Price pressures meanwhile remained elevated, despite some easing in both input cost and output charge inflation. In both cases, rates of increase were nonetheless only moderately below highs reached earlier in the year. (…)

Goods production rose at the quickest pace in over six years, underpinned by a similarly strong increase in new orders received. Service sector activity rose at a rate little-changed from April’s six-year high,although new business grew at the slowest pace in four months. (…)

Encouragingly, both the hard data and the surveys are revealing a broad-based upturn. So far in the second quarter the PMI surveys are running at levels indicative of 0.7% GDP growth in France and Germany, with nearly 1% being signalled for Spain and 0.5% in Italy. (…)

CHINA COMPOSITE PMI EDGES UP TO 51.5

The Caixin China Composite PMI™ data (which covers both manufacturing and services) indicated only a modest expansion of overall output during May. At 51.5, the Composite Output Index rose slightly from April’s ten-month low of 51.2, but nonetheless posted the second-lowest reading seen since September 2016.

Data split by sector highlighted differing trends, with service providers noting an acceleration in business activity growth while manufacturers saw only a marginal rise in production. Furthermore, goods producers registered the slowest increase in output for 11 months. In contrast, services activity expanded at a solid pace that was the quickest since January, as shown by the seasonally adjusted Caixin China General Services Business Activity Index posting 52.8 in May, up from 51.5 in April.

Stronger growth in services activity reflected a quicker increase in total new business during May. Moreover, the latest expansion in new orders was the most marked in the year-to-date and solid amid reports of stronger underlying client demand. In line with the trend for production, manufacturers saw a further slowdown in new order growth to the weakest in the current 11-month sequence of expansion. The faster increase in new orders across the service sector offset the weaker rise at goods producers, and therefore growth in composite new work held steady at April’s modest pace.

Employment continued to increase across China’s service sector in May. That said, the rate of job creation eased to the weakest in the current nine-month sequence of growth. Meanwhile, manufacturing firms continued to pare back staff numbers, with the latest reduction the quickest since last September. As a result, composite employment fell for the second month in a row in May and at a rate that, though marginal, was the fastest in eight months. (…)

Cost pressures intensified at services companies during May, with the rate of input price inflation picking up from the six-month low in April. The solid increase in input costs was generally linked to greater prices for raw materials and higher staff costs. In contrast, manufacturing companies recorded the first fall in cost burdens since June 2016, albeit only slight. Consequently, input prices at the composite level rose at a modest pace that was the weakest in 11 months.

May survey data pointed to a further increase in prices charged for Chinese services, thereby extending the current period of inflation to 14 months. That said, the rate at which charges were raised remained slight. Reflective of the trend for input costs, manufacturers cut their selling prices in May. Though only marginal, it was the first time that factory gate charges had declined since February 2016. (…)

More Chinese Companies Turn to Shadow Banking Beijing’s game of Whac-A-Mole against financial risks is sending some borrowers into darker corners. New loans from so-called trusts in the first four months of this year were nearly five times as much as a year earlier.

(…) Trust firms, which often charge borrowers higher rates than banks, occupy a middle ground between banking and asset management. They are licensed and loosely regulated by China’s banking watchdog, but they lack some of banks’ protections, such as government deposit insurance, and they have more flexibility to invest in risky areas than banks do. (…)

A shift to trust lending would make it even harder to gauge the true extent of credit in the system. (…)

Chinese Banks Face Up to Funding Squeeze Household deposits, long the foundation of China’s economy, are now fleeing the country’s banking system.

Household deposits—long the backbone of China’s economy, funding inexorable loan growth—are fleeing: Around 1.2 trillion yuan ($180 billion) left the banking system last month. Meanwhile, growth in corporate deposits has slowed, reducing the rise in deposits overall to a crawl.

The exodus is proving a double whammy for China’s banks. Not only are they losing a stable source of funding, they are also bearing the brunt of higher costs to raise cash as financial conditions tighten. Much of the money pulled out of conventional deposits is being invested in the rapidly multiplying population of investment funds, which offer higher rates.(…)

Adding another constraint on liquidity, government deposits into the banking system are slowing. All the same, banks are pushing out ever-more loans to companies and households: The system’s total loan-to-deposit ratio, a measure of liquidity, is nearing 80%, its highest level in over a decade. (…)

Saudis, U.A.E., Bahrain and Egypt Cut Ties With Qatar Four Arab states cut off diplomatic ties with Qatar, accusing their neighbor of meddling in their internal affairs and backing terrorism.

• Oil prices dip on fears Middle East spat could harm OPEC cuts

• Oil Steadies as Limited Impact Seen From Gulf Diplomatic Crisis

EARNINGS WATCH

Factset’s weekly summary:

Overall, 99% of the companies in the S&P 500 have reported earnings to date for the first quarter. Of these companies, 75% reported actual EPS above the mean EPS estimate, 7% reported actual EPS equal to the mean EPS estimate, and 18% reported actual EPS below the mean EPS estimate. The percentage of companies that reported 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 were 5.9% above expectations. This surprise percentage was above the 1-year (+4.3%) average and above the 5-year (+4.1%) average.

The blended earnings growth rate for the first quarter is 14.0% this week, which is slightly above the earnings growth rate of 13.9% last week. If the Energy sector is excluded, the blended earnings growth rate for the remaining ten sectors would fall to 9.8% from 14.0%

In terms of revenues, 64% of companies reported actual sales above estimated sales and 36% reported actual sales below estimated sales. The percentage of companies that reported sales above estimates was above the 1-year average (53%) and above the 5-year average (53%).

In aggregate, companies reported sales that were 0.7% above expectations. This surprise percentage was above the 1-year (0.0%) average and above the 5-year (+0.1%) average.

The blended revenue growth rate for Q1 2017 is 7.6%. If the Energy sector is excluded, the blended revenue growth rate for the index would fall to 5.8% from 7.6%.

At this point in time, 112 companies in the index have issued EPS guidance for Q2 2017. Of these 112 companies, 75 have issued negative EPS guidance and 37 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 67% (75 out of 112), which is below the 5-year average of 74%.

Excluding IT and Health Care, guidance is 46 negative, 10 positive (45/10 last week).

The 6 consumer-centric sectors are expected to post EPS growth of only 0.4% ().6% last week) on average in Q2: