Wage Growth Slows, Even as U.S. Employers Add Jobs U.S. employers are churning out jobs unabated, but the inability to generate more robust wage growth represents a missing piece in a largely complete labor recovery.
@jbjakobsen
(…) Economists have advanced many explanations for the trend. A more globalized economy is holding down what workers can earn everywhere, especially in rich countries losing manufacturing jobs to low-wage economies. The reduced power of unions has impeded the bargaining power of workers. People are more easily replaced by machines or individuals sitting on the sidelines of the labor force waiting to return.
The burdens of slow wage growth, importantly, are softened for workers by the fact that inflation is low. Inflation-adjusted wage growth for blue-collar workers, at 0.7% a year in this expansion, is actually better than in any of the three previous expansions, and wages by this measure have grown for 49 straight months. (…)
There are other explanations for soft wage gains. Economists point to low worker-productivity growth, which limits the ability of firms to raise pay without eating into profits. Companies may also be hunting out cheaper workers—either younger or less skilled ones—rather than competing solely on wages. (…)
(Association of American Railroads)
(…) “It’s not ‘old school’ sequential tightening when the Fed hiked at every meeting until something breaks,” such as a U.S. recession, Gundlach said. “What we have now is the ‘new old school’ sequential tightening.” (…)
“I think the Fed is emboldened to hike when the stock market is pushing near highs and when there is a sense or whiff of panic in the air, they start to talk cautiously.”
Friday, the Fed said in its semiannual report to Congress that vulnerabilities in the U.S. financial system “remained, on balance, moderate.”
Gundlach said the Fed was “getting awfully specific” on asset prices in its semiannual report. “It almost sounds like they are saying, ‘I warned you and don’t blame us.’ I told you we were going to do this (hike rates) and asset prices are going down. If stocks go down 10 percent in October, don’t blame us.” (…)
Amid the chorus of “solid jobs report”, David Rosenberg is a lone cautious wolf:
- More labor slack was created in June.
- More worrisome was the continued exodus of prime-age (25 to 54-year-old) men from the workforce, some 21,000 in June, after 92,000 in May.
- Looking at the Household survey data, Rosy observes that employment for private wage-earners contracted 43,000 in June.
- In fact, Household employment has risen 12,000 in the past 2 months, and within that number, 264,000 were self-employed people. “Question is are they making money? Maybe this explains why wage growth is so soft.”
- There was also an influx of 203,000 kids, age 16 to 19, into the workforce and a 178,000 rise in the “aging, not aged” baby boomers over 55 who must keep working to maintain a lifestyle they can’t afford on their depleted retirement savings.
- There is also a 5.2% rise in multiple-job holders in the past year, a sign of folks needing more income to make ends meet.
- Over the last 3 months, the annualized growth rate in work-based income has throttled back to a 1.9% annual rate, among the weakest trend we have seen in the past two years.
That said, the BLS computes an index of aggregate weekly payrolls for all private employees, sort of a labor income proxy. It was +4.5% YoY in June, same as the average for Q2 but better than the +3.9% Q1 average.
So we have OK employment growth, OK wage growth resulting in 4.0-4.5% growth in labor income. Meanwhile, CPI inflation is slowing, boosting real income growth.
Here’s the labor income proxy deflated by total CPI:
(…) Canada’s unemployment rate is down to 6.5 per cent after the economy churned out a better-than-expected 45,000 jobs in June. Most of those gains, however, were in part-time positions.
Still, over the course of 12 months, Canada has created 351,000 jobs, most of them full-time
And notably, Statistics Canada said Friday, employment gains in the second quarter, of 103,000, mark the strongest quarterly showing since 2010. The jobless rate dipped one notch, from 6.6 per cent in May. (…)
The JPMorgan PMI™, compiled by IHS Markit, edged down from 53.8 in May to 53.7 in June, but still completed a solid Q2. At 53.7, the Q2 average was unchanged on that seen in Q1, which had in turn been the best performance for two years. The surveys have therefore been signalling global GDP growth of approximately 2.5% per annum over the first half of 2017.
Global PMI* & economic growth
Sources: IHS Markit, JPMorgan
However, the surveys also showed the divergence between the developed and emerging markets widening, amid slower growth in the latter. The developed world PMI signalled the second-fastest rate of expansion in just over 1½ years. In contrast, the emerging markets PMI fell to its lowest level since last November. The underperformance of the emerging market PMI compared to the developed world was the most marked since January 2016.
Developed & emerging market output*
Source: IHS Markit. * PMI shown above is a GDP weighted average of the survey output indices
Developed world growth was broad-based but was once again led by the eurozone. Although the Eurozone PMI signalled slightly softer growth in June, the region outperformed its peers for the fifth straight month with the surveys signalling Q2 growth at a six-year high. Rates of expansion also slipped in the UK and Japan, but in both cases rounded off better quarters than the first three months of the year. In contrast, US growth accelerated slightly in June, though the Q2 average remained below Q1.
Of the four largest emerging markets, only India saw business activity grow at an increased rate in June. Growth slowed in both China and Russia, though the latter recorded the fastest growth of the BRIC economies. Brazil meanwhile slipped back into decline after two months of marginal expansion.
Central Banks Looking to Reduce Stimulus Face Quandary of Falling Inflation Leading central banks plan to withdraw some of the stimulus measures they have put in place since the financial crisis. But their timing seems a little puzzling: Inflation, which is already below their targets, is falling world-wide.
(…) Across the Group of 20 largest economies, which account for most of the world’s economic activity, annual inflation slumped in May to its lowest level since August 2016, according to the Organization for Economic Cooperation and Development.
Much of that decline was due to easing energy prices. But even excluding that volatile item, and similarly choppy food prices, “core” inflation is slowing in many places.
That isn’t a recent phenomenon. Core inflation in developed economies hasn’t changed much in the years since the financial crisis, never reaching the 2.5% rate it stood at in September 2008, when Lehman Brothers collapsed, or going below the 1.1% rate it hit in December 2010.
(…) According to the OECD, the unemployment rate in developed economies fell to 5.9% in May from 6.3% a year earlier. (…)
EARNINGS WATCH
(…) Barring an unlikely disaster, companies will say profits rose for the fourth straight time, with analysts calling for a 7.4 percent increase over a year earlier. (…) In the past, earnings have been a reliable antidote. Their arrival each quarter has lifted stocks 100 percent of the time since 2013, and under-estimating the profit machine has been a sure route to impoverishment since the bull market began in 2009. (…)
In the past five years, S&P 500 firms beat estimates by an averaged 3.6 percentage points.
The bar is arguably higher this time. Analysts have been standing firm with their forecasts even as economic data trailed expectations by the most since 2011. Their estimates for earnings growth fell by 1.4 percentage points during the course of second quarter, the smallest reduction in six years. (…)
Based on Factset and Thomson Reuters’ numbers, this should be another good earnings season:
- Second quarter earnings are expected to increase 7.9% (TR) or 6.5% (F) from Q2 2016. Excluding the Energy sector, the
earnings growth estimate declines to 4.8% (TR) or 3.7% (F).
- Through July 7, 23 companies in the S&P 500 Index [13 in the consumer areas and 6 IT] have reported earnings for Q2 2017. Of these companies,
78.3% reported earnings above analyst expectations and 8.7% reported earnings below analyst expectations.
In a typical quarter (since 1994), 64% of companies beat estimates and 21% miss estimates. Over the past
four quarters, 71% of companies beat the estimates and 19% missed estimates.
- In aggregate, companies are reporting earnings that are 8.2% above estimates, which is above the 3.1%
long-term (since 1994) average surprise factor, and above the 4.9% surprise factor recorded over the past
four quarters.
- In aggregate, companies are reporting revenues that are 1.5% above estimates.
- IT and Financials are expected to grow EPS 8.2% in Q2 [+8.4% last week], down from 9.5% expected on March 31. The 6 consumer-centric sectors are expected to show EPS growth of only 0.6% (+0.6%), down from +2.4% on March 31.
These strong earnings have boosted current trailing EPS to $124.90 from $122.81 after Q1. Coupled with lower inflation rates, the Rule of 20 Fair Index Value (yellow line below) has shut up since March when inflation peaked at 2.3%. The Rule of 20 P/E has thus dropped from 22.4 in February to its current 21.0, failing to reach the “extreme risk” area.
It is rather interesting that equities valuation measured by the Rule of 20 have improved since the February high while just about every other valuation tool has continued to deteriorate. At 21.0, the Rule of 20 P/E is 5% above its “20 fair value” level (13% in February) and is thus moderately risky on that basis. Most other popular measures are in “extremely overvalued” territory as this great table from CMG Wealth Management shows:
Trailing EPS have advanced 6.4% since the end of 2016 and inflation has slowed measurably. As a result, Fair Value as per the Rule of 20 has risen from 2097 at the end of February to its current 2297 (actually this is the 200-d m.a. level), a 9.5% gain while the S&P 500 Index rose 1.9%. Interestingly, on the basis of Thomson Reuters’ earnings estimate of $131 for the full year 2017, Fair Value would be 2410.
Similarly, the “120 Yield Spread” has not been broken except for a brief 2-week period at the end of June. It is now 133 and rising.
So, while the trends in the overall economy keep flashing sluggish growth, the basic market fundamentals are improving rather rapidly. Corporate profits continue to impress amid a soft economy and very slow inflation. Q2 revenue growth is forecast at +4.6%, ex- Energy +3.9% on average, when inflation is in the 1.5% range and wages are rising at 2.5%. In all, profits at large cap companies are not showing any signs of stress just yet.
The Fed wants to normalize interest rates and start unwinding its balance sheet. Doing this while the economy is in slow growth mode and inflation barely deserving its name will require unproven skill from the Fed and the ECB. Meanwhile, oil prices are defying OPEC’s resolve to do “whatever it takes” as Saudi Arabia has clearly lost the game of chicken and must now try to save face and the Aramco IPO which was expected to net some $100B to SA.
The risk is that oil prices drop back to their 2016 low and drag equity markets lower along the way. However, the positive correlation between oil prices and the S&P 500 Index was interrupted last November. Furthermore, Energy now only accounts for 6% of the Index so any damage would have to be collateral, either financial or another deflation scare. The financial impact is likely to be fairly subdued since the 70 companies that filed for bankruptcy in 2015-16 are now debt-free and produce nearly 1 million bbls/day.
We still call it a stock market, but these days it has many more indexes than it does stocks: There are nearly 6,000 indexes today, up from fewer than 1,000 a decade ago. Meanwhile, the number of stocks in the Wilshire 5000 Total Market Index has shriveled to 3,599, from 7,562 in 1998. (…)
Through the first five months of this year, investors steered $338 billion into passive mutual funds and ETFs—that’s on top of last year’s record inflows of $506 billion, according to Morningstar. If this pace keeps up, passive funds could take in more than $800 billion in 2017, a 60% jump from 2016’s record and nearly double the haul from 2015. (…)
Passive and quantitative strategies now account for 60% of equity assets, up from less than 30% a decade ago, says Marko Kolanovic, JPMorgan’s global head of macro quantitative and derivatives research. By his estimates, just 10% of trading volume originates from fundamental discretionary traders. (…)
With cap-weighted indexes, index buyers have no discretion but to load up on stocks that are already overweight (and often pricey) and neglect those already underweight. That’s the opposite of buy low, sell high.
“By definition, index funds also guarantee that you will suffer 100% of the next bear market’s decline,” notes James Stack of InvesTech Research. The same risk management that causes active managers to underperform in a bull market can lessen the pain of a correction, but passive funds have no option to hoard cash or diversify. (…)
Leaders of the world’s biggest economies are trying to have it both ways on trade. The final statement from the Group of 20 countries meeting in Hamburg over the weekend included a vow to fight protectionism, but the WSJ’s Emre Peker and William Horobin report the G-20 leaders also stepped back from an unequivocal commitment to free trade. Instead, the countries are trying to respond to rising protectionist movements by saying they recognize the need for defensive trade measures.
That’s a bow to the defiantly unilateral stance President Donald Trump has taken, but European officials believe it also signals a new international consensus on economic issues can be rebuilt. With the European Union already advancing new trade pacts this year that include Canada and Japan, countries already are setting up closer ties while the U.S. tries to figure out how to turn the country’s changed stance on trade into new negotiations.
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