Month: September 2017

Payroll employment increases by 156,000 in August; unemployment rate changes little (4.4%)

• The change in total nonfarm payroll employment for June was revised down from +231,000 to +210,000, and the change for July was revised down from +209,000 to +189,000. With these revisions, employment gains in June and July combined were 41,000 less than previously reported. After revisions, job gains have averaged 185,000 per month over the past 3 months.
• Employment growth has averaged 176,000 per month thus far this year, about in line with the average monthly gain of 187,000 in 2016.
• The labor force participation rate, at 62.9 percent, was unchanged in August and has shown little movement on net over the past year.
• The average workweek for all employees on private nonfarm payrolls declined by 0.1 hour to 34.4 hours in August. In manufacturing, the workweek declined by 0.2 hour to 40.7 hours, while overtime was unchanged at 3.3 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls was 33.7 hours for the fifth consecutive month.
• Average hourly earnings for all employees on private nonfarm payrolls rose by 3 cents to $26.39, after rising by 9 cents in July. Over the past 12 months, average hourly earnings have increased by 65 cents, or 2.5 percent.

U.S. Personal Income & Spending Pick Up

Personal income increased 0.4% during July following unrevised stability in June. Wages & salaries increased 0.5% (2.5% y/y), the same as during June which was upwardly revised. (…)

Disposable income rose 0.3% (2.7% y/y) following no change during June. Adjusted for price changes, take-home pay improved 0.2% (1.3% y/y) after stability a month earlier.

Personal consumption expenditures increased 0.3% last month following a 0.2% rise, revised from 0.1%. Adjusted for price change, personal spending advanced 0.2% (2.7% y/y), the same as in June. Real durable goods purchases jumped 0.8% (5.9% y/y) for the second straight month. Real nondurable goods spending rose 0.3% (2.5% y/y) following a 0.1% dip. Real spending on services rose 0.2% (2.3% y/y) for the third straight month.

The personal savings rate declined to 3.5%, the lowest level since December and down from the 6.1% high during all of 2015. Personal saving grew by roughly one quarter y/y.

The chain-type price index ticked 0.1% higher (1.4% y/y) following no change during June. Excluding food & energy, prices increased 0.1% (1.4% y/y) for the third straight month. Durable goods prices fell 0.2% (-2.0% y/y), down for the sixth straight month. Nondurable goods prices rose 0.3% (1.0% y/y) after two months of decline. Services prices improved 0.1% (2.1% y/y), following two months of 0.2% increase.

  

Expenditures have been growing much faster than income for 16 months. This can’t go on much longer…

Also noteworthy from yesterday’s report is that core inflation remains very subdued as these Daily Shot charts illustrate:

  

Inflation on Services is also slowing indicating either slowing demand or slow wage growth, or both:

In fact, all the main inflation measures are trending down:

Finally, the core PCE deflator shows annualized inflation of 0.8% during the last 5 months. Fed up, or not?

U.S. Pending Home Sales Slip

The National Association of Realtors (NAR) reported that pending home sales eased 0.8% (-1.3% y/y) during July to an index level of 109.1 (2001=100). It was the fifth monthly decline this year, and left sales 4.0% below the peak during April 2016.

Pending sales were mixed m/m across regions. The index for the West improved 0.6% (-4.0% y/y) to the highest level since December. Elsewhere in the country sales fell. For the South, the index declined 1.7% (-0.2% y/y) to the lowest level since January. The index for the Midwest eased 0.7% (-2.8% y/y), also to the lowest level since January. The index in the Northeast slipped 0.3% (+2.4% y/y) following two months of slight increase.

 

Euro zone inflation rises more than forecast ahead of ECB meeting

Inflation in the 19-country currency bloc, targeted by the ECB at just below 2 per cent, accelerated to 1.5 per cent in August from 1.3 per cent, coming just ahead of expectations for 1.4 per cent on the back of higher energy costs, Eurostat said on Thursday.

Underlying inflation, or prices excluding volatile food and energy costs, a figure closely watched by ECB policymakers, held steady at 1.3 per cent, beating forecasts for 1.2 per cent. (…)

AUGUST PMI’S

Manufacturing activity has improved across the world with strength seen in both domestic and export demand. We are seeing capacity constraints, emerging shortages and rising input and output prices. The Eurozone manufacturing PMI is particularly strong which no doubt will put pressure on the ECB.

USA

• IHS Markit U.S. Manufacturing PMI

The seasonally adjusted IHS Markit final US Manufacturing Purchasing Managers’ Index™ (PMI™) registered 52.8 in August, down slightly from July’s reading of 53.3. Nonetheless, the latest index figure signalled an ongoing improvement in operating conditions across the US manufacturing sector.

Weighing on the headline index was a softer rise in manufacturing production. Output at manufacturing firms increased at the weakest pace since June 2016 in August. Some panellists noted that relatively subdued foreign client demand had limited growth in production.

Meanwhile, new orders rose at a pace only slightly weaker than July. Anecdotal evidence linked the rise in new business to improving domestic economic conditions and an associated rise in customer demand. In contrast, new export sales were broadly unchanged in August, following a fractional contraction in July.

The survey brings more encouraging signs of improved domestic demand, however, with orders for both consumer goods and investment goods such as plant and machinery on the rise, boding well for the wider economy to continue to expand as we move through the second half of 2017.

For the first time since April, the level of outstanding business at manufacturing firms increased. Backlogs rose at a modest rate and panellists generally linked growth to greater volumes of new orders. Subsequently, firms continued to hire additional staff. Workforce numbers expanded at the strongest pace in six months.

On the price front, cost burdens increased at the fastest rate since April and output price inflation was the strongest in three months. Panellists noted that input cost inflation was driven by higher raw material prices, especially steel and electrical components. Firms generally passed these rises on to clients through increased factory gate charges.

• U.S. ISM PMI

The August PMI^® registered 58.8 percent, an increase of 2.5 percentage points from the July reading of 56.3 percent. The New Orders Index registered 60.3 percent, a decrease of 0.1 percentage point from the July reading of 60.4 percent. The Production Index registered 61 percent, a 0.4 percentage point increase compared to the July reading of 60.6 percent. The Employment Index registered 59.9 percent, an increase of 4.7 percentage points from the July reading of 55.2 percent. The Supplier Deliveries Index registered 57.1 percent, a 1.7 percentage point increase from the July reading of 55.4 percent. The Inventories Index registered 55.5 percent, an increase of 5.5 percentage points from the July reading of 50 percent. The Prices Index registered 62 percent in August, the same reading as July, indicating higher raw materials’ prices for the 18th consecutive month. Comments from the panel reflect expanding business conditions, with new orders, production, employment, backlog and exports all growing in August, as well as supplier deliveries slowing (improving) and inventories increasing during the period. The Customers’ Inventories Index experienced a sharp decline in August compared to July.

Of the 18 manufacturing industries, 14 reported growth in August, in the following order: Textile Mills; Petroleum & Coal Products; Machinery; Transportation Equipment; Fabricated Metal Products; Computer & Electronic Products; Paper Products; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Chemical Products; Nonmetallic Mineral Products; Plastics & Rubber Products; Printing & Related Support Activities; and Food, Beverage & Tobacco Products. Three industries reported contraction in August compared to July: Apparel, Leather & Allied Products; Primary Metals; and Furniture & Related Products.

China’s Factory Activity Gauge Rebounds in August An official gauge of China’s factory activity rose in August, though new export orders declined despite strong global demand as the stronger yuan made Chinese exports more expensive.

Robust domestic demand was the main factor boosting the official manufacturing purchasing managers’ index, which rebounded to 51.7 from July’s 51.4. (…) A subindex measuring total new orders climbed to 53.1 from 52.8 in July, but new export orders dropped to 50.4 in August from 50.9, hurt by the stronger yuan. (…)

The country’s official nonmanufacturing PMI, also released Thursday, fell to 53.4 in August from 54.5 in July. Though the index remained in expansion, it indicated the slowest growth in the sector since May last year.

The subindex for services dropped to 52.6 from 53.1 in July, while the component measuring construction activity decreased to 58.0 from 62.5, the statistics bureau said.

  

• The independent Markit/Caixin survey is even more upbeat:

China’s manufacturing sector remained in expansion territory in August, fuelled by the strongest increase in new business for just over three years. Firmer foreign demand was a key driver of new order growth, with export sales rising to the greatest extent in over seven years in August. As a result, companies expanded their production schedules and buying activity, while business confidence rose to its highest for five months. However, stricter environmental policies were a key factor leading to longer delivery times, whilst inflationary pressures intensified as input costs and output charges both rose at faster rates.

The seasonally adjusted Purchasing Managers’ Index™ (PMI™) registered 51.6 in August, up from 51.1 in July to signal an improvement in overall operating conditions. (…) August survey data signalled a solid rise in total new work placed at Chinese manufacturers, with the rate of expansion the quickest seen for 37 months. A broad-based upturn in foreign demand was cited by panellists as a key driver of new order growth. This was highlighted by the sharpest increase in export sales since March 2010.

Sustained growth in new orders led firms to expand their production schedules again in August. Furthermore, the rate of growth was little changed from July’s five-month high.

(…) a combination of lower employment and rising new work led to a further increase in outstanding business in August. Notably, the pace of accumulation was the quickest seen in the year to date.

Rising output requirements underpinned a further increase in buying activity during August. Notably the rate of increase was the fastest seen for just over three years. Greater purchasing activity contributed to a further rise in stocks of inputs, albeit only marginal. In contrast, inventories of finished items declined at the quickest rate since May 2016, which some panellists attributed to the fulfilment of new orders.

The average time taken for inputs to be delivered continued to lengthen in August. Moreover, the rate at which vendor performance deteriorated was the most marked since January, with a number of firms mentioning that stricter environmental policies had delayed lead times.

Average input costs rose to the greatest extent in five months in August. Survey respondents widely commented on higher prices for a broad range of raw materials in the latest survey period. Consequently, output prices rose at a solid pace that was the fastest in 2017 to date.

Stronger Chinese demand was felt in Japan:

Nikkei Japan Manufacturing PMI®: Solid growth sustained during August

The Japanese manufacturing sector continued to experience improving operating conditions during August, with output, new orders and employment all registering expansion. Strengthened demand from both domestic and international sources (especially China) was widely reported by panellists.

The headline Japan Manufacturing Purchasing Managers’ IndexTM (PMI)® was little changed during August at a level of 52.2 (July: 52.1). The latest reading was indicative of
solid growth, and the PMI has now recorded above the 50.0 no-change mark for 12 successive months.

Underpinning the ongoing expansion of the sector was a further increase in manufacturing output, the thirteenth in as many months. The rate of expansion was solid, and the best recorded since May. Panellists reported that a combination of backlog depletion – latest data showed a second successive monthly fall in outstanding business – and rising levels of new work supported production.

Overall new work increased during August for an eleventh successive month amid reports of higher domestic and international demand. New export orders rose modestly with manufacturers noting higher sales to clients based in China. (…)

Panellists reported that positive projections for orders underpinned inventory accumulation, which was also noted as a reason to expand workforce numbers. Rising current workloads strengthened the need for additional workers and overall employment rose at a historically marked pace as a result. (…)

Input prices were also higher, although the rate of inflation was the lowest recorded in 2017 so far. Output charges were increased only fractionally as a result. (…)

Eurozone manufacturing growth remains among strongest seen since 2011

August saw a strong and accelerated increase in eurozone manufacturing production, as robust demand and rising employment underpinned a solid improvement in overall operating conditions.

The survey indicates that euro area manufacturing output is growing at an annual rate of approximately 4%.

The final IHS Markit Eurozone Manufacturing PMI® rose to 57.4, up from 56.6 in July and equalling June’s 74-month high. (…) The expansion was led by a strong core of Germany, the Netherlands and Austria. PMI readings for Austria and the Netherlands both hit 78-month highs, while the rate of growth signalled for Germany was among the best registered since early-2011. These nations also recorded the steepest increases in output and new orders.

The other countries covered by the survey also saw business conditions improve during August. Italy, Ireland and France were mid-ranked in the PMI growth table, with rates of expansion improving across all three. (…) Only Spain saw its rate of improvement slow during August.

August saw euro area manufacturing production rise at one of the fastest rates since April 2011, bettered or equalled only by the expansions seen in May and June of this year. The trend in new order inflows also improved, with the rate of expansion similarly among the best since early-2011.

Companies generally reported that domestic market conditions remained robust in August. Growth in new export business also underpinned the rise in new work intakes, with export orders rising at the quickest pace in six-and-a-half years. Foreign demand improved in all of the nations covered by the survey, including a mild increase in Greece for the first time in a year. Growth of new export business at German manufacturers was the strongest since May 2010. Rates of increase also accelerated in France, Italy, the Netherlands, Austria and Ireland.

The solid upswing in new order intakes exerted pressure on capacity, leading backlogs of work to rise at the third-fastest rate in the series history. This encouraged further job creation, with the rate of growth in staffing levels staying close to May’s survey-record high.

Employment rose in all of the nations covered during August. The steepest increases were signalled in Austria, the Netherlands and Germany. However, only Italy, Austria and Greece reported sharper rates of expansion than in the prior month.

Pressure on capacity was also evident at suppliers, as average vendor delivery times lengthened to the greatest extent since April 2011. Companies linked this to rising demand for raw materials and shortages developing for a number of inputs. Further reinforcing this was the trend in purchasing activity at manufacturers, as input buying volumes rose at the steepest pace in over six years.

Price pressures strengthened in August. Input cost inflation accelerated for the first time in six months to the highest since May, while charges also rose at a faster rate than in July. Alongside higher commodity prices, overall input costs also rose due to supply chain pressures. (…)

Hence:

Corporate America remains very focused on costs and margins:

• GE’s new CEO preparing job cuts in bid to reduce costs: source

• Big Food Faces Pressure From Retailers Demanding Discounts Packaged-food companies have been struggling with declining sales as shoppers shift from older brands to options perceived as healthier. Now retailers are adding to the companies’ woes.

Profit margins per the U.S. national accounts are perking back up after having been reduced by the collapse in oil prices.

Higher capacity utilization rates, also impacted by oil prices, are also helping.

CORPORATE CONCENTRATION

Increasing corporate concentration is one of the factors that have boosted profit margins during the last 15 years. I wrote about this last year:

• CETERIS NON PARIBUS
• Certain Uncertainties

Now, more scholars are documenting this…

• A Provocative Look at the Harm From Corporate Heft A new study finds that lack of competition has driven up prices, hurting U.S. growth, wages and labor-force participation

(…) size and scale can enable companies to reduce costs, invest in better products and compete globally.  But a provocative new study concludes the opposite. It found that in recent decades a lack of competition has driven up prices,  hurting U.S.  growth, wages and labor-force participation. (…)

The authors analyze data on every publicly traded company in the U.S. back to 1950 to determine how much its revenue exceeded its variable costs, such as labor and commodities. That excess, what they call the markup of price over marginal cost, fluctuated between 16 % and 32% until 1982 and has since climbed steadily, to 67%.The trend holds across industries, and is more pronounced in smaller rather than the biggest companies.

This, they say, is proof that companies are increasingly able to exert “market power,” that is, charge higher prices so as to boost profits at the expense of consumers.

Other studies have come to similar conclusions. One by former President Barack Obama’s Council of Economic Advisers found return on capital had become astronomical for the most profitable publicly traded companies, which shouldn’t be possible if competitors could freely enter their market.

The latest study goes even further, arguing the prevalence of market power helps explain deeper economic maladies. A company with such power often restricts production to prop up prices and profits. Messrs. De Loecker and Eeckhout argue this reduces demand for labor and thus explains why wages for low-skilled workers have stagnated in recent decades. Lower wages also discourage people from working, which depresses labor-force participation.

They add that markups may be evidence of barriers to entry by new competitors, which is corroborated by slumping business startup rates. The especially sharp rise in markups since 2009, they say, may explain why economic growth has been so tepid since. (…)

But some of its claims invite skepticism. Ample evidence already links depressed wages to globalization, weaker unions and the demand for skills. Growth has been weak globally since 2009 and seems due mostly to aging and repairing the damage of the financial crisis. The link to market power thus far appears mostly circumstantial.

By focusing on variable costs the authors may understate how companies’ fixed costs have risen, to pay for things such as software, computers, research and development and marketing. One major fixed cost, depreciation, has risen from 12% of GDP in the 1960s to around 16% as companies spend more on tech equipment that quickly becomes obsolete. (…)

The question for trust busters is whether this move toward companies with higher fixed costs and more market power is benign or malign. The policy implications are either “‘We’re being too lenient,’ which is what we heard in the corridors of Europe, or it could be, ‘Here’s the way business models are evolving,’” says Mr. De Loecker. (…)

…and are raising the antitrust flag:

• Amazon’s Antitrust Paradox

Amazon is the titan of twenty-first century commerce. In addition to being a retailer, it is now a marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer, and a leading host of cloud server space. Although Amazon has clocked staggering growth, it generates meager profits, choosing to price below-cost and expand widely instead. Through this strategy, the company has positioned itself at the center of e-commerce and now serves as essential infrastructure for a host of other businesses that depend upon it. Elements of the firm’s structure and conduct pose anticompetitive concerns — yet it has escaped antitrust scrutiny.

This Note argues that the current framework in antitrust — specifically its pegging competition to “consumer welfare,” defined as short-term price effects — is unequipped to capture the architecture of market power in the modern economy. We cannot cognize the potential harms to competition posed by Amazon’s dominance if we measure competition primarily through price and output. Specifically, current doctrine underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anticompetitive. These concerns are heightened in the context of online platforms for two reasons. First, the economics of platform markets create incentives for a company to pursue growth over profits, a strategy that investors have rewarded. Under these conditions, predatory pricing becomes highly rational — even as existing doctrine treats it as irrational and therefore implausible. Second, because online platforms serve as critical intermediaries, integrating across business lines positions these platforms to control the essential infrastructure on which their rivals depend. This dual role also enables a platform to exploit information collected on companies using its services to undermine them as competitors.

This Note maps out facets of Amazon’s dominance. Doing so enables us to make sense of its business strategy, illuminates anticompetitive aspects of Amazon’s structure and conduct, and underscores deficiencies in current doctrine. The Note closes by considering two potential regimes for addressing Amazon’s power: restoring traditional antitrust and competition policy principles or applying common carrier obligations and duties.

More to come on this matter…Oh! BTW, politicians are also getting the same idea:

• Google is losing allies across the political spectrum Antitrust sentiment grows, so does skepticism about Google on both the left and the right.

Last time I looked, AMZN was over 200x earnings and GOOG 30x.

Meanwhile, back at the ranch:

• In GOP Primaries, Candidates Battle to Be the Trumpiest Dozens of people vying for elected offices echo the president’s slogans and style. The potential arrival of a wave of like-minded lawmakers could make it far easier for Trump to turn his ideas into law.

• Views of Trump’s presidential conduct, handling of issues