Perspective impacts news treatment and judgement.
U.K. newspapers were their sensationalist-selves carrying this headline Double earthquake strike in Japan: Tokyo hit by TWO huge tremors in space of hours) Saturday morning even though the double earthquake was barely mentioned in Japanese media. After all, there were apparently 25 quakes in Japan in the last 30 days.
But for Suzanne and I, awaken by a shaking hotel in the middle of the night, these 15-or-so trembling seconds in this pitch black room on the 28th floor were rather scary, even knowing this was a rather recent hotel tower.
Perspectives also are at play in economics and finance. Friday’s employment report is a prime example.
Hurricanes Batter U.S. Jobs Data, but Unemployment Falls The U.S. economy was nicked by two hurricanes in September but is showing signs of underlying strength. The country shed 33,000 jobs, the first loss in seven years, but the unemployment rate fell to 4.2%.
The country shed 33,000 jobs in September, the first loss in seven years, the Labor Department said Friday, ending the longest stretch of job growth on record. (…)
Employment in the restaurant industry, in particular, took a big hit, falling 105,000 in September from the month before, after averaging growth of 29,000 during the prior six months.
A separate survey of households, rather than businesses, pointed to a much stronger labor market. It showed employment actually rose sharply—by 906,000—in September from the prior month and that the unemployment rate fell by 0.2 percentage point to 4.2%, the lowest since 2001.
The survey of businesses counts a drop in employment if a person doesn’t work and isn’t paid during the survey week. The household survey is different. It counts a person as employed as long as he or she keeps the job. That might make the household survey a more reliable gauge when business is temporarily disrupted.
The household survey suggested about 1.5 million people couldn’t show up to work last month due to bad weather—the most since an East Coast blizzard in 1996. The Labor Department said the business survey likely was distorted but that the storms had “no discernible effect on the national unemployment rate.” (…)
Workers’ wages jumped last month, but that figure, recorded in the business survey, may have been affected by the storms as well. Average hourly earnings rose 12 cents, or 0.45%, from a month earlier. Wages were 2.9% higher from a year earlier.
One likely factor: Many low-wage workers in restaurants or hotels were temporarily unemployed because of the storms, pushing up the overall average for a time. The Labor Department estimates that one in 13 workers had a job in counties affected by the storms in September.
(…) Overall, the nation had 331,000 fewer unemployed workers in September than in August. At the same time, the labor force grew by 575,000.
(…) The survey of households that the unemployment rate is based on doesn’t reflect whether people got paid but rather what they said about their employment. It showed last month was strong, with 906,000 more people counting themselves as employed than in August. The household figures come with the caveat that, because they are drawn from a smaller survey, they are a lot choppier. Moreover, they include many people not included in the employer survey, such as agricultural workers. Household figures adjusted to match the same employment concept as the employer survey showed a gain of just 7000 jobs, according to the Labor Department.
The report also showed that average hourly earnings rose last month, putting them 2.9% above their year earlier level—the largest gain on the year since 2009. The hurricanes probably had something to do with that as utility workers’ pay jumped and some lower paid leisure and hospitality workers didn’t work and therefore weren’t included in the average. But Bank of America Merrill Lynch economists calculate that, even absent those effects, pay gains would have been strong. Moreover, wage figures for July and August were revised higher. (…)
David Rosenberg is unconvinced:
From the perspective of upbeat economists, the addition of 906,000 workers as per the household survey is the important fact in the report. Like if it made much sense that this slow-mo economy could have created more jobs than in any month in the last 4 years. In 2005, when the economy was booming, the household survey showed a decline of 33,000 jobs after Katrina. According to the BLS, there were 935,000 new full time jobs in September, the most since January 2000 when the economy was also booming. Difficult to believe.
For FOMC members, this report only adds to the confusion which varies with each individual’s perspective:
- St. Louis Fed President James Bullard said the September payrolls report causes him concern. “To actually have negative numbers there was a bit startling,” he said. “I’m getting more concerned that we might make a policy mistake.”
- Dallas Fed President Robert Kaplan said he’s undecided on the next rate move, noting the U.S. economy is solid, and inflation pressures are probably building. “I am open minded and haven’t made a decision yet. I would like to see more evidence of progress in reaching our inflation target. I have the benefit of time and I plan to take it,” he said.
- Atlanta Fed President Raphael Bostic said continued strength in the U.S. economy would make him comfortable with raising interest rates in December. In an interview following the release of September employment data, Bostic said the drop in the number of U.S. workers on payrolls last month probably reflected the disruption caused by hurricanes, masking a more positive underlying trend.
From the perspective of Markit’s September PMI survey, which surveys real business people about their real situation, there is no reason to think almost one million jobs were created last month.
September survey data signalled a further rise in business activity across the US service sector. Although the rate of growth eased slightly compared with August, upturns in both activity and inflows of new work were strong compared to the average seen over the past two years. Sustained growth of output and new orders supported solid increases in staffing levels. Additional payroll numbers helped to alleviate capacity pressures.
Meanwhile, inflationary pressures continued to intensify. Input price inflation was the fastest since June 2015, and charge inflation accelerated to the quickest in three years.
The seasonally adjusted IHS Markit U.S. Services Business Activity Index registered 55.3 in September, down slightly from 56.0 in August. This indicated a strong end to the third quarter, and the fastest average quarterly growth so far this year. A number of survey respondents linked the rise in business activity to strong client demand in domestic markets. (…)
Employment growth in the service sector was solid in September, albeit easing to a three-month low. Service providers stated that staffing levels had risen due to a sustained increase in overall activity and resulting pressures on capacity. Notably, backlog accumulation also softened to a marginal rate. (…)
The final seasonally adjusted IHS Markit U.S. Composite PMI™ Output Index fell to 54.8 in September, from 55.3 in August. The slower services sector expansion was accompanied by further subdued manufacturing output growth, with the rate of increase unchanged on August’s 14-month low.
Despite easing since August, the average composite reading over the past three months signalled the fastest overall quarterly growth in 2017 so far. (…)
Looked at alongside the manufacturing PMI, the survey data point to GDP rising at an annualised rate of just over 2% in the third quarter. Growth is largely reliant on the services economy, however, as manufacturing lags behind, struggling in part due to the strong dollar.
From the perspective of workers who could not get to work during the month, there is no statistical adjustment: they simply did not get paid. If the BLS payroll survey is right, 33,000 fewer people received a pay check in September.
Some other non-trivial facts overlooked by the media and other pundits:
The change in total nonfarm payroll employment for July was revised down from +189,000 to +138,000, and the change for August was revised up from +156,000 to +169,000. With these revisions, employment gains in July and August combined were 38,000 less than previously reported.
In total, the number of people who received employment income during Q3 dropped by 71,000 people from their June level. Lousy summer from their perspective!
Employment growth, that variable which drives GDP growth along with productivity, was even slower than the slow growth initially reported. It was +1.4% YoY in August, +1.2% in September.
In all, the feedstock for consumer expenditures, jobs + wages, are not accelerating from an already slow trend. Yet, Americans bought a lot of new vehicles last month:
The market for new motor vehicles regained positive momentum last month as automakers aggressively cleared inventory in advance of the 2018 model selling season. Total sales of light vehicles jumped 15.0% during September (4.8% y/y) to 18.57 million units (SAAR) from 16.14 million in August, according to the Autodata Corporation. It was the highest level of sales since July 2005.
A 16.3% surge (11.6% y/y) in light truck sales led the sales increase last month. The jump to 11.76 million sales (AR) was powered by domestically-made light trucks which increased 16.5% (9.6% y/y) to 9.69 million units. Imported light truck sales also showed strength with a 15.7% surge (22.0% y/y) to a record 2.07 million units.
The passenger car market also strengthened during September with a 12.9% rise (-5.2% y/y) to 6.81 million units. Domestically-produced passenger car sales increased 13.6% last month (-5.5% y/y) to 4.95 million units. Sales of imported passenger cars rose 10.9% (-4.4% y/y) to 1.85 million units.
Haver Analytics failed to mentioned that part of the September jump was from urgent replacement demand after Harvey flooded the Houston area. Annualizing these sales is pure wishful thinking. No doubt that consumer credit data will explode in September, taking the savings rate even lower on the eve of the Holidays season…on of more interest rate hikes. We got August data last week:
Consumer credit outstanding grew $13.07 billion (5.5% y/y) during August following a $17.71 billion July increase, revised from $18.49 billion. During the past ten years, there has been a 51% correlation between the y/y growth in consumer credit and y/y growth in personal consumption expenditures.
Nonrevolving credit usage rose $7.31 billion (5.5% y/y) after a $15.66 billion gain. (…) Revolving consumer credit balances rose $5.76 billion (5.4% y/y) after a $2.07 billion increase. (…)
Meanwhile in Canada:
Canada’s labor market showed more signs of tightening in September, with the 10th straight month of employment gains and the strongest wage increases in more than a year. Employment increased by 10,000 (est. 12,000). The increase reflects 112,000 new full-time jobs, offsetting a loss of 102,000 part-time jobs. Annual average hourly wage gains hit 2.2%, the fastest since April 2016 .
(…) The U.S. oil-rig count, typically viewed as a proxy for activity in the sector, grew 6% in the third quarter—a marked deceleration from the previous four quarters, when it rose more than 20% on average. Last month, the U.S. Energy Information Administration cut its forecast for U.S. oil production, saying it now expects the industry to end the year at 9.69 million barrels a day, down from 9.82 million.
U.S. oil output remains robust and may still surpass the record annual average of 9.6 million barrels a day, set in 1970. But companies, confronting technological, operational and financial obstacles, are starting to ease up on drilling.
The pace of innovation that allowed shale drillers to maintain production even as prices fell appears to be slowing, experts say. The cost of labor and services, meanwhile, is rising in the most popular oil fields, driving up drilling expenses. And companies are facing a backlash from investors, who have grown weary of drillers focusing on growth over profit and are insisting they live within their means. (…)
“There are no new shale plays that have come forward,” said Mark Papa, chief executive of Centennial Resource Development Inc. and former CEO of EOG Resources Inc.EOG 0.23% “Their ability to spew forth infinite streams of oil is really just a myth.” (…)
“The EIA’s phantom forecast needs huge growth to catch up to projections,” said Mr. Hamm, one of the pioneers of North Dakota’s Bakken Shale formation. (…)
Delays for fracking and related services are also becoming problematic for producers. (…)
Adjusted for length, new wells in key regions of the Permian basin haven’t been significantly more productive since 2014, according to Tudor Pickering Holt & Co. (…)
Some of the biggest producers, including EOG and ConocoPhillips , COP 0.79% have promised to pay for new investments and dividends only with cash from operations. If they keep those promises, U.S. crude output would likely surge into 2018 and then stay roughly flat for the next three years, never rising above 10 million barrels a day, according to energy advisory firm BTU Analytics.
Wood Mackenzie forecasts that the surge in drilling activity in the Permian wouldn’t peak until 2025 and is on pace to produce almost 5 million barrels a day.
But the energy consulting firm recently warned that if operators drill in the same aggressive manner used in other basins, employing techniques that maximize initial production but jeopardize future wells, Permian output could peak as soon as 2021 at 4.4 million barrels a day.
EARNINGS WATCH
In the last month, estimated dollar-level earnings for the S&P 500 for the third quarter have decreased by about $6.3 billion (to $287.0 billion from $293.3 billion). At the industry level, the Insurance industry has by far recorded the largest decline in dollar-level earnings during this time at $4.8 billion (to $5.1 billion from $9.9 billion). Thus, the Insurance industry alone accounts for 77% of the decline in the estimated earnings for the S&P 500 for Q3 2017 over the past month. If the Insurance industry were excluded, the estimated earnings growth rate for the S&P 500 for Q3 2017 would improve to 4.9% from 2.8%.
Analyst have lowered EPS estimates for companies in the insurance industry to account for catastrophic losses due to the recent hurricanes and the earthquake in Mexico. Chubb Limited, AIG, Everest Re Group, XL Group, and Allstate have been the five largest contributors to the decline in earnings for this industry over this period. Combined, these five companies account for $4.0 billion (or 83%) of the $4.8 billion decline in earnings for this industry since September 5. All five companies have seen their mean EPS estimate for Q3 drop by more than 50% during this period. (Factset)
Thomson Reuters’ numbers have also come down…
…from a base that has grown 1.6% since the end of Q2. The official Q3 earnings season has not officially commenced but it is underway. Twenty-three companies have already reported, with 87% above expectations, beating by 6.9% so far.
But here’s a very different perspective buried deep into the Washington Post web pages:
The Republican Party has largely abandoned its platform of fiscal restraint, pivoting sharply in a way that could add trillions of dollars in federal debt over the next decade. (…)
“I felt there was a period, two or three years ago, when there was a real seriousness about trying to solve our fiscal issues,” said Sen. Bob Corker (R-Tenn.), a longtime deficit hawk who is part of a scarce group of Republicans consistently preaching restraint. “When the election result turned out what it was [in November], any thought of fiscal responsibility has gone out the window.”
He added, “It’s very disheartening to me that when the other side of the aisle was in charge we cared about fiscal issues, and now that we’re in charge we don’t care about fiscal issues. It’s very disheartening.” (…)
Mulvaney — who was a leading deficit hawk when he served in the House of Representatives — and other White House officials are pushing hard for the tax-cut package, shrugging off the worry of growing the deficit in the next few years by saying that letting people keep their own money is much different than cutting government spending.
Mulvaney, like many in the White House, argues that the focus should be on taking steps to grow the economy, which officials say will create trillions of dollars in new revenue to offset the impact of lowering tax rates. (…)
“I have to work in the real world, and right now I just don’t think there’s the appetite to balance the budget based on spending alone,” Mulvaney said.
(…) I have to live in a world where we can pass cuts out of the House and of the Senate. And so growth is going to be the best chance we have to balance the budget.” (…)
Corker said Mulvaney’s transformation from a budget warrior to allowing larger deficits is emblematic of others in the party.
[White House Council of Economic Advisers Chairman Kevin Hassett] said that addressing the debt would be a focus later in the Trump administration, after the tax-cut plan was voted into law.
“I think the debt problems are severe,” Hassett said. “I think the president views it as a multistage thing. The first order of business is to get 2 percent growth back to a rate we’re used to seeing.” (…)
Budget officials believe the United States is in the midst of a problematic shift, with rising health-care costs and an aging U.S. population that increases costs for Medicare and Social Security. (…)
“I think there is some openness to [see] how we can get in the middle there, understanding tax reform is something that we only have a once-in-a-generation opportunity to do,” [Budget Committee chairman, Rep. Diane Black (R-Tenn.)] said. (…)
“I fear that Republicans feel like they have to deliver so badly that I’m just fearful that there may be a movement to do whatever, even if it’s harmful to our deficit issues, just to pass anything,” Corker said.
There is also YayYo, a company that billed itself as a ride-hailing aggregation app. Its late-night TV commercials for its Reg A+ offering featured John O’Hurley, the actor who played fashion-catalog mogul J. Peterman on Seinfeld. YayYo says it paid Mr. O’Hurley for his endorsement but declined to say how much.
