Year: 2023

Payroll employment increases by 209,000 in June; unemployment rate changes little at 3.6%

(…) Nonfarm employment has grown by an average of 278,000 per month over the first 6 months of 2023, lower than the average of 399,000 per month in 2022. (…)

The change in total nonfarm payroll employment for April was revised down by 77,000, from +294,000 to +217,000, and the change for May was revised down by 33,000, from +339,000 to +306,000. With these revisions, employment in April and May combined is 110,000 lower than previously reported.

In June, average hourly earnings for all employees on private nonfarm payrolls rose by 12 cents, or 0.4 percent, to $33.58. Over the past 12 months, average hourly earnings have increased by 4.4 percent. In June, average hourly earnings of private-sector production and nonsupervisory employees rose by 11 cents, or 0.4 percent, to $28.83.

The average workweek for all employees on private nonfarm payrolls edged up by 0.1 hour to 34.4 hours in June. In manufacturing, the average workweek was unchanged at 40.1 hours, and overtime was unchanged at 3.0 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls remained at 33.8 hours.

@LizAnnSonders

SERVICES PMIs

USA:

• S&P Global’s: Robust services growth accompanied by reignition of cost pressures in June

At 54.4 in June, the seasonally adjusted final S&P Global US Services PMI Business Activity Index fell slightly from 54.9 in May. Nonetheless, the latest data indicated a solid rise in business activity that was the second-fastest in just over a year. Companies noted that strong client demand and a sustained uptick in new business supported the latest expansion.

New orders at service providers increased for the fourth successive month in June. The rate of growth eased fractionally from May’s 13-month high, but remained sharp overall. New customer wins and continued interest from existing clients were reportedly maintained by successful marketing strategies, helping to boost new sales, according to panellists.

At the same time, external demand improved for a second month running. Firms noted that a rise in new business from abroad was linked to the acquisition of new customers and a greater interest in international travel. New export orders grew at a solid pace, though the rate of increase slowed from that seen in May.

On the price front, service sector firms saw a marked rise in cost burdens at the end of the second quarter. The increase in business expenses was reportedly driven by greater wage bills, with some companies also noting upticks in supplier prices and higher borrowing costs. The pace of cost inflation reaccelerated and was the sharpest since January.

Despite faster cost inflation, service providers registered a slower increase in selling prices in June. The rate of charge inflation eased further from April’s eight-month high to the weakest since February. Efforts to remain competitive reportedly limited pricing power, despite several firms reporting the continued pass-through of greater costs to clients.

A further expansion in new business led firms to raise employment. Job creation has been seen in each month since July 2020, with June’s modest pace of increase again little-changed since March. Nonetheless, strain on capacity was reflected in a renewed accumulation of backlogs of work in June. Although only marginal, service providers noted pressure on staffing resources to fulfil incoming new business.

Sentiment was buoyed by accommodating demand conditions, with output expectations for the year ahead strengthening. The degree of confidence was the highest for just over a year amid hopes that investment in new service lines, marketing spending and softer inflation will support growth.

The S&P Global US Composite PMI Output Index posted 53.2 in June, down from 54.3 in May, to signal a solid but slower Composite Output Index Gross Domestic Product (GDP) upturn in business activity.

Similarly, total new orders rose at a solid pace, albeit slower than in May. The decline in manufacturing new sales accelerated and offset to some degree the services expansion. Meanwhile, new export orders fell further. Total new business from abroad contracted for the thirteenth month running. Cost pressures picked up, as a second successive fall in cost burdens at manufacturers was offset by the steepest rise in service sector costs recorded since January. Output charges continued to rise at a strong rate that was well above the pre-pandemic average. This was despite broadly unchanged selling prices in the goods-producing sector. Output charges were buoyed by rising prices in the service sector, though the overall increase was the slowest since January. Efforts to fill long-held vacancies, alongside service sector efforts to work through backlogs, led to a further moderate increase in employment.

• The ISM:

In June, the Services PMI^® registered 53.9 percent, 3.6 percentage points higher than May’s reading of 50.3 percent. (…) The Business Activity Index registered 59.2 percent, a 7.7-percentage point increase compared to the reading of 51.5 percent in May.

The New Orders Index expanded in June for the sixth consecutive month after contracting in December for the first time since May 2020; the figure of 55.5 percent is 2.6 percentage points higher than the May reading of 52.9 percent. (…)

Fifteen industries reported growth in June. (…)

That’s vs 11 in May.

May’s decline in the ISM Services has been reversed and more, as expected from S&P Global’s Services PMI.

Both surveys are now in sync on growth and new orders on the important service sector. Wages are still pushing up.

The Fed’s job’s not done.

Eurozone economy stalls in June as services growth wanes and factory production falls

The seasonally adjusted HCOB Eurozone Composite PMI® Output Index signalled a stalling of the eurozone economy in June, registering just a fraction below the 50.0 no-change mark at 49.9. This was down from 52.8 in May, and a considerable loss of momentum from April’s 11-month high of 54.1. The latest survey data continued to portray significant differences in performance by sector as a deepening downturn in factory output compared with sustained, albeit softer, expansion in services activity.

The latest survey data revealed that the direction of travel was broadly downwards for the five monitored euro area nations, with the Composite PMI Output Index falling for Spain, Ireland, Germany, Italy and France. Notably, the latter two both saw private sector business activity fall for the first time in six and five months respectively. Growth was sustained in the largest eurozone country, Germany, but slowed markedly since May to just a marginal pace. Spain was the strongest performer, as has been the case since February.

Economic activity was restrained in June by declining intakes of new business. According to the latest survey data, new orders fell modestly and for the first time since January. Manufacturing demand conditions were considerably weak, with the sales of eurozone goods falling at the quickest pace in eight months. Demand for services increased, but the rate of growth slowed for a second month in succession to a five-month low.

There was an increased drag on sales from non-domestic clients, as evidenced by a sharper decrease in new orders from external clients. The drop in new export business was broad-based, although manufacturers recorded a much steeper decline than services firms. (…)

Price pressures across the eurozone continued to soften at the end of the second quarter. Notably, the overall rate of input cost inflation fell to a two-and-a-half-year low and was below its long-run average. The manufacturing sector was a considerable driver behind this, with their input prices falling at the most rapid pace since July 2009. Services expenses rose sharply, but at the slowest pace in just over two years.

Euro area businesses continued to raise their charges in June, albeit to the weakest extent since March 2021. Discounting accelerated at manufacturers amid falling costs and intensifying competition. By contrast, services charges rose at strong rate, although output price inflation here slid to a 20-month low.

The HCOB Eurozone Services PMI Business Activity Index fell for a second month running in June to 52.0, from 55.1 in May. Although signalling sustained growth, the upturn was only modest and the weakest since January.

There was a slowdown in new business growth at the end of the second quarter. Having hit a one-year high only as recently as April, the increase in new workloads eased to a marginal pace in June that was the softest in five months. Dragging on demand was a renewed, albeit fractional, deterioration in sales performances to non-domestic customers. The respective seasonally adjusted index had reached its second- and third-highest levels in the series history in the two prior months.

Volumes of incomplete business broadly stabilised in June following four consecutive monthly increases. Eurozone service providers continued to recruit additional workers, with the rate of job creation remaining strong despite easing to a three-month low.

The latest survey data pointed to a cooling of price pressures across the eurozone services sector. The overall rate of input cost inflation remained sharp in June but fell to a 25-month low. Firms were less aggressive in their price setting behaviour as a result, with output charges rising at the slowest pace since October 2021.

Lastly, businesses’ growth expectations for the coming 12 months weakened at the end of the second quarter. Although firms remained optimistic overall, the level of positive sentiment slid to the lowest in the year to date.

U.S. Oil Boom Blunts OPEC’s Pricing Power U.S. petroleum production is on pace for a record-breaking year, helping to keep energy prices stable despite the efforts of Saudi Arabia and other major oil exporters to drive them higher.

U.S. crude output this year through April is up 9% from a year ago, surprising analysts given that oil futures were sliding and the country’s shale boom was showing signs of peaking. The surge is being driven in part by improved production efficiency, and signals that the Organization of the Petroleum Exporting Countries’ power to control prices could be waning as output continues to grow in the rest of the world.

After prices crashed in 2015, U.S. producers “went back to the lab and got much more efficient, with a lot of engineering-based gains and a lot of staff and cost cutting,” said Vikas Dwivedi, global oil and gas strategist at Macquarie Group.

OPEC and its allies so far this year have announced cuts amounting to about 6% of last year’s production. Crude prices have nevertheless slid by about 13%. Along with weaker-than-expected demand in China, prices are being weighed down by stepped-up production in other countries including Brazil, Canada and Norway. Increased output in countries outside OPEC is making up for about two-thirds of the alliance’s cuts, according to estimates by Rystad Energy.

Half of that new crude is coming from the U.S., where major producers including ConocoPhillips, Devon Energy, Pioneer Energy and EOG delivered strong production in the first quarter. Smaller private companies are reaping the rewards of a drilling surge they made last year when oil prices were higher. 

Companies’ efforts to improve efficiency are also giving them more leeway to remain profitable even when oil prices are slipping. Production improvements since 2014 have pushed down the cost of drilling and fracking in the U.S. shale patch by 36%, according to J.P. Morgan, even as recovered oil volumes have increased. (…)

The increased efficiency means EOG can earn as much from oil priced at $42 a barrel today as it would have from oil trading at $86 nine years ago. People familiar with Saudi oil policy have said the government’s budget requires an estimated $81 a barrel. (…)]

Exxon-Mobil and Chevron are both working to significantly boost their output in the next few years from the Permian Basin—a key oil-producing region that spans parts of West Texas and southeastern New Mexico. The industry still only recovers about 10% of the oil it theoretically could, Exxon-Mobil Chief Executive Darren Woods said at a conference last month.

Woods has challenged his engineers to double that rate. (…)

Treasury Rout Sends Global Yields to 15-Year High on Strong US Job Market

• 1-Year Treasury yield is currently at 5.40%, a level not seen since December 2000 (@Barchart)



• Bond Markets Want to Break Free Two-year yields last hit these levels in 2007, but accidents don’t happen the same way twice. Still, the Fed will be more pressured force a hard landing.

(…) Since the 21st century officially started at the beginning of 2001, this was only the 65th day when the two-year yield had traded above 5%. This is unusual; it means that a spike earlier this year can’t be taken as the high for the cycle, and it can’t be ignored:

(…) The trigger for Treasury yields’ spike to levels last seen in 2007 came from the far-stronger-than-expected ADP data on private sector employment sparked bets anew that the Federal Reserve may not slow its monetary tightening pace as inflation proves more persistent. It came in at almost double expectations, suggesting an extra half-million jobs were created last month (…).

If the ADP number is anything like accurate, then, that implies that a lot of economists have this very wrong. (

The latest data on claims for jobless insurance suggested no increase in layoffs; initial claims did tick up a little, but this was balanced by continuing claims. On this measure, it’s impossible to say that the labor market has eased meaningfully enough to help vanquish inflation.

There was also the customary jolt from the JOLTS (Job Openings and Labor Turnover Survey). It showed a reduction in vacancies, which suggests less pressure on employers to offer higher wages to attract workers. However, that decline is nowhere near as fast as might have been hoped, and means that there are still more than 1.5 job openings for every unemployed person.

(…) the US economic surprise index kept by Citi, which tracks how much incoming data is exceeding or lagging expectations, has jumped to its highest in more than two years (…)

Note that serious Fed tightening started in mid-2022. Since then, it’s been surprise after surprise. Must be the lags…or a wrong playbook…

The BLS Job Openings are on track with Indeed’s Job postings, down some more through June 30 but still 25% above pre-pandemic levels:

Lagarde Says ECB Won’t Stand Idly By If Margins and Wages Rise

FYI:

Norway’s EV boom blazed a trail that may be followed by the rest of the world — but it also shows how hard it is to quit oil.

• Government incentives costing about $1.8 billion annually in lost revenue propelled a jump in new EVs from 3% of total sales in 2012 to almost 80% in 2022, a local association said.
• Gasoline use fell by 37% since 2013, Eurostat data show, but demand for diesel remains strong and has yet to show a consistent downtrend.
• Still, it’s a “dramatic change for oil’s position in the whole energy system,” as renewables rise in the energy mix.

Vehicles Sales at 15.68 million SAAR in June; Up 20% YoY

Wards Auto released their estimate of light vehicle sales for June: U.S. Light-Vehicle Sales End First-Half 2023 on Solid Note as June, Q2 Record Double-Digit Growth (pay site).

With second-quarter results finishing 18% above the same period last year, first-half 2023 volume totaled 7.66 million units, a 13% increase on January-June 2022. Sales are forecast to rise 11% year-over-year to 7.72 million units in the second half, and Wards Intelligence partner GlobalData is pegging entire-2023 at 15.4 million units.

Wards Auto estimates sales of 15.68 million SAAR in June 2023 (Seasonally Adjusted Annual Rate), up 4.2% from the May sales rate, and up 20.2% from May 2022.

• Households’ excess savings could run out as soon as September per @bcaresearch (via @SoberLook and @LizAnnSonders)

Fed’s Williams Says Data Supports More Action on Interest Rates

(…) “We can take some time and assess and collect more information and then be able to act, knowing that we also communicated through our projections that we don’t think we’re done, based on what we know,” Williams said Wednesday during a discussion held at the New York Fed as part of the annual meeting of the Central Bank Research Association. “And obviously we’re absolutely committed to achieving our 2% inflation goal.” (…)

Williams said he would be data-dependent when deciding the Fed’s next steps, noting that recent economic data showing a stronger-than-expected housing market, resilient growth and a slowdown in consumer spending have been “informative.” (…)

But can we depend on the data?

• Payrolls May Overstate US Job Gains, Some Fed Officials Suggest

Some Federal Reserve officials suspect that robust gains in payrolls may be overstating the strength of the labor market.

That’s according to the minutes of the Fed’s June 13-14 policymaking meeting released on Wednesday.

Other measures of employment – including the Labor Department’s household survey and Census report, and Fed staff’s own calculations – “suggested that job growth may have been weaker than indicated by payroll” statistics, the policymakers were reported to have noted during the meeting. (…)

“We think the last several months of payrolls estimates will ultimately be revised down,” Bloomberg economist Stuart Paul wrote in a report on Wednesday that highlighted widening cracks in the labor market.

As evidence, he cited the Quarterly Census of Employment and Wages, a more comprehensive reading of the jobs market also carried out by the Labor Department but which comes out with a lag. Based on that report, he expects last year’s payrolls to be revised down by about 900,000 when the department updates the data in September. 

Mark Zandi, chief economist for Moody’s Analytics, reckons that actual payroll gains are running an average of 150,000 to 200,000 per month, rather than the close to the 300,000 pace reported in the monthly jobs numbers.

Paul said the monthly payrolls report may be overestimating the number of jobs being created by new businesses in its so-called birth-death model.

The Labor Department draws its monthly payroll numbers from a survey of employers and its monthly estimate of the unemployment from a survey of households. In May, payrolls rose by 339,000 while employment as measured in the household survey tumbled by 310,000.

Fed staff also make their own calculations of private sector job growth drawing on payroll data from Automatic Data Processing Inc.

I discussed that on Monday:

The chart plots the BLS Nonfarm payrolls (+2.7% YoY in May), the BLS Private payrolls (+2.7%), ADP Private employment (+2.4% black) and the BLS Household employment (+1.5%).

All series have been gradually slowing since spring 2022 but only the household survey has kept weakening lately.

PMI surveys also support a reasonably strong labor market. From S&P Global’s June survey:

“Greater success in finding suitable candidates allowed [manufacturing] firms to expand their workforce numbers in June, despite concerns surrounding future demand conditions. The rate of job creation slowed slightly but remained among the fastest in a year.”

“Services firms continued to hire amid greater new orders. That said, the rate of job creation eased to the weakest since January amid challenges replacing voluntary leavers.”

In a recent interview, Nela Richardson, ADP’s chief economist, said that

small firms that produce two thirds of the net new jobs in the ten years preceding the pandemic, they’re still hiring. Even as larger firms are pulling back in their hiring, small firms are taking their place. They were blocked out by a lot of large retailers and warehouse firms and weren’t able to hire to the degree they wanted to last year. Now, they’re seeing some breathing room in terms of adding to their headcount. That’s why whether you’re looking at BLS or you’re looking at NER, you’re still looking at plus 200 000 jobs created in the economy in a month. In normal times, that would have been considered a strong month. I think small firms are leading that charge right now.

More Manhattan homebuyers are paying cash than at any other time on record as mortgage rates soar. About two-thirds of purchases in the second quarter were completed without financing, the largest share since Miller Samuel and Douglas Elliman began tracking payment methods in 2014.

As Greedflation Starts to Fade, Wageflation Creeps In Softer demand, more supply and rising labor costs all take the air out of profit margins.

Judging by recent developments, inflation driven by corporations flexing their power to jack up prices more than costs—greedflation, as some called it—is on its way out. Pretax margins, which widened sharply in 2021 and 2022, were roughly back to prepandemic levels in the first quarter of 2023, according to revised government data released last week. Margins in six of the S&P 500’s 11 sectors were lower in the second quarter than four years earlier, according to FactSet.

Narrowing profit margins, though, doesn’t necessarily mean an end to inflation. Wages are now growing faster than prices. While that doesn’t provoke the same outrage as soaring profits, it’s just as problematic for getting inflation down. (…)

In the year through the second quarter of 2021, those companies’ prices rose 4.3%. At the same time, the cost of labor per unit of output fell 2.3%, because though wages were rising in that time, output per worker (productivity) was rising faster. Profit per unit of output rose a whopping 40%. (…)

Workers are slowly recapturing more of the economic pie. In the first quarter of 2023, wages and salaries rose to 49.3% of corporate value added, higher than in 2019. Labor costs per unit of sales rose 6% in the year through the first quarter, ahead of prices, which were up 5.3% in the same period. Profits per unit of output rose just 1.6%.

The trend of wages rising faster than prices has continued in recent months. That’s welcome relief for workers but poses a set of difficult tradeoffs: Either profit margins will have to narrow further, which businesses will resist; high inflation will have to continue, which the Federal Reserve is fighting; or productivity will have to boom, of which there is no sign yet. If none of those things happen, then wageflation, like greedflation, will have to go away.

The first chart plots actual business sales and wages. Sales peaked in mid-2022 and have been drifting down since. Wages are showing no signs of slowing.

The same two series but YoY. Business sales were down 1.3% YoY in April against wages up 5.0%.

At the S&P 500 level, primarily a “goods” vs a mainly “services” economy, revenues are expected down 0.5% in Q2 and up only 0.6% in Q3.

Economy-wide, labor productivity has declined rather unusually since 2022. Unit labor costs were up 3.8% YoY in Q1’23 and only decline during recessions:

The same two series indexed at Q1’20 = 100.0. Productivity is up 3.8% and softening but unit labor costs are up 11.3% and rising.

• Remote Work Sticks for All Kinds of Jobs Lower-income, less-educated and service workers are all clocking more work-from-home hours than before the pandemic hit.

Last week, a Fed paper predicted:

End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns

I show that the decline in interest rates and corporate tax rates over the past three decades accounts for the majority of the period’s exceptional stock market performance. Lower interest expenses and corporate tax rates mechanically explain over 40 percent of the real growth in corporate profits from 1989 to 2019. In addition, the decline in risk-free rates alone accounts for all of the expansion in price-to-earnings multiples.

I argue, however, that the boost to profits and valuations from ever declining interest and corporate tax rates is unlikely to continue, indicating significantly lower profit growth and stock returns in the future. (…)

A few charts from the report:

  

  

The conclusion:

However, P/E multiples in the future—averaged over the longer run—are unlikely to expand much beyond 2019-levels. P/E multiples can only expand if: (1) risk-free rates decline; (2) risk premia decline; (3) earnings growth expectations increase; or (4) payouts to shareholders increase (Eq. 4). Notably, from 1989 to 2019, the decline is risk-free rates can account for all of the expansion in P/E multiples. Since risk-free rates are not expected to fall much below 2019-levels, this severely constrains the extent to which P/E multiples can continue to expand.

Likewise, P/E multiples are unlikely to get a boost from higher earnings growth expectations. Indeed, it is questionable whether the market is currently pricing in the substantially lower earnings growth that I argue is very likely to prevail in the future. There is some chance that the market is simply assuming that the very strong earnings growth experienced over the past thirty years will continue indefinitely.

In other words, it is unclear whether the market is taking into account the fact that this growth was mechanically boosted by declining interest and corporate tax rates—a trend that has reached its limits. If the market is not taking this into account, then P/E multiples will not expand, but contract, once the market adjusts its longer-run earnings expectations downward to more reasonable levels. Obviously, stock market performance would suffer as a result. (…)

What is a reasonable rate growth of EBIT growth to expect? As noted earlier, from 1962 to 2019, EBIT growth came in below GDP growth. Given this 60-year pattern, it is reasonable to extrapolate that, over the long run, EBIT growth in the future will also probably not exceed GDP growth.

For the 15 years prior to the pandemic, U.S. real GDP grew at annual rate of 1.9 percent. Going forward, the Congressional Budget Office projects real GDP growth of 1.9 percent per year over the next decade.

In the future, the real longer run growth rate of both stock prices and corporate earnings is therefore unlikely to exceed 2 percent per year. Given that this represents an optimistic scenario, the risks to this forecast, if anything, are to the downside.

For those who missed The Daily Edge in recent days:

Floating rate debt now costs 550bps more than in 2021. Fixed rate debt is being renewed at double its pre-2022 cost. The hit on cashflow will only keep growing through 2025.

Since U.S. nonfinancial corporate debt reached $12.7T as of Q1’23, a 550bps incremental cost would reduce annualized cashflow by $636B or $500B after tax, a 16% setback on total corporate cashflow and 20% on corporate profits.

But, as Ed Yardeni notes, such bleak outlook is not part of analysts thinking just yet:

Industry analysts remain optimistic on S&P 500 forward revenues which rose to another record high during the June 29 week (chart). They’ve also stopped lowering their consensus expectations for the S&P 500’s forward profit margin. As a result, S&P 500 forward earnings have been rising in recent weeks. The weekly data on forward revenues, forward earnings, and the forward profit margin are excellent coincident indicators of the comparable actual quarterly data collectively reported by the S&P 500 companies.

U.S. Looks to Restrict China’s Access to Cloud Computing The Biden administration proposal, aimed at closing a loophole in chip export controls, could escalate a tit-for-tat fight with Beijing.

• China’s Export Curb on Chip-Making Metals Prompts Countries to Explore Supply-Chain Diversification Beijing’s decision to curb exports of rare minerals alarms South Korea and Japan.

Industrial experts say China’s move—viewed as retaliation against U.S. export restrictions aimed at curbing Beijing’s high-technology industries—is unlikely to immediately hit global output of semiconductors and other products, in part because Beijing would be hurting its own technology industry if it implemented the controls too strictly. But it has sounded an alarm for countries that stand to be hit.

South Korea’s government held an emergency meeting on Tuesday to assess the potential consequences of China’s export restrictions on the two minerals, gallium and germanium, and pledged to do more to diversify its sourcing of materials critical to major industries like semiconductors. Japan’s government also said Tuesday that it is studying the impact of the restrictions. Both countries boast large semiconductor industries that would be exposed to a shortage of the two minerals.

China’s Foreign Ministry said the latest export controls, which kick in on Aug. 1, don’t target any specific countries. “China has always been committed to maintaining the security and stability of the global supply chain, and has always implemented fair, reasonable, and non-discriminatory export control measures,” spokeswoman Mao Ning said Tuesday. (…)

In an interview published Wednesday in the state-run China Daily, Wei Jianguo, a former vice minister of commerce, said China’s latest export curbs are just a start and that China has sanction options should Washington impose stricter technology restrictions on Beijing.

Analysts said China’s measures, which restrict exports of the two minerals, as well as dozens of related compounds, appeared to be aimed at countries such as the U.S., South Korea and Japan, which have restricted exports of advanced semiconductors and related technology to China.

China mines and exports large quantities of gallium and germanium, providing the raw materials to countries such as the U.S. and Japan that process them into high-end products, which can then be used in manufacturing advanced semiconductors, military radars, LED panels, solar panels, electric vehicles and wind turbines. By contrast, China processes other minerals like cobalt, which are mined elsewhere. (…)