DRIVING BLIND?
Yellen Assures Markets on Rates Federal Reserve Chairwoman Janet Yellen offered new assurances the Fed intends to keep interest rates low, describing in unusually personal terms why the economy needs these policies to support a weak job market.
Here’s what she said last week on when the Fed will start raising rates:
“It’s hard to define but, you know, it probably means something on the order of around six months [after the bond-buying program ends] or that type of thing,” she said. “What the statement is saying is it depends what conditions are like.”
And here are what conditions are like:
(…) “The recovery still feels like a recession to many Americans, and it also looks that way in some economic statistics.” (…)
Nothing really changed in a week, except the realization that her forward guidance was too explicit. Yesterday, she was explicit on the evidence that conditions are not what they need to be, not that things have really changed in a week:
Ms Yellen also argued that a significant chunk of the decline in labour force participation – which is down from 66 per cent of the working-age population before the financial crisis to 63 per cent afterwards – was due to lack of demand in the economy.
“Based on the evidence, my own view is that a significant amount of the decline in participation during the recovery is due to slack, and another sign that help from the Fed can still be effective.”
Here’s her evidence from her speech in Chicago:
One form of evidence for slack is found in other labor market data, beyond the unemployment rate or payrolls, some of which I have touched on already. For example, the seven million people who are working part time but would like a full-time job. This number is much larger than we would expect at 6.7 percent unemployment, based on past experience, and the existence of such a large pool of “partly unemployed” workers is a sign that labor conditions are worse than indicated by the unemployment rate. Statistics on job turnover also point to considerable slack in the labor market. Although firms are now laying off fewer workers, they have been reluctant to increase the pace of hiring. Likewise, the number of people who voluntarily quit their jobs is noticeably below levels before the recession; that is an indicator that people are reluctant to risk leaving their jobs because they worry that it will be hard to find another. It is also a sign that firms may not be recruiting very aggressively to hire workers away from their competitors.
A second form of evidence for slack is that the decline in unemployment has not helped raise wages for workers as in past recoveries. Workers in a slack market have little leverage to demand raises. Labor compensation has increased an average of only a little more than 2 percent per year since the recession, which is very low by historical standards.5 Wage growth for most workers was modest for a couple of decades before the recession due to globalization and other factors beyond the level of economic activity, and those forces are undoubtedly still relevant. But labor market slack has also surely been a factor in holding down compensation. The low rate of wage growth is, to me, another sign that the Fed’s job is not yet done.
A third form of evidence related to slack concerns the characteristics of the extraordinarily large share of the unemployed who have been out of work for six months or more. These workers find it exceptionally hard to find steady, regular work, and they appear to be at a severe competitive disadvantage when trying to find a job. The concern is that the long-term unemployed may remain on the sidelines, ultimately dropping out of the workforce. But the data suggest that the long-term unemployed look basically the same as other unemployed people in terms of their occupations, educational attainment, and other characteristics. And, although they find jobs with lower frequency than the short-term jobless do, the rate at which job seekers are finding jobs has only marginally improved for both groups. That is, we have not yet seen clear indications that the short-term unemployed are finding it increasingly easier to find work relative to the long-term unemployed. This fact gives me hope that a significant share of the long-term unemployed will ultimately benefit from a stronger labor market.
A final piece of evidence of slack in the labor market has been the behavior of the participation rate–the proportion of working-age adults that hold or are seeking jobs. Participation falls in a slack job market when people who want a job give up trying to find one. When the recession began, 66 percent of the working-age population was part of the labor force. Participation dropped, as it normally does in a recession, but then kept dropping in the recovery. It now stands at 63 percent, the same level as in 1978, when a much smaller share of women were in the workforce. Lower participation could mean that the 6.7 percent unemployment rate is overstating the progress in the labor market.
Jefferies’ David Zervos:
“This could be one of the most dovish speeches I have ever read from a Federal Reserve official. If anyone doubts Janet’s belief that there is excessive slack in labor markets – read the tape. And if anyone doubt’s Janet conviction that there are no material inflation risks on the horizon – read the tape.”
The jury is out on this…
Meanwhile, conditions at retail stores are distorted by the weather and the late Easter this year:
So, we got the weather and a late Easter to blame. Driving blind!
Polar Vortex Chilled U.S. Profits in First Quarter
(…) Freezing temperatures and mountains of snow in the first three months of 2014 kept shoppers indoors, grounded flights and made it harder for shippers to fill product orders. As a result, Macy’s Inc. shut 244 stores for at least part of January, Union Pacific Corp.’s trains ran 9 percent slower and Delta Air Lines Inc. canceled 8,000 flights in January and February.
Companies already blaming the weather for poor performance include FedEx Corp., General Motors Co. and McDonald’s Corp. More will probably attribute weakness to the cold, even in cases where management may bear part of the responsibility, said William Stone, chief investment officer of PNC Wealth Management in Philadelphia, which manages $128 billion.
“For many of these businesses there’s a true impact,” Stone said in a phone interview. “The skill is to separate how much of it really is the weather and how much is them taking some liberty to blame other execution problems on the weather.”
Earnings at Standard & Poor’s 500 Index companies rose an estimated 1.1 percent in the first quarter, according to analysts’ estimates compiled by Bloomberg, slower than the 8.8 percent increase in the previous three months and the lowest rate since the second quarter of 2012.
Factset:
- For Q1 2014, 93 companies in the S&P 500 have issued negative EPS guidance and 18 companies have issued positive EPS guidance. If these are the final numbers, it will mark the second highest number of companies issuing negative EPS guidance and the third lowest number of companies issuing positive EPS guidance for a quarter since FactSet began tracking the data in 2006.
- The percentage of companies issuing negative EPS guidance is 84% (93 out of 111). If this is the final percentage for the quarter, it will mark the second highest percentage on record (since 2006).
- On average, companies have issued EPS guidance that has been 6.7% below the mean EPS estimate. This percentage decline is smaller than the 5-year average of -10.8%.
Growth Is Picking Up In U.S. Office Market Businesses Adding Space at Fastest Pace Since 2007
The amount of occupied office space grew by 9.8 million square feet in the first three months of the year, up from 9 million square feet in the fourth quarter of 2013 and an average of 5.2 million square feet a quarter between 2011 and 2013, according to Reis.
But the first-quarter growth rate—accounting for a 0.3% increase in the occupied office space—remains slow by historic standards, reflective of the sluggish labor market. Throughout much of the 2000s, occupied space routinely grew by 12 million to more than 20 million square feet a quarter.
The vacancy rate nudged down to 16.8% from 16.9% in the fourth quarter of 2013, but still well above the 12.5% rate reached in mid-2007, according to the Reis report, which tracks 79 metropolitan areas. Rents sought by landlords in the first quarter grew 0.7% to $29.28 per square foot.
Cities with growing industries such as technology and energy continued to outpace the rest of the country. The San Jose area, which includes Silicon Valley, and San Francisco had the nation’s highest rent growth during the past 12 months, with annual rents increasing 6.1% and 4.8% to $26.17 and $37.28 a square foot, respectively.
Technology firms have been gobbling up space at a rate not seen since the late 1990s dot-com boom. (…)
Slowing Inflation Poses Risk to Recovery Consumer-price growth in the world’s largest economies slowed for the third straight month in February, fueling concerns that too little inflation, rather than too much, could threaten the global economy’s fragile recovery
The Organization for Economic Cooperation and Development on Tuesday said the annual rate of inflation in its 34 members fell to 1.4% from 1.7% in January, while in the Group of 20 leading industrial and developing nations it fell for a third straight month, to 2.3% from 2.6%. The G-20 accounts for 90% of global economic activity.The decline in the inflation rate was driven by lower energy prices, while the core rate of inflation in the OECD—excluding energy and food—was unchanged at 1.6%.
The OECD said six of its members experienced a decline in prices over the 12 months to February—all being in Europe.
CHINESE ALSO DRIVING BLIND:
CHINA: OFFICIAL VS PRIVATE SURVEYS
Today’s FT’s headline:
China factory data hint at stability Pressure on Beijing to add fresh stimulus eases
Hmmm…
China’s official manufacturing purchasing managers’ index rose for the first time in six months, edging up to 50.3 in March from 50.2 in February. On the other hand, the independent HSBC survey fell to 48.0 from 48.5.
Zerohedge illustrates:
Just in case you are wavering between the official or HSBC survey, here’s another private survey:
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China Economic Activity Below Seasonal Trends in March
- CEBM’s April survey results revealed lower than expected sales across nearly all industries.
- The overall economic environment remains sluggish.
- Looking forward into April, the forward-looking CEBM Industrial Expectations Index (SA) decreased significantly to -20.4% from -1.7% in February. The weak economy in Q1 2014 had a strong impact on sentiment among our respondents, and most of them have lowered their own expectations earlier in the month.
- Relatively satisfactory sales and expectations in exports and home appliance stores are attributed to the recovery of external economies, especially in the US and Europe.
J.P. Morgan economist sums it up:
”Despite the slight increase in the March [official] PMI reading, it underperforms the normal seasonal pattern rather notably, suggesting that the underlying momentum in the manufacturing sector likely remains on the soft side… The only relatively bright spot seems to be the export sector, as the export order component for both the NBS and Markit manufacturing PMI readings rose in March.”
Beware, it’s April fools’ day!