Pace of Hiring Slows in Mixed Jobs Report U.S. hiring slowed in March but broader trends suggest slack in the labor market is disappearing, leaving the Federal Reserve on track to keep raising interest rates and workers with prospects of better paydays.

• Employers added 98,000 jobs to their payrolls in March, an unusually low figure in what has been a strong run of job growth in recent years. They added 219,000 jobs in February, down from the initially reported 235,000. And they added 216,000 in January instead of the previously reported 238,000.
• Hiring in the construction trades rose by only 6,000 in March after adding 59,000 jobs in February. Manufacturing firms grew their payrolls by 11,000 jobs, less than half the 26,000 jobs they added the previous month.
• The U.S. retail industry shed 29,700 jobs in March and 31,000 in February, according to the Labor Department. Some 2,880 store closings have been announced so far in 2017, compared to 1,153 over the same stretch last year, according to Christian Buss, an analyst at Credit Suisse. The current pace of store closures puts the industry on track to top 8,600 this year, far exceeding the peak of 6,163 hit in 2008, during the financial crisis.
• Warehouse and storage jobs stood at 898,000 in March 2016 compared with 945,200 last month—which amounts to more than 47,000 new jobs (+5% YoY). Retail trade employment rose 318,000 (+2.0%) YoY during the period. BTW, starting pay for warehouse workers rose 6% over the past year to $12.15 an hour in February, according to an analysis by ProLogistix, a logistics staffing firm.

Still, the unemployment rate dropped two-tenths of a percentage point to 4.5%, the lowest level since May 2007. The drop in the jobless rate occurred even as more people entered the labor force, meaning there was more than enough hiring to absorb new workers.

The March hiring slowdown came after two strong months of gains, 216,000 in January and 219,000 in February, leaving the average for the first quarter as a whole at 178,000, near its pace for all of 2016.

The labor-force participation rate held steady at 63% in March. (…)

Across the nation, average hourly earnings for private-sector workers rose 2.7% in March compared with a year earlier. (…)

While the business survey showed the monthly slowdown in hiring, the survey of households, upon which the jobless rate is calculated, showed a large gain in employment—472,000 for the month.

According to Philippa Dunne and Doug Henwood at the Liscio Report, as an economic expansion matures, folks working “off the books” get picked up in the household data, but not in the payroll tally.

That helped to drive improvements in several measures of joblessness. For example, an alternative measure of unemployment and underemployment, which includes those who have stopped looking and those in part-time jobs who want full-time positions, dropped to 8.9% in March, down from 9.2% the prior month and the lowest since December 2007. The rate averaged 8.3% in the two years before the recession. (…)

Curiously, the household survey reveals that adult male employment declined last month while female jobs soared 339,000. A similar trend occurred in February. Go figure! David Rosenberg points out that the number of prime working-age males (25-54) declined by 47k in March, the third decline in a row, a streak not seen since late in 2009. He adds that

the overall decline in the unemployment rate was due to the ladies, whose level dropped sharply from 4.6% to a nine-year low of 4.3%.

Can’t be a Trump effect, can it?

Even though the Jan-Mar weather stats were there for all to see, and all saw them given the consensus was for a “low” 175k jobs gain, the weather takes most of the brunt for the miss:

Payroll growth was under the weather from a cool and stormy March after a warm January and February. But stripping out the weather-sensitive industries, payroll growth was down only modestly.

David Rosenberg is not so modest, estimating that ex-weather, payroll still rose only 128,000.

In all, employment growth continues to slow which is important from an economic momentum point of view: on a YoY basis, growth in total employment peaked at +2.3% in February 2015 and declined to +1.9% in March 2016, to +1.6% last December and to +1.5% in March. Using quarterly data to smooth out the weather noise, the slowdown is just the same.

Meanwhile, the consumer labor income proxy (hourly earnings x hours worked x employment), blue line above, is trending similarly with Q1’17 up 3.8% from +4.0% in Q4’16 and +4.3% in Q1’16, mainly because wage growth is not accelerating enough to compensate for the employment slowdown. Note on the chart how the more stable labor income proxy has not perked up like personal income (red) has since December. Growth in personal income accelerated sharply from 3.6% in December to 4.6% in February, a sharp upturn that has not been witnessed in wages nor in spending patterns. March personal income data with revisions for prior months will be released May 1st.

This is quite important because also trending wrongly is inflation: the PCE deflator has accelerated from +0.8% to +2.1% during the last 12 months, taking the growth in the real labor income proxy down from +3.5% in Q1’16 to +1.7% in Q1’17. On the other hand, personal income jumped at a 5.5% annualized rate in January-February, suggesting a much stronger trend in real income.

The consumer supporting some 70% of the economy, it is crucial to have a good reading of its income and spending trends. For now, the employment-derived hard data seem too soft to assume that there is a strong sustainable momentum to the economy. (See also on this THE U.S. CONSUMER: FRAGILE STRENGTH)

These next stats may be providing a clue on the above: faced with a real income squeeze, Americans resort to credit right when the Fed is embarking on a rate hike (sorry, “normalization”) mission:

America’s Credit-Card Tab Hits $1 Trillion Credit-card debt breached the $1 trillion threshold in the U.S., joining auto loans and student debt in crossing that level, and hitting its highest mark since the nation’s last recession.

(…) New Federal Reserve data released Friday shows that U.S. consumers now owe $1.0004 trillion on credit cards, up 6.2% from a year ago and 0.3% from January. It is also the highest amount since January 2009. (…)

Total consumer debt, including mortgages, by the end of last year was within 1% of the previous peak back in 2008, according to data recently released by the New York Federal Reserve. (…)

Missed payments on consumer loans—while mostly at near record lows—are on the rise in the credit-card market. Personal loan and subprime auto-loan delinquencies are also mostly rising. (…)

The Fed’s three interest-rate increases since late 2015 have added $4.3 billion in additional interest charges that card users will incur through 2017, according to WalletHub.com. (…)

(Haver Analytics)

So, here’s the risk from up, or down, or both:

1. Consumer income is not rising as fast as the personal income data to February is suggesting.
2. Inflation is stronger and not transitory as the Fed is suggesting.
3. Real personal income is collapsing, right when rising rates are hitting the mountain of debt.

The Fed scenario: consumer income growth is fine, inflation is not a threat and sustained real income growth will be strong enough to support real spending growth to keep the economy rolling while rates are being normalized.

Some (somewhat biased) evidence for your consideration:

• The Fed has been wrong all the way this cycle…
• These charts are not pointing positively…

Now, you might mention the potential tax reform bonanza to be factored in. Hmmm…:

Speaker of the House Paul Ryan said on Wednesday that tax reform could take longer than health-care reform. And Congress and the White House initially were closer to agreement on health care. Now, while the House has a plan and the Senate is working on one, “the White House hasn’t nailed it down,” so none of the three entities are on the same page.  (Barron’s)

• Price for Tax Overhaul Makes Bipartisan Deal Unlikely Democrats are starting to settle on a price for participating in a tax-code overhaul, and many Republicans won’t want to pay it.

Not forecasting anything here, just observing, as George Soros would say.

U.S. Steelmakers Press Their Luck With Price Increases U.S. steelmakers have benefited from duties put on certain steel imports last year, but they risk driving away business with significant price increases.

(…) Domestic steel companies have raised prices by as much as 50% on popular types of steel in recent months. That has boosted their profits, but troubled customers who say they can’t afford the higher cost. Steel users say they are looking for cheaper alternatives from countries unaffected by the tariffs.

“We can’t pass along this kind of increase to our customers,” said Stuart Speyer, president of Tennsco Corp. a Tennessee-based manufacturer of steel shelves and file cabinets. He said his suppliers have raised steel prices seven times since October, adding about $180 to the cost of a ton of steel. (…)

EARNINGS WATCH

Factset sets the stage for this new earnings season:

In terms of estimate revisions for companies in the S&P 500, analysts made smaller cuts than average to earnings estimates for Q1 2017 during the quarter. On a per-share basis, estimated earnings for the first quarter fell by 3.6% from December 31 through March 31. This percentage decline was smaller than the trailing 5-year average (-4.3%) and the trailing 10-year average (-5.9%) for a quarter.

In addition, a smaller percentage of S&P 500 companies have lowered the bar for earnings for Q1 2017 relative to recent averages. Of the 111 companies that have issued EPS guidance for the first quarter, 79 have issued negative EPS guidance and 32 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 71% (79 out of 111), which is below the 5-year average of 74%.

Because of the downward revisions to earnings estimates, the estimated year-over-year earnings growth rate for Q1 2017 is 8.9% today. On December 31, the expected earnings growth rate was 12.5%.

Over the past five years on average, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 4.1%. During this same period, 68% of companies in the S&P 500 have reported actual EPS above the mean EPS estimates on average. As a result, from the end of the quarter through the end of the earnings season, the earnings growth rate has typically increased by 2.9 percentage points on average (over the past 5 years) due to the number and magnitude of upside earnings surprises.

Energy profits are off the chart from a loss quarter in 2016 (ex-Energy, the estimated earnings growth rate for the remaining ten sectors would fall to 5.1% from 8.9%). This will be a strange season with 3 sectors expected to show growth above 13% and 6 others averaging –1.3% with the important Industrials expected to report a weak –7.3% quarter, down materially from +0.5% expected on Dec. 31. Despite the decrease in estimated earnings, this sector has witnessed an increase in price of 3.8% since December 31.

• 23 S&P 500 companies have already reported Q1 earnings and 73.9% have beaten estimates.

RESILIENCE

Mohamed A. El-Erian: Impressive Market Resilience Shouldn’t Be Taken for Granted

(…) the price action also serves as yet another illustration of one of the markets’ distinguishing features in the recent past: resilience. And it is the result of behavior that, at least so far, has served traders and investors well when it comes to making money — that of buying on dips.

This investor reaction is underpinned by strongly held beliefs in the marketplace regarding the underlying stability of global growth dynamics, the continued backing of central banks, the likelihood of large inflows of corporate cash, and the containment of adverse political spillovers.

Yet recent data also points to some potential cashflow strains, including the largest weekly outflow of retail investor funds from U.S. stocks for more than 18 months. Moreover, the original August deadline set by Treasury Secretary Steven Mnuchin for tax reform looks less certain, raising questions about the timetable for the repatriation of corporate cash held abroad. Meanwhile, the low growth equilibrium risks are becoming less stable and central banks are less able and less willing to continuously repress financial volatility.

For all these reasons, growing exposure to market risk is gradually being borne by a slowly shrinking base of investors. This is not much of a concern as long as unanticipated shocks remain relatively infrequent and containable. Indeed, the minority of investors who have reduced their portfolio exposures could even be attracted back in.

The picture changes significantly, however, if negative shocks become more frequent and more generalized. As such, market participants would be well advised not to lose sight of the uncertain political outlook in Europe, the potential quick sand in the crisis-ridden countries of the Middle East, rising tensions over North Korea, and the economic policy pivots that Europe and the U.S. need to make to place their economies on firmer footing and validate high asset prices.

This also explains some of the resilience:

But there’s more to the market’s resilience than just numbers, according to Ethan Harris, Bank of
America Merrill Lynch’s global economist in New York. Like the fable of the boy who cried wolf, Harris says pessimistic forecasters have so badly over-estimated the consequences of big events – the rolling European debt crisis since 2010, the U.S. debt-ceiling standoff in 2011, Brexit in 2016 – that traders have become conditioned to ignore them. Even when bears are right, the past eight years have shown that central banks are more than willing to save the day when markets fall.
“It’s been a period of repeated shocks, and I think people get toughened against that,” Harris says. “It seems like uncertainty is the new norm, so you just learn to live with it.”

Some smart charts from Ed Yardeni to test your resilience:

Also testing our resilience:

• Russia, Iran Warn U.S. They Will “Respond With Force” If Syria “Red Lines” Crossed Again

• Tillerson’s Mission to Moscow Just Got a Lot More Complicated

• Xi Buys Time With Trump as Tensions Loom Over North Korea

• Geopolitics from France to Korea keep investors cautious

Following up on my June 2016 post CETERIS NON PARIBUS:

• Chinese Banks Ramp Up Overseas Loans Big Chinese banks are lending record volumes abroad in a bid to tap new growth, helped by state-backed ambitions to build infrastructure around the world.

(…) For the first time, three of the country’s four largest lenders last year posted larger increases in overseas lending than in domestic corporate loans. The expansion, believed to have largely funneled to Chinese companies, comes as Chinese banks try to carve out a bigger presence in some of the world’s priciest business districts, financially as well as physically: Bank of China Ltd. last year moved its U.S. headquarters to a 450-foot-tall glass tower in Midtown Manhattan. (…)

Chinese banks predominantly lend to Chinese state-owned companies, analysts say, though they are trying to court more foreign borrowers. (…)

The overseas surge reflects the broader pace of China’s outward direct investment, which last year expanded by 40.1% to $170.1 billion, despite Beijing’s stricter scrutiny of capital outflows.