- Total nonfarm payroll employment rose by 151,000 in August, compared with an average monthly gain of 204,000 over the prior 12 months.
- The change in total nonfarm payroll employment for June was revised down from +292,000 to +271,000, and the change for July was revised up from +255,000 to +275,000. With these revisions, employment gains in June and July combined were 1,000 less than previously reported. Over the past 3 months, job gains have averaged 232,000 per month.
- The average workweek for all employees on private nonfarm payrolls decreased by 0.1 hour to 34.3 hours in August. In manufacturing, the workweek declined by 0.2 hour to 40.6 hours, while overtime was unchanged at 3.3 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls decreased by 0.1 hour to 33.6 hours.
- average hourly earnings for all employees on private nonfarm payrolls rose by 3 cents to $25.73. Over the year, average hourly earnings have risen by 2.4 percent.
Total sales of light vehicles during August declined 5.0% versus July (-4.5% y/y) to 16.98 million units (SAAR), and reversed most of July’s increase. Sales fell in three of the last four months.
Sales of light trucks declined 5.4% to 10.21 million units (+1.6% y/y). Domestic light truck sales slumped 6.3% to 8.52 million units (-0.3% y/y). Sales of imported light trucks were unchanged at 1.69 million units (+12.5% y/y). Truck sales remained near the record high of 60.1% of the light vehicle market.
Auto sales fell 4.5% to 6.78 million units (-12.5% y/y). The decline reflected a 4.8% drop in domestic car sales to 4.91 million units (-12.5% y/y). Imported car sales fell 3.8% to 1.86 million (-12.4% y/y).
This still looks like a cyclical peak in demand (charts from CalculatedRisk)
Doug Short adds this significant chart:
This trend will also get more attention pretty soon:
Borrowing by U.S. small businesses sank in July, and more firms were late on repaying existing loans, data released on Thursday showed, both trends pointing to softer economic growth ahead.
The Thomson Reuters/PayNet Small Business Lending Index fell to 121.5 in July, the lowest level since January and down from an upwardly revised 139.2 in June. Borrowing fell 16 percent from a year earlier, driven by declines in all major industry groups and the 10 biggest states.
Companies also struggled to pay back existing debts. Loans more than 30 days past due rose in July to 1.63 percent, the fourth straight monthly increase and the highest delinquency rate since December 2012, separate data from PayNet showed.
“The thing that scares us is the rise in delinquencies,” said Bill Phelan, PayNet’s president. “Every one of these months where investment is down and deliquencies are up is one step more toward contraction.” (…)
The PayNet index typically corresponds to U.S. gross domestic product growth one or two quarters ahead.
Meanwhile, in the big biz league, Moody’s issues a serious warning:
Markets are now relatively sanguine about default risk, effectively concurring with the baseline forecast of Moody’s Default Study. After rising from September 2014’s current cycle low of 1.6% to July 2016’s 5.5%, the baseline forecast sees the US high-yield default rate peaking in early 2017 at roughly 6.5%. Thereafter, the baseline prediction has the default rate receding to 4.9% by July 2017.
However, the baseline forecast is bordered by considerable downside risk. In addition to the baseline view, Moody’s Investors Service supplies optimistic and pessimistic projections for the default rate. The optimistic scenario projects a 5.3% average default rate for January-July 2017 that hardly differs from the 5.6% projected average of the baseline view. In stark contrast, January-July 2017’s 13.7% average expected default rate of the pessimistic scenario towers over the baseline forecast.
On balance, the default forecast suggests that the best days of the current credit cycle have passed. Even if the optimistic backdrop holds true, the default rate is likely to remain above-trend given the presence of an economic recovery. That is: The optimistic scenario predicts a range of default rates that exceeds both the average and median default rates of economic recoveries. Even if the optimistic view is correct, the default rate may still exceed its average, or trend, of an economic upturn. (…)
Following each of the three previous episodes showing a climb by the default rate up to 6.5%, the default rate continued its ascent. After first reaching 6.5% in February 2009, April 2000, and February 1990, the default rate eventually crested at 14.7% in November 2009, 11.1% in January 2002, and 12.4% in June 1991. Coincidentally, a recession overlapped each of the default rate’s last three peaks. In addition, the equity market suffered deep setbacks at some point during the 12 months prior to the peaking of the default rate.
Only once has an ascent by the default rate to 6.5% not been followed by a recession within 12 months. The lone exception occurred during the mid-1980s, or when the default rate first approached 6.5% in July 1986. Thereafter, the default rate formed a localized peak at the 7.0% of April 1987.
(…) the market’s current expectation of a limited rise and subsequent fall by the high-yield default rate implicitly assumes a major rejuvenation of net revenues. As derived from the US National Income Product Accounts (NIPA), corporate gross-value-added slowed from the 5.4% annual increase of the year-ended June 2015 to the 2.1% of the year-ended June 2016. Partly because the deceleration by net revenues was more pronounced than the comparably measured ebbing of employment cost growth from 5.4% to 4.7%, the annual percent change of operating profits switched direction from the 4.7% increase of the year-ended June 2015 to the -6.8% contraction of the year-ended June 2016.
If the market’s current sanguinity regarding the near term path of defaults is to prove warranted, then the annual increase of net revenues needs to quicken from Q2-2016’s 2.1% to at least 4% by Q4-2016. The adequacy of the latter requires an annual increase by employment costs that is no greater than 4%, which matches its year-over-year increase of Q2-2016. All else the same, Q2-2016’s -4.9% yearly drop by operating profits would have been deeper had the yearly growth rate of employment costs not slowed from Q2-2015’s 5.6%. Nevertheless, a further tightening of the US labor market warns of possibly faster growth by employment costs.
Finally, it is wrong to assign all of the blame for insufficient sales growth to the price deflation afflicting companies having exposure to the oil and gas industry. The 459 non-energy company members of the S&P 500 showed per share sales growth of merely 2.7% annually for 2016’s second quarter, where the retirement of equity shares cast an upward bias to the per share sales growth rate.
BTW, RBC Capital calculates that equity buybacks contributed +2.4% to S&P 500 ex-Energy per share data in Q2, suggesting that non-energy sales growth was closer to +0.3% in Q2. Back to Moody’s:
Moreover, preliminary indications suggest that July’s annual increase for an estimate of core business sales rose by only 1.2% from July 2015. Core business revenues equal the sales of manufacturers, retailers and wholesalers plus construction spending less sales of identifiable energy products.
Recently, the annual increase of core business revenues slowed from Q2-2015’s 2.5% and Q1-2016’s 1.8% to the 1.2% of Q2-2016, wherein construction spending’s annual increase sagged from Q2-2015’s 10.7% and Q1-2016’s 10.5% to Q2-2016’s 3.1%. For July, construction outlays edged up by only 1.6% annually despite support from ultra-low mortgage yields.
Both the pronounced slowdown by construction spending and July’s year-over-year declines of -1.6% for existing home sales and -2.2% for pending sales of existing homes constitute a strong case against significantly higher Treasury bond yields. If a sufficient revitalization of business sales does not materialize, Treasury bond yields will fall under 1.5%. By the way, September 1’s 10-year Canadian government bond yield is around 1%.
IMF Signals Another Downgrade to Growth The failure of policy makers to fix deep-rooted problems in the world’s largest economies has pitched the globe into the worst slow-growth rut in nearly three decades.
The IMF warned leaders of the Group of 20 largest economies meeting later this week in China that the global economy is at risk of stalling without urgent action to revive dismal trade and investment levels, and stronger efforts to reverse a rising tide of protectionism. (…)
But muted output, very low inflation and slowing trade points to an even slower pace of global growth than the fund’s July forecast of 3.1%, the IMF said in a briefing prepared for the G-20 summit. “High frequency data points to softer growth this year.”
U.S. growth has underwhelmed, weighed down by a strong dollar and weak exports and dimming long-term growth prospects. The IMF indicated it would downgrade its July 2.2% forecast for the world’s largest economy this year. (…)
Under pressure from exporters and industry, China’s leadership is still keeping unproductive steel and aluminum capacity online, pushing prices down and aggravating trade relationships world-wide. Antitrade rhetoric on the U.S. presidential campaign has all but capsized the White House’s efforts to get the Trans-Pacific Partnership trade deal ratified by Congress. British voters decided in June to upend decades of European economic integration by voting to leave the EU.
Those and a host of other economic and geopolitical threats mean the risks to the global economy are skewed to the downside, says the IMF. Over the past several years, the IMF’s downside scenarios have repeatedly materialized into their baseline forecast, forcing the emergency lender to slash its 2016 global forecast from 4.6% to 3.1%.
That is why the IMF is calling on central banks to keep the cheap cash machine running, including telling the Fed to consider overshooting its inflation target and holding off near-term rate increases and urging the European Central Bank to beef up its monetary policy efforts.
(…) the IMF has also said a global joint stimulus plan is necessary to ward off darker prospects. (…)
The country’s statistics agency, Istat, confirmed on Friday that Italy’s economic recovery ground to a halt in the second quarter, having eked out growth of 0.3 per cent in the first three months of the year. Economists had originally expected growth of 0.2 per cent in the second quarter.
Year-on-year Italy’s economy grew 0.8 per cent in the second quarter, a slight improvement on the previous estimate of 0.7 per cent growth.
South Korea’s Hanjin Shipping Co., one of the world’s largest shipping lines, stopped taking new cargo and U.S. ports began turning away its ships after it filed for bankruptcy protection on Wednesday.
The move, coming at a critical time for U.S. retailers stocking up for the holidays, roiled global trade and caused U.S. shippers to brace for steep rate increases on routes to and from Asia.
Hanjin, a major container carrier and the world’s seventh-largest shipping line by capacity, moves manufactured products and consumer goods from electronics to clothing, furniture and toys destined for Amazon.com Inc. and other retailers. Asia-based freight brokers estimate about 25,000 containers are crossing the Pacific each day on Hanjin ships.
The repercussions of Hanjin’s filing in Seoul were nearly instantaneous. Three of its ships that were scheduled to berth at the ports of Los Angeles and Long Beach, Calif., drifted off the coast Wednesday, their contents—bound for retail shelves, factories and warehouses—marooned indefinitely. Uncertainty about Hanjin’s future raised concerns that its ships could be subject to seizure by creditors, clogging the ports.
Meanwhile, port terminals from New York to Georgia to California said they would turn away outbound containers destined for Hanjin ships, sending U.S. exporters scrambling to rebook, truck, reload and repack their cargo into other carriers’ containers.
Shippers and truckers fretted about rising costs and shrinking capacity.
“There’s going to be exorbitant costs,” said Peter Schneider, vice president of T.G.S. Transportation Inc. in California. “Everything is unraveling.” His company has about $6,000 to $7,000 in outstanding bills to Hanjin, which he will likely write off, but other trucking companies could be harder hit. Smaller companies that “had all their eggs in one basket with Hanjin—they may go under,” he said. (…)
Hanjin accounts for 3.1% of global container capacity, according to maritime data provider Alphaliner. (…)
Also in the WSJ:
- Hanjin handles about 7.8% of the trans-Pacific trade volume for the U.S.
- Freight brokers in Asia said about 540,000 containers are expected to face delivery delays that one of them said could range from a few days to more than a month.
- Cargo owners said rates from Busan, South Korea, to Los Angeles had risen to $2,300 a container by Thursday, up from $1,700 four days earlier. One U.S. importer said he was getting rate quotes of $2,000 a container, compared with $700 before the Hanjin news.
UPS to Raise Service Rates by 4.9% on Average Starting Sept. 19, it will cost 4.9% more on average to ship a package through United Parcel Service Inc.’s freight service.
Prospective buyers at one Upper East Side condo project are quietly being offered a 5 percent discount. At an almost-completed Midtown building, five-bedroom homes will be divided into smaller units. Brokers whose clients sign deals at a downtown tower before Labor Day are getting $5,000 gift cards.
Such tactics have become more common in Manhattan, where developers are coping with a luxury-condo glut and adjusting to a new reality after years of building to meet seemingly insatiable demand. With the market now sputtering, they’re altering sales plans and making behind-the-scenes deals in an attempt to create momentum at their projects before an onslaught of even more competition. (…)
For the first 35 weeks of the year, contracts to buy Manhattan homes at $4 million or higher tumbled 21 percent from the same period in 2015, data compiled by luxury brokerage Olshan Realty Inc. show. The 758 properties in those deals spent an average of 291 days on the market, or 54 more days than a year earlier.
Developers have postponed plans to add even more apartments. The 3,574 units slated to reach the market this year are 38 percent fewer than what was estimated in January, according to brokerage Corcoran Sunshine Marketing Group. (…)
Oil Stems Losses on Russia Support for Output Cap Crude prices steadied following three consecutive days of losses, after Russia signaled support for a cap on production.
(…) The market got a boost after Russian President Vladimir Putin earlier on Friday called on oil producers to agree to limit output when members of the Organization of the Petroleum Exporting Countries meet in Algeria later this month. (…)
UK construction sector moves closer to stabilisation in August
Following the sharp jump in the August UK manufacturing PMI, we now learn that the Brexit impact did not worsen in the important construction industry as Markit found in its August UK Construction PMI survey:
UK construction companies indicated a sustained reduction in business activity during August, but the pace of decline was only marginal and much softer than the seven-year record seen during July. New order volumes also moved closer to stabilisation, with the latest reduction the least marked since May. This contributed to a renewed rise in staffing levels across the construction sector and a rebound in business expectations for the next 12 months. However, latest data indicated a further steep acceleration in input cost inflation.
Sub-sector data pointed to much slower reductions in housing activity and commercial building than those recorded in July. In both cases, the rate of contraction in August was the slowest for three months. Meanwhile, civil engineering activity stabilised in August, following a reduction during the previous month.
Reports from survey respondents suggested that Brexit uncertainty continued to act as a brake on the construction sector during August, especially in terms of house building and commercial work. However, a number of firms noted that sales volumes had been more resilient than expected. Some panel members also commented on signs of a rebound in client confidence from the lows seen earlier this summer. Reflecting this, latest data highlighted that incoming new work decreased at the slowest pace since May.
But the 8-10% drop in the pound is having an immediate impact on prices and margins:
Purchasing costs went up at a rate not seen for half a decade, as the impact of the weak pound was felt by the construction sector. Firms reduced their purchasing volumes as a result, as new orders and activity continued to fall – though at a more moderate rate compared to last month. Costs for energy and raw materials such as steel and timber were highlighted as company margins were squeezed.
UNINTENDED CONSEQUENCES
Life Insurance Customers Push Back Over Surprise Cost Increases Policyholders are filing suit, as big U.S. life insurers blame the Federal Reserve’s decision to keep interest rates low for longer.
Over the past year, several major insurers have notified tens of thousands of people of higher costs to keep their policies in force, with increases ranging from midsingle-digit percentages to more than 200%, according to financial advisers. To justify the increases, they blamed the impact on their investments from the Federal Reserve’s decision to keep interest rates lower for longer. (…)
The insurers counter that these cost increases are permitted under provisions that allow them to charge up to a maximum amount, based on expectations of future policy performance. The insurers claim those expectations have plummeted with the Fed keeping short-term interest rates at near zero for nearly eight consecutive years. (…)
Insurers’ problem is that many older policies guarantee annual interest rates of 4% to 5%. In the mid-1980s, when universal life policies surged in popularity, the average investment portfolio yield for life insurers was nearly 10%, according to ratings firm A.M. Best Co.
Today, that yield is just under 5%, thanks to a general decline in rates over the decades, followed by the more recent sharp leg down.
In selling universal life, insurers typically aim to earn 1 to 2 percentage points more on the premiums they invest than they pay out in interest to policyholders, said Deloitte Consulting LLP principal Matthew Clark. Most insurers aren’t earning this spread today, and “with continued low rates some could face a situation where they are paying out more to policyholders than their investments earn,” he said. (…)
Also at issue in the lawsuits is “mortality” experience. In setting initial policy charges, actuaries make assumptions about the life expectancy of people who will buy the policies. The lawsuits maintain that the insurers have profited from rising life expectancies across the U.S. population, and that is among reasons they said cost increases shouldn’t be allowed. (…)
