U.S. ISM Nonmanufacturing Index Slips

The Institute for Supply Management (ISM) Composite Index of Nonmanufacturing Sector Activity fell to 56.5 during March from an unrevised 56.9 in February. These numbers remained well below the highs of the second half of 2014.

The slip last month in the nonmanufacturing composite index reflected a sharp decline in the business activity reading to 57.5, the lowest point in twelve months. The supplier delivery (54.0) index also reversed its February gain, but the recent upward trend in the index indicates slowing delivery speeds. The new orders reading (57.8) recovered some of the prior month’s decline while the employment index notched slightly higher to 56.6, its highest level since October.

The prices paid series rose to 52.4, indicating rising prices, on balance, for the first time since November. A higher 21% of respondents paid higher prices, though that still was down from the 2011 high of 57%. A lessened 9% paid lower prices, the least in six months.

Haver Analytics constructs a Composite Index using the nonmanufacturing ISM index and the ISM factory sector measure, released Wednesday. It fell to 55.9, the lowest level since last April. During the last ten years, there has been a 74% correlation between the index and the q/q change in real GDP.

Services Jobs More Resilient Than Manufacturing So Far

(…) there’s no denying that Friday’s March jobs report sketched how the factory sector is struggling and the broader economy is feeling the impact. Private-sector job growth slowed to the weakest pace since December 2013, as manufacturing employment fell into contraction. While some economists will attribute this to port disruptions and weather, Bloomberg Economics sees the broader impact from a stronger dollar hurting domestic industry as well as the export sector. (…)

From Evercore ISI:

Employment releases are the most influential macro indicators for capital markets and Fridays report was unquestionably weak and is consistent with the sharp reduction in GDP estimates we’ve seen over the past month as the breadth of U.S. economic activity has deteriorated and suggest just +1.0% real GDP in 1Q.  However, two easier-to-measure and more timely employment readings were distinctly stronger last week.  First, unemployment claims declined to 268k versus 327k four weeks ago.  Second, Evercore ISI temp & perm employment cos sales surveys increased to a record 61.2 and +6.1 y/y.

The U.S. Job Market Is Losing Its Dynamism The economy is creating and destroying jobs at a slower pace than before

More than 7 million jobs are created, and almost as many are destroyed, every quarter in the U.S., according to Maximiliano A. Dvorkin, an economist at the Federal Reserve Bank of St. Louis. That’s healthy because “resources are allocated to alternative — presumably better — uses,” he wrote in a March 27 blog post.

Except the pace of that churn is slowing. (…)

“Despite the large cyclical swings in net employment and gross job destruction and creation rates, most industries share a common feature: The rate of job creation and destruction has been falling,” he wrote.

That points to two consequences for U.S. workers. Jobs last longer, as does the typical bout of unemployment. Indeed, those out of work for at least 27 weeks represented 30 percent of all unemployed in March, compared to 11 percent in March 2000, according to the U.S. Bureau of Labor Statistics.

Part of the explanation, Dvorkin wrote, may be found in the dearth of young companies, which have higher rates of hiring and letting workers go. In 2014 just 34 percent of employers had been in operation for less than five years, accounting for 14 percent of jobs. That’s down from 2000 when 41 percent were that young, accounting for 25 percent of jobs.

• Structural Trends in Employment by Age Group

Global Economy’s Manufacturing Sector Struggles

In March, 11 of the 17 countries/units in the table showed declines in their respective manufacturing PMIs. Moreover, 8 of these 17 entities have PMI readings below 50, indicating contraction.

In February, 9 of 17 readings fell month-to-month and six had PMI readings below 50. This is a good deal of sluggishness and weakness in manufacturing especially so far into an economic expansion period that continues to be weak by historic standards. The highest manufacturing PMI in this group is the U.K. in March at 54.4. Mexico at 54.4 was the highest in February. These are still rather modest readings.

Moreover, the queue standings are uniformly poor. In these we rank each country’s PMI in its time series of historic values. The highest readings are for Mexico and Vietnam, two countries that only have compiled data since the fourth quarter of 2012. Among countries with observations back to late-2007, the euro area and Germany have the highest standings with each in their 60th percentile range. These are quite modest standings, especially so for the best in class. The U.S. sits in the bottom 6 percentile of its historic queue of data since October of 2007. The U.S. manufacturing PMI has been slipping steadily since August of last year. The strong dollar is not helping.

Japan, China and India all have manufacturing PMI readings at the edge of the lower one-third of their respective ranges. Turkey is at its low. Brazil and Russia are not far from their respective lows. These standings are all the more depressing since they are comparisons of current values with a period when these economies were in recession then transited into expansion. These are very weak readings for such a period.

Against this background, it is hard to understand the Fed’s compulsion to hike rates. There are no capacity constraints in the U.S. or even in the global economy. Manufacturing everywhere is extremely weak. There has been a lot of monetary stimulus and the countries that did that early have fared better (the U.S. and the U.K.). But now that stimulus is wearing off and the stimulus launched in Europe is playing a part by driving the euro lower and the dollar higher. (…)

Europe is starting to pick up as EMU loan schemes are in play and QE has been announced and launched. But to the extent that these programs work through the exchange rate mechanism, they only rob Peter to pay Paul. No new growth is created globally by rearranging who is supplying the inadequate demand of the day. (…)

The fact is that the world economy has been reconfigured to have more of its output produced in Asia where savings rates are higher thereby blunting the multiplier effect on expansion. It is one of the reasons that the global economy is in a state of excess supply and still working out of a period of excess leverage. It is not exactly a prescription for stronger growth but economic conditions should become more solid under this plan as it plays out. But this is a plan to develop long-run stability not to enhance short-run growth. For now growth is slow and the threat of inflation rising is distant and it’s being kept at bay through the tight regulation of banks. Do central banks truly understand the situation they have created? How is inflation at risk to low interest rates when central banks control lending so effectively? It’s a question manufacturers will be asking themselves for a long time.

Fewer Oil Trains Ply America’s Rails

The WSJ adds good color to a story I had yesterday:

The number of train cars carrying crude and other petroleum products peaked last fall, according to data from the Association of American Railroads, and began edging down. In March, oil-train traffic was down 7% on a year-over-year basis. (…)

About 1.38 million barrels a day of oil and fuels like gasoline rode the rails in March, versus an average of 1.5 million barrels a day in the same period a year ago, according to a Wall Street Journal analysis of the railroad association’s data. (…)

BNSF Railway Co., which is responsible for about 70% of U.S. oil-train traffic, operated as many as 10 trains a day last year, but is averaging nine a day now, a spokesman said. (…)

Languishing oil prices also make oil-train transportation look too expensive when compared to shipping in foreign oil. (…)

Shipping oil across the U.S. on a train can cost from about $6 a barrel to nearly $12, depending on where the oil is pumped and where it’s going, Genscape data show. That mode of transport only makes sense when the price of American crude-oil is significantly cheaper than oil pumped overseas.

At times in recent years, U.S. crude sold for $10 to $20 a barrel less than oil pumped in places like Europe and West Africa. The big differential has made shipping American oil on trains an attractive option, said Colin Halling, an analyst at Genscape. “The wider that spread is, the better it is for the economics of crude by rail,” he said.

In recent weeks, the price gap between U.S. and Brent, the benchmark foreign crude, has narrowed to about $7 a barrel, making some oil-train shipments too costly at this time.(…)

Auto Analyst: The Remainder of My Career Will Be Focused on This One Chart

Jonas says that the auto industry is being eyed by outside players that want in on the “$10tn mobility market (10tn miles traveled x $1/mile)” and that the future of the industry is going to revolve around two fairly recent phenomenons: (1) the shared economy and (2) autonomous driving. 

He breaks it down into four quadrants: the status quo of today, the shared mobility market with the likes of Uber, “owned autonomy” where we are giving up control of cars to a computer, and “shared autonomy” where fleets of completely autonomous vehicles are operating 24 hours a day.

So basically how the auto industry gets from quadrant 1 to quadrant 4 will be the entire story of the auto industry as Jonas sees it.

And he’s quite right.

EARNINGS WATCH

Negative Earnings Expectations Mount Companies are issuing negative earnings guidance at the second highest rate on record, but that may not yield complete doom and gloom for stocks.

(…) According to FactSet, 101 companies have issued first quarter guidance, and 85 businesses, or 84%, have delivered negative forecasts. FactSet considers guidance to be negative if a company’s estimate is less than the consensus among analysts the day before the company’s outlook was released.

The only other time the percentage of negative preannouncements ran higher was for the fourth quarter of 2013 when 85% of guidance was negative. Earnings that season ended up 8.8%, above earlier projections of 6.2% at the end of the 2013. And after a three-week pullback of 6.1%, stocks continued to grind higher. FactSet says the unusually high percentage of negative preannouncements for this season and in the fourth quarter of 2013 can be attributed to only a small number of positive outlooks. In the past five years, negative guidance has averaged 69%. (…)

Even though the outlook is far from rosy heading into reporting season, companies have a tendency to beat expectations and stocks typically react positively to that. “Analysts…have slashed their forecasts so drastically that corporate executives should have few problems soaring over these watered down projections,” said JC O’Hara, chief market technician at FBN Securities.

About three fourths of companies usually beat estimates, notes FactSet. If that trend plays out this time, it should bode well for stocks. While earnings are expected to fall in the first half of this year, they are projected to return to record levels in the latter half of 2015, which should help stocks as they deal with higher interest rates ahead.

For the record, Q1’14 negative pre-announcements were 83.8% vs the current 84.2%. In Q1’14, 93 companies had negatively pre-announced compared with 85 this quarter. In Q1’14, 9 companies had negatively pre-announced during the month preceding quarter end. This year, only 4 companies have done so since Feb. 27. This is surprising given the weather, slow retail sales and inflation, the USD and the overall economic slowdown while employment surged.

On the other hand, only 16 companies have lifted guidance during Q1, the lowest number in 9 years. There were only 17 in Q4’13 but 21 in Q1’14 and an average of 29 in the last 3 quarters.

CFOs don’t seem too concerned at this point. S&P dividends jumped 31% QoQ annualized in Q1 (+15% YoY).

BTW:

CFOs Continue Positive Outlook: CFO Signals Survey

The Deloitte CFO Signalsâ„¢ survey for the first quarter of 2015 was conducted between Feb. 9, 2015 and Feb. 20, 2015. Eighty-two percent of the 96 CFO respondents were from organizations with more than $1 billion in annual revenues, and 68% were from publicly traded organizations.

North American CFOs responding to Deloitte’s first-quarter 2015CFO Signals™ survey indicated a ninth straight quarter of optimism regarding their organization’s prospects, continuing to forecast significant growth in earnings and hiring. While CFOs expressed concern with challenges, such as a strengthening U.S. dollar, a lagging global economy and U.S. equity markets swings, they maintained a steadfast level of positive sentiment.

In the first quarter of 2015, 48% of CFOs expressed improving optimism, relatively unchanged from the fourth quarter of 2014. However, only 14% expressed declining optimism, improving on the previous quarter’s 16%. Overall, net optimism increased quarter-on-quarter from +33.3% to +34.4%. (…)

As a whole, the survey captured CFOs’ highest-ever bias toward growing revenue over cutting costs. Revenue growth expectations receded, but were still better than they were a year ago. And despite a drag from energy/resources companies, earnings expectations rose close to a six-quarter high, increasing from 9.7% in the fourth quarter of 2014 to 10.6% in the first quarter of 2015. In total, 79% of surveyed CFOs expected year-over-year gains in earnings. Additionally, hiring expectations in the first quarter rose to 2.4%, matching the highest level in two years. U.S. CFOs’ expectations rose from 1.7% in the fourth quarter of 2014 to 2.3% in the first quarter of 2015, falling between their Canadian (1.4%) and Mexican (4.7%) counterparts.

Despite these figures, CFOs noted a number of new and preexisting challenges. The rising strength of the U.S. dollar, global economic performance and equity market shifts are causing some CFOs to take action. In response to the U.S. dollar rise, several companies that have not previously managed currency risks said they are now looking at options to do so. And while a substantial proportion of CFOs said they do not have significant foreign currency exposure, quite a few reported becoming more deliberate about their hedging strategies.

CFOs’ outlook on the global economy remained skeptical. Just 18% regarded China’s economy as good, down from 34% in the fourth quarter of 2014; only 13% expected improvement within a year, down from 25% in the previous quarter. Still, more than 25% of CFOs expressed plans to expand operational capacity in China. Expectations for Europe remained dismal as well, as 2% of CFOs surveyed described Europe’s economy as good, only 10% expected it to improve in the next year.

Nearly half of CFOs (46%) continue to believe that U.S. equity markets are overvalued, but this is a significant decrease from 61% in the fourth quarter of 2014. Nearly all CFOs (93%) say debt is an attractive financing option, and one-third of public company CFOs view equity financing favorably. (…)

What I have been saying is summarized in this Evercore ISI comment:

The issue in the short term is that with traditional valuations already stretched accelerating growth is needed to support earnings and make equity returns less dependent on multiple expansion.  Weaker economic data indicating slower topline growth at a time when profit margins are at increased risk due to accelerating nominal wage growth is a particularly bad combination for earnings growth.  Earnings season starts this week and disappointing earnings releases and revisions make already lofty valuations look even higher and increases downside risk to the market as long as that continues.

Here’s the hope: 

That’s why its important that the US economy is rebounding in March with data from PMIs to vehicle sales to Rail Car Loadings to Evercore ISI Company Surveys all recovering we expect +4.0% real GDP in 2Q.  Evercore ISI company surveys overall, after trending lower by -4.5 over the past six months, have bounced back a significant +2.2 over the past five weeks, led by retailers +8.9, auto dealers +6.6, truckers +1.9, and homebuilders +1.6.