Modest August Job Growth Shows Economy Expanding, but Slowly

The U.S. economy added 130,000 payrolls in August, the Labor Department reported Friday, and has averaged 156,000 new jobs a month over the past three. That was down from average growth of 190,000 a month in the eight years since employment started picking up after the last recession. The August tally was propped up in part by the addition of 25,000 temporary Census Bureau workers by the U.S. government, while estimates of payrolls in July and June were revised down. (…)

A survey of households showed the share of workers aged 25 to 54 working or seeking work increased to 82.6% in August from 82% in July, the largest monthly increase since 1960 and a signal that working-age individuals remain optimistic about their job prospects.

Meanwhile, pay is holding up after slowing a bit in the spring. Average hourly earnings climbed 3.2% from August 2018, enough to keep worker earnings well above the inflation rate. (…)

Manufacturers added 3,000 employees to their payrolls in August, another sign of slowdown. So far this year, manufacturing payrolls have grown 27,000, compared with growth over the same period in 2018 of 154,000 and in 2017 of 91,000.

Manufacturing overtime dipped to 3.2 hours a week, the lowest level since April 2017.

Forecasting firm Macroeconomic Advisers projects economic output in the third quarter will grow at an annual rate of 2%, matching the 2% pace in the second quarter while down from 2.9% in 2018. (…)

Source: FTN Financial (via The Daily Shot)

The YoY rate of growth in the payrolls index (employment x hours x wages) hooked up a little to +4.5% last month, up a strong 0.74% MoM bringing the last 3 months a.r. to +5.4% from +3.6% during the 3 previous months. Hourly earnings (wages) of production and nonsupervisory employees, 80% of the total, jumped 0.5% MoM in August and are up 3.5% YoY.

From a labor income standpoint, the consumer is in decent shape as wage growth is compensating for slower employment growth.

Importantly, the employment level for the 25-54 year-group jumped by 669k in August after dropping 292k in July. It is now up 0.7% YoY. It was –0.5% in July! These are the big spenders.

However, remember that Markit’s August Services PMI for the U.S. sunk from 53.0 in July to 50.7 in August.

In line with a slower expansion in new business, employment across the service sector rose at only a fractional rate in August. The rate of job creation was the softest since February 2010 as firms expressed greater reluctance to increase staffing, with the vast majority noting no change in workforce numbers.

There is a clear slowing in Services employment growth:

The Services PMI is falling in synch with manufacturing while new orders and employers’ optimism are reaching new lows:

  

A reminder that the goods-producing side of the economy is weak:

• Truckers Slashed Payrolls in August The job cuts in trucking came as hiring in manufacturing and other goods-producing sectors remained weak

The Association of American Railroads produces this chart that is a good reflection of the goods economy in the USA:

Lastly, payroll estimates keep being revised down, often the sign of a weak labor market. Payroll gains were revised up until March when downward revisions became the norm as government statisticians learned to adjust to a softening labor market. March gains were revised down -43k, April -47k, May –13, June -46k and July –5k.

In all, this was a decent employment report but the foundations are fragile. Hence

• Powell Signals Rate Cut Likely at Meeting This Month Fed chairman says U.S. economy remains in “good place,” due partly to Fed easing

• To keep the upper hand, Trump tweeted Friday: “They were WAY too early to raise [rates], and Way too late to cut,” Mr. Trump said. “Where did I find this guy Jerome? Oh well, you can’t win them all.”

Meanwhile, business sales growth was down to 1.3% in June from 8.0% one year ago and is now much slower than wage growth. Hmmm…

China’s Central Bank to Free Up $126 Billion for Lending The People’s Bank of China plans to reduce the amount of reserves that commercial banks are required to keep with the central bank by half a percentage point as the world’s second-largest economy faces increasing pressure from a trade war with the U.S.

China Says Growth Is Fine. Private Data Show a Sharper Slowdown. Beneath China’s stable headline numbers, there is a growing belief the real picture is worse. That has economists, analysts, companies and investors crunching data—from energy consumption to photos taken from space—to get a more accurate reading.

(…) Beneath China’s stable headline economic numbers, there is a growing belief among economists, companies and investors around the world that the real picture is worse than the official data. That has analysts and researchers crunching an array of alternative data—from energy consumption to photos taken from space—for a more accurate reading.

Their conclusion: China’s economy isn’t tanking, but it is almost certainly weaker than advertised. Some economists who have dissected China’s GDP numbers say more accurate figures could be up to 3 percentage points lower, based on their analysis of corporate profits, tax revenue, rail freight, property sales and other measures of activity that they believe are harder for the government to fudge. (…)

As the effects of tit-for-tat tariffs filter into China’s economy, the country’s government has also tightened access to data that has proved reliable in the past, in some cases stopping the release of indicators that paint an unfavorable picture. (…)

• China is Weak — Part I

• China is Weak Part II

China’s Trade Numbers Send More Distress Signals Imports fall for fourth straight month in as a drop-off in exports to the U.S. steepens

Chinese imports of everything from raw materials to high-tech products dropped 5.6% in August compared with a year earlier, the same decline as July, the Chinese customs data showed. (…) Sunday’s customs data showed a 1% decrease in exports in August from a year earlier, reversing a 3.3% gain in July. (…)

Although China’s exports to the European Union held up, exports to the U.S. tumbled by nearly 16% last month after falling 6.5% in July from a year earlier, customs data show. (…)

From ING:

China’s exports were weaker than expected in August, falling 1% after a short lived positive growth rate of 3.3% in July. This was despite a low base effect.

Most of the fall was attributable to a decline in exports to the US, which were down 8.9% YoY. 

Perhaps more shocking was the drop in imports.  

Headline imports into China fell 4.6% YoY, of which imports from the US slid 27.5% YoY. This data shows that while China has been hurt by the trade war, the US has suffered even more.

Markit’s PMI Indices suggest that the U.S. manufacturing sector is hurting more than China’s:

Canada’s Jobs Market Surprises Again With Monster Gain

The economy added 81,100 jobs last month, Statistics Canada said Friday in Ottawa, versus expectations for a gain of about 20,000. It’s the seventh largest monthly gain in records going back to 1976. Canada has now added 471,300 jobs over the past 12 months, the most in a year since 2003.

• Hourly pay was up 3.7% in August from a year earlier. While that’s down from 4.5% in July, it’s still well above average in recent years. Permanent worker pay slowed to an annual pace of 3.8%
• Total hours worked in August were up 1.2% from a year earlier, compared to 0.7% annual pace in July
• The economy added 23,800 full-time jobs in August, while part- time employment increased by 57,200.
• The number of people employed by private sector companies surged 94,300, more than reversing a drop the previous month
• The employment gain last month was largely in services, which recorded a 73,300 increase

Truly amazing! In one month, employment jumps the equivalent of 830k American jobs and total hours rise 1.2% YoY while real domestic final sales contract in 3 of the last 4 months. As David Rosenberg says, either Canadians’ productivity is sinking or people at Statscan are big users of legal pot.

EARNINGS WATCH

From Refinitiv/IBES:

Through Sep. 6, 497 companies in the S&P 500 Index have reported earnings for Q2 2019. Of these companies, 73.8% reported earnings above analyst expectations and 18.1% reported earnings below analyst expectations. In a typical quarter (since 1994), 65% of companies beat estimates and 20% miss estimates. Over the past four quarters, 76% of companies beat the estimates and 18% missed estimates.

In aggregate, companies are reporting earnings that are 5.6% above estimates, which compares to a long-term (since 1994) average surprise factor of 3.3% and the average surprise factor over the prior four quarters of 5.3%.

Of these companies, 56.7% reported earnings above analyst expectations and 43.3% reported earnings below analyst expectations. In a typical quarter (since 2002), 60% of companies beat estimates and 40% miss estimates. Over the past four quarters, 63% of companies beat the estimates and 37% missed estimates.

In aggregate, companies are reporting earnings that are 1.0% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.5% and the average surprise factor over the prior four quarters of 1.0%.

The estimated earnings growth rate for the S&P 500 for 19Q2 is 3.2%. If the energy sector is excluded, the growth rate improves to 3.9%.

The estimated revenue growth rate for the S&P 500 for 19Q2 is 4.7%. If the energy sector is excluded, the growth rate improves to 5.1%.

The estimated earnings growth rate for the S&P 500 for 19Q3 is -2.0%. If the energy sector is excluded, the growth rate improves to -0.3%.

The estimated growth rate for Q3 was 0.8% on July 1.

Analysts keep revising down but larger caps have taken more of the negative hits in the last 2 weeks: 57% of large cap revisions were negative versus 48% for smaller caps.

Downward revisions have been especially large on Energy companies as the price of WTI is down 9% from its Q2 average and 20% YoY (-11.8% in Q2 and –12.8% in Q1).

Interestingly, preannouncements for Q3 are arriving in line with last year and much better than at the same time during Q2’19.

Lower oil prices could help save the quarter as the S&P 500 contains a lot more oil consumers (including consumer-centric companies) than oil producers (Energy producers contribute 4.5% to total S&P 500 profits).

Trailing EPS are now $164.44, up only 0.3% from their end of May level but up 7.5% YoY.

TECHNICALS WATCH

Lowry’s Research says that “in recent days, Buying Power has risen above the level of late July, when prices were appreciably higher. This sustained trend of improving Demand suggests prices are set to continue rising. (…) Thus, the probabilities are that the move by the market to a new rally high above the top of last month’s trading range is not simply a short term reaction to a positive news event. Rather the rally likely represents the end result of a process of accumulation and strengthening Demand sufficient to support a sustainable advance with the potential to carry the market to new all-time highs in the weeks ahead.”

JP Morgan has created an index to track the effect of Trump’s tweets on financial markets: ‘Volfefe index’

J.P. Morgan found that the index, named after Trump’s infamous and still mysterious “covfefe” tweet, explains a measurable fraction of the moves in implied rate volatility for 2-year and 5-year Treasurys. (…)

Since his election in 2016, Trump has averaged more than 10 tweets a day to his nearly 64 million followers —roughly 14,000 total over that period associated with his personal account, of which more than 10,000 occurred after the 2017 inauguration. (…)

Most of Trump’s tweets come around noon to 2:00 pm, with a 1:00 pm tweet roughly three times as likely to arrive at any other hour of the afternoon or evening, according to J.P. Morgan’s report.

Trump’s 3:00 am tweets are also more common than 3:00 pm tweets, which can be a nuisance for U.S. rates markets, since overnight market depth tends to be thin.Trump is presumably asleep from 5:00 am to 10:00 am, according to the report, since there’s a lull in tweeting activity during that time.

Days when Trump tweets a lot are also associated with negative stock market returns, according to Bank of America Merrill Lynch. (…)

WeWork Parent Weighs Further Cut to Its Valuation We Co. is eyeing a valuation for its initial public offering that could fall below $20 billion as some existing investors push the workspace company to shelve the planned offering.

(…) Should We yank or postpone the IPO, it stands to miss out on nearly $10 billion needed to fund its ambitious but money-losing global-growth plans. The company was planning to raise $3 billion to $4 billion in the IPO and up to $6 billion in debt that is contingent on the IPO raising at least $3 billion.

If the IPO doesn’t happen, the company will either need to find more cash or scale back its plans for further growth, according to people close to the company. One problem is that We has long been betting its main appeal to investors is its rapid growth, but that growth is fueled by ever-growing helpings of cash.

We primarily rents space through long-term leases, renovates it and then divides the offices and subleases them over the short term. (…)

This is getting messy. I did not spend the time to get all the numbers right but Softbank/Vision Fund have been kind of self boosting their own valuation buying We shares at higher and higher valuations they hoped the public market would eventually more than validate. That did not work out too well with Uber, now selling 22% below IPO. There are a lot of $billions in this. From some of my readings, Softbank/Vision Fund could need to revalue (read devalue) their own valuation which would then trickle down to all private investors, including many mutual funds.

In the Race to Dominate 5G, China Has an Edge The super-fast wireless technology 5G is expected to revolutionize everything from driving to surgery, and everybody wants to be first. Beijing is using its authoritarian power to clear obstacles on the ground

(…) As it did in constructing its high-speed rail network and Olympic Games infrastructure, the Chinese government has flexed its authoritarian, top-down power to clear red tape for a 5G project that it deems a national priority. It has directed regulators, provincial and local governments and its three major state-owned wireless carriers to work together.

In the U.S., where residents are prone to complain loudly about new cellphone towers going up next door, Washington’s strategy is far from unified. The White House hasn’t taken an important step to clear the military from valuable 5G airwaves, while measures from the Federal Communications Commission meant to fast-track 5G have actually created infighting among Washington, municipal governments and private wireless carriers, which are now suing one another. (…)

“By the end of this year, it’s clear that China will have more 5G than any other place on the planet, and by the end of 2020, they’ll have 100 million 5G users,” said Chris Lane, a Bernstein analyst and former strategy director for Vodafone Group PLC, the world’s No. 2 wireless carrier by subscribers behind China Mobile. “That’s far more than any other country.”

(…) 5G could turbocharge some Chinese companies. It might also help China’s efforts to stem a scientific brain drain that has led some of its brightest students to study abroad and then stay there.

“If you’re a scientist, where do you want to do it?” said retired Gen. Robert Spalding, who was essentially forced out of the White House’s National Security Council last year after proposing that the federal government play a bigger role in managing America’s 5G build-out. “You want to do it where they’re doing the research and have the money.” (…)

U.S. wireless providers are expected to outspend their Chinese counterparts on 5G capital expenses, $284 billion to $179.8 billion, from 2018 to 2025, according to data from GSMAi, the research arm of a global wireless trade group. But because it’s so much cheaper to build 5G in China, that country is projected to have five to 10 times as many major cellular sites over the next five years, said Stefan Pongratz, an analyst at telecom research-firm Dell’Oro Group. (…)

In the U.S., wireless carriers spend billions in Washington-run auctions for radio frequencies, or spectrum, for 5G. Then they spend billions more to lease real estate for cellular towers. Then they spend billions on top of that to build the actual towers and put hardware on them.

Beijing gives its carriers the spectrum and real estate—the government decides land-use rights in China—at a low price. And it is employing strategies that make efficient use of both.

(…) One cellular tower in China can cover the same area as 100 high-speed American ones.

“Spectrum is very important in determining the costs of 5G,” said Huawei global vice president Daisy Zhu. “The U.S. has a problem with spectrum.”

(…) “There’s an unwillingness to share by the utilities,” said Ken Schmidt, head of Steel in the Air, a wireless-infrastructure valuation firm. “Without the sharing, it’s going to significantly limit the expansion of 5G outside dense urban areas for the next five years.” Mr. Schmidt said carriers are finding it faster just to build new towers. (…)

In the U.S., about 95% of the grounds and rooftops suitable for cellular towers are privately owned, Mr. Schmidt said, with the average rent for a ground lease around $1,300 a month. The timeline from finding a location to having a working tower typically takes between one and six months, but in rare cases can stretch to two years, he said. The biggest delay is obtaining zoning permits from municipal governments, despite FCC efforts to speed up the process. (…)

And then there’s the cost of the telecom equipment itself, which includes the radios hanging on towers that wirelessly communicate with phones, as well as the giant routers and switches in climate-controlled rooms that make sure data gets to the right place. Telecom carriers spend $80 billion a year on it, and Huawei is the world’s biggest maker of the stuff by far. Its hardware is often more advanced and cheaper—by 20% or more—than equipment from Western rivals, say European wireless-carrier executives. (…)

• Qualcomm-Samsung axis brings 5G to the masses as Huawei struggles Qualcomm Inc promised on Friday to bring 5G mobile phones to the masses with a high-end modem and said its chips would also power mid-price devices hitting the market next year.

• Huawei and Samsung’s New 5G Chips Designed to Threaten Qualcomm

Samsung Electronics Co. and Huawei Technologies Co. took turns announcing new mobile processors at the IFA technology show in Berlin last week, and the big thing the new chips have in common is an integrated 5G modem.

In a market dominated by U.S. rival Qualcomm Inc., the world’s two biggest smartphone manufacturers asserted a lead in delivering one of the keys to unlocking widespread availability of 5G devices. A system-on-chip that integrates the applications processor and a fifth-generation wireless modem significantly reduces the space and power requirements compared to existing solutions that use two separate chips.

Qualcomm has such models on its 2020 road map, but this past week Samsung announced it’s planning mass production for its alternative at the end of 2019 and Huawei is moving even faster, promising to release its most advanced processor with the Mate 30 Pro smartphone on Sept. 19. (…)

The silver lining to the trade war for Qualcomm, however, is that Huawei’s Mate 30 Pro will struggle to sell in Europe so long as the Trump administration prevents it from offering Google services on new phones. Irrespective of how fast and advanced its Kirin 990 5G may be, the trade war will prevent Huawei from fully capitalizing on its capabilities and may, in fact, push the company to license the chip out to other smartphone vendors, such as Lenovo Group, which is not subject to the same sanctions.

If the U.S. keeps Huawei on its blacklist, preventing it from buying American technology, the company faces further chip challenges. To develop successors to the Kirin 990, it needs to license the latest designs from SoftBank Group’s ARM, but that company discontinued work with Huawei because of the U.S. ban.

What China Has and Hasn’t Done to Address U.S. Trade Gripes