(…) More than 800,000 Americans joined the labor force for the month, according to the report, many bypassing unemployment and jumping straight into jobs. It was the largest one-month labor-pool increase since 1983, outside months that included temporary Census hiring. (…)
Average hourly earnings for all private sector workers rose 2.6% from a year earlier in February, a smaller increase than the prior month. The average workweek rose—meaning firms were looking for ways to get more output from the workers they had—and weekly paychecks rose. (…)
January’s initial estimated wage gain—showing the biggest increase since the recession ended—had stoked concerns in financial markets that bigger than expected paychecks would lead to higher inflation. Friday’s report revised down the reported increase for January and calmed investor worries that Fed officials might act more aggressively than planned. (…)
Though the unemployment rate is low, broader measures of unemployment and underemployment are still elevated, suggesting there is still slack in the labor market that companies can draw from to increase worker output without very aggressively bidding up wages.
One measure that includes Americans in part-time jobs or still too discouraged to seek work held at 8.2% in February. That rate, known as U-6, remains elevated compared with the last time the headline rate touched 4%. In December 2000, the broader measure was 6.9%. (…)
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Jobs Report Was No Fairy Tale The jobs report Friday was strong, but investors should watch distortions from weather and a burst of retail hiring
(…) The job gains were probably flattered by better weather in February after a rough January kept an unusually large number of people away from work. This doesn’t mean the job market isn’t good, points out High Frequency Economics economist Jim O’Sullivan, but perhaps it isn’t quite so strong as the February figures suggested.
The story on wages, too, might not be so benign. Retail hiring was exceptionally strong in February, with the sector adding 50,000 jobs. That matters because retail jobs pay significantly less than most other jobs, so months with a lot of retail hiring can temporarily depress wage figures. Moreover, the trend in wage growth, while choppy, has been pointing up. So long as job gains remain solid, that will continue, pushing labor costs higher and giving the Fed cause to keep raising rates. There wouldn’t be anything particularly bad about that outcome, but it might not be the happily every after some investors expect.
Carriers added 5,600 jobs last month, the U.S. Department of Labor said Friday. It was largest such increase since May 2015 (…).
Truck operators have been stepping up pay and bonuses for drivers and increasingly say they’ve been able to pass along their rising labor costs to customers. The average price to hire the most common type of big rig on the spot market, where companies book last-minute transportation, was up 31% in February compared with the same month in 2017, according to online freight marketplace DAT Solutions LLC. (…)
In all, a pretty good report from most angles:
Last month’s job creation was the largest since the middle of 2016 and was led, in part, by 61,000 jobs added in the construction industry, the largest such increase since the beginning of the recession in 2007. A government hiring spree also helped drive February’s job creation, with 26,000 jobs added, many of which at the local level. The newly released figure is significantly above the average 182,000 jobs created per month in 2017.In all, a really good report from most angles. (Barron’s)
Actually, Bespoke has a unique angle:
This month, the BLS reported a very strong 31,000 net new jobs created in the manufacturing sector, with upward revisions bringing January’s total to 25,000. Over the last three months, 96,000 manufacturing jobs have been added, a far cry from the sector’s small job losses in 2016. The current ramp up in manufacturing jobs suggests that something is very different about this economic cycle.
Below we show the cumulative change in manufacturing jobs over the course of each economic expansion and contraction since the 1948 recession. Prior to the 1980s, there was a familiar pattern of huge additions to manufacturing payrolls in expansions, with big job losses in recessions. At the end of the 1970s, total payroll employment peaked out at 19.55mm. But cycles since have been different. While the mid-1990s expansion saw reasonably robust payrolls additions to US manufacturing, they were relatively small versus prior expansions. Then, in the 1990s cycle, cumulative manufacturing payrolls declined over the course of the full expansion, a result without precedent post-WW2. That was just a prelude, though. Over the full course of the 2000s expansion (6 years, from November 2001 to November 2007), manufacturing payrolls fell by more than 13% or more than 2 million jobs. That was in spite of robust expansions in aggregate employment, GDP, and stronger inflation. In fact more manufacturing jobs were lost in the 2000s expansion than any post-WW2 recession including 2007-2009!
So why is this expansion different? Almost one million net new manufacturing jobs have been created, with a bit more than a quarter of those coming in the last 12 months. Manufacturing payrolls’ secular decline from 1990-2010 now appears to be over.
To see this, in the chart below we show the cumulative change in manufacturing payrolls in recessions (dark blue lines) and expansions (light blue lines). While total manufacturing payrolls are still a shadow of their 1970s self (35% below the record level from 1979), their solid gains this expansion is a big change from the last few cycles. The irony, of course, is that return to normal cyclical behavior comes just as US policymakers have shifted towards a policy that was more applicable in the last few cycles but no longer looks as necessary. We should note, of course, that US manufacturing output using monthly Fed data on real output is only 2.5% below 2008 record highs. In other words, while manufacturing payrolls went into secular decline, manufacturing output never did, as factories became much more productive.
Here’s another way to look at the recent strength in manufacturing employment:
Durable goods manufacturing logged in 32k new jobs in February on top of an increase in overtime hours from 3.5 in January to a cycle-high 3.6 hours in February. Add the 61k construction jobs and the total new jobs in the Good-Producing industries reached 100k in February, a very, very rare occurrence, especially when considering that goods-producing workers are more than 5 million fewer now than at the 2000 peak.
Investors appeared relieved by the slowdown in wage growth to +2.6% YoY from January’s scary +2.9% revised to +2.8%. But wages of production and nonsupervisory employees, which compose 82% of the work force and are the ones in short supply, keep accelerating. They were up 2.5% YoY in February from +2.4% in January and +2.2% last October and have increased at a 3.0% annualized rate in the last 4 months.
Wages of goods-producing employees have so far held down overall wages but they are now in a sharp acceleration mode having risen +5.2% annualized in the last 4 months and +3.5% YoY in February from +3.2% in January and +2.5% last October.
More recently, the overall average wage growth rate has been held down by declining retail wages in the last 2 months and the surprise 50k jump in retail jobs in February which skewed the average.
Has the downward trend in the employment momentum over?
Barron’s argues otherwise:
Census Bureau projections show the overall U.S. population, a rough proxy for the country’s demand for goods and services, growing faster than the workforce— which supplies those goods and services— through 2030 and probably beyond. From 2017 to 2027, the nation faces a shortage of 8.2 million workers, according to Thomas Lee, head of research at Fundstrat Global Advisors. It’s the most substantial shortfall in at least 50 years, on a percentage basis, according to his calculations. (…)
Two other pressure points add to the pain. Millions of people have dropped out of the workforce, owing to factors such as disability, opioid addiction, and prison records that make it hard to snare jobs. The labor force participation rate, which measures the percentage of the adult population that’s working or actively seeking employment, has dropped to 63% from 67% in 2000.
Those who are working are sometimes pulling double duty, but it’s not showing up in the economic numbers. Since the recession, productivity has risen “more slowly than at any other period in U.S. history,” Levanon says. And the Trump administration’s plans to reduce immigration—both legal and illegal—could hamper another source of labor force growth.
The working-age population is set to grow just 3% by 2030, even as the total population expands by 9%, the Census Bureau projects.
Manufacturing has about 12.5 million workers today. By 2025, about 2.5 million will have retired in the preceding decade, says Carolyn Lee, executive director of the Manufacturing Institute, an arm of the National Association of Manufacturers. All told, the industry is looking at a two million-worker shortage by 2025.
The trucking industry already faces a shortage of 51,000 drivers, and that’s expected to more than triple by 2026, according to the American Trucking Associations.
(…) Consulting firm Bain estimates that one in four or five U.S. jobs will be automated by 2030. But as the BMW experience shows, other positions will be created by the need to handle higher-level work that robots still can’t perform.
Bottom line: Don’t expect technology to solve the labor crunch anytime soon. Truckers are desperate for help, but artificial intelligence, despite recent advances, can’t yet get big rigs all the way from loading dock to unloading dock. (…)
If humans and robots collaborate, Bain and fellow consultancy McKinsey agree, productivity gains could help offset the demographic drag.
For that to happen, humans require extensive retraining, and robots need lots of refinement. Says McKinsey analyst Michael Chui: “The transition is the great challenge.”
The law of supply and demand suggests higher wages ahead, unless the economy grows much more slowly.
- Meanwhile, Germany’s labor cost increases have slowed over the past couple of quarters. (The Daily Shot)
Canada Jobless Rate Dropped in February to 10-Year Low Canada’s unemployment rate edged down in February to a 10-year low, and the economy added jobs after a steep decline in the previous month.
Canada added a net 15,400 jobs in February on a seasonally adjusted basis, Statistics Canada said Friday, following a net loss of 88,000 in January. (…) The country’s unemployment rate fell to 5.8% in February, marking a 10-year low. (…)
According to the jobs report, full-time employment declined 39,300 in February, while part-time work rose 54,700. Nevertheless, full-time employment in Canada increased 282,900, or 1.9%, on a 12-month basis, whereas part-time employment has been flat over the past year.
The bulk of the job gains in February were in the public sector, led by health care and education.
Meanwhile, average hourly wage growth—a key metric for the Bank of Canada—climbed 3.1%, following a 3.3% advance in the previous month.
- Canada’s industrial capacity utilization continues to climb. (The Daily Shot)
Mortgage Rates at a Four-Year High Threaten to Roil Housing Besides discouraging borrowers, rising rate could make current homeowners less likely to move, creating a bottleneck throughout the system
The rate for a 30-year fixed-rate mortgage rose to 4.46%, the highest in more than four years and the ninth consecutive week of increases, according to data Thursday from mortgage-finance giant Freddie Mac . At the start of the year, the average rate was 3.95%. (…)
Talks on Trade Set as Allies Push Back American and European officials are planning new talks this week as U.S. allies seek ways to avoid steel and aluminum tariffs and China signaled it is poised to retaliate.
Mr. Trump’s tariffs declaration Thursday has rattled two of the U.S.’s biggest economic partners, Japan and the European Union. The two economies together account for about a quarter of America’s annual trade in goods, and leaders from both stressed serious concern over the weekend, calling on U.S. officials to exclude them from the measures as close security and trade allies. (…)
Mr. Trump, for his part, appears to be unwavering in his plans, saying at a campaign-style rally in Pennsylvania late Saturday, after the Brussels meeting, that the metals tariffs are his “baby.” Separately, in a tweet Saturday, Mr. Trump said: “The European Union, wonderful countries who treat the U.S. very badly on trade, are complaining about the tariffs on steel & aluminum. If they drop their horrific barriers & tariffs on U.S. products going in, we will likewise drop ours.” Mr. Trump also reiterated his objective to close America’s trade deficit with the EU: “If not, we Tax Cars etc. FAIR!” (…)
“I explained that this could have a bad effect on the entire multilateral trading system,” the Japanese envoy said. (…)
On Sunday, China’s commerce minister, Zhong Shan, said that Beijing doesn’t want a trade war and wouldn’t initiate one but reiterated that the government is ready to retaliate. “We can handle any challenge,” Mr. Zhong said at a briefing Sunday in Beijing. (…)
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A New Front in Trump’s Trade War Taking unilateral action against China’s “unfair” IP practices would backfire on America.
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The unlikelihood of a trade war (RBC)
(…) the reality is that the cost/benefit of an all-out trade war is so significantly skewed to the costs that this is still very unlikely. Indeed, we believe the proposed aluminum/steel tariffs, while economically flawed, are politically attractive to the administration from a cost/benefit standpoint. However, the economic/market fallout from broad tariffs make them untenable especially for an administration that operates more with concern about image than ideology. (…)
Assuming some deal cannot be worked out with Europe over the coming two weeks, they would be one of the primary losers vis a vis steel. But retaliation would be fraught with problems as a tit-for-tat on tariffs would likely leave Europe much worse off than the Unites States. Indeed, the competitive nature of U.S. markets means the probability of substitution is very high. In other words, a narrow “trade war” with Europe means European goods probably lose market share in the U.S. With limited broader implications for U.S. inflation/growth, this means any retaliation is likely to be toothless. (…)
Trump can claim victory even if the tariffs are inevitably shot down by the WTO or Congress. His credibility as an antiglobalist/outsider rises even if tariffs are inevitably unwound. Insofar as he can navigate narrow tariffs with limited economic downside, it is a win. (…)
Trump is willing to “disrupt” only if the payoff significantly outweighs the downside. In a broad tariff/trade war scenario, the downside (stagflation) significantly outweighs the payoff (scoring some points with a narrow constituency). Indeed, given the negative ramifications for the economy and markets, it is unclear that there even is a payoff. (…)
OPEC Divided on the Right Price for Oil OPEC is breaking down into two camps after more than a year of unity. On one side is Saudi Arabia, which wants oil prices at $70 a barrel or higher, and on the other is Iran, which wants them around $60.
EARNINGS WATCH
The Q4’17 season is over. Factset’s summary:
To date, 99% of the companies in the S&P 500 have reported actual results for Q4 2017. In terms of earnings, more companies reported actual EPS above estimates (73%) compared to the 5-year average. In aggregate, companies reported earnings that were 4.4% above the estimates, which was also above the 5-year average. In terms of sales, more companies (77%) reported actual sales above estimates compared to the 5-year average. This marked the highest percentage of S&P 500 companies reporting positive sales surprises since FactSet began tracking this metric in Q3 2008. In aggregate, companies reported sales that were 1.5% above estimates, which was also above the 5-year
average.
The blended earnings growth rate for the fourth quarter is 14.8%. This marked the highest earnings growth reported by the index since Q3 2011 (16.8%). The blended sales growth rate for the fourth quarter is 8.2%. This marked the highest revenue growth reported by the index since Q3 2011 (12.5%).
If the Energy sector were excluded, the blended earnings growth rate for the remaining ten sectors would decrease to 13.1% from 14.8%.
Trailing EPS are now $133.07 per Thomson Reuters/IBES. They should reach $138 (reflected in chart below) after Q1’18 given the impact of tax reform and positive guidance.
Bond Investors Don’t Fear Corporate America’s Rising Debt Load U.S. corporate debt has climbed to levels that have coincided with recent recessions. Many analysts and investors are unconcerned.
(…) Even before this week’s blockbuster $40 billion bond sale by CVS Health Corp. CVS 1.33% , corporate debt stood at 45% of GDP, a level it last reached in 2008 as the economy was entering a recession, according to Moody’s Investors Service. (…)
Today, signs of economic growth persist, supported by corporate tax cuts and a stimulative budget deal, as well as borrowing costs that remain relatively low by historical standards. That means companies can continue to borrow without creating significant economic risks, according to analysts. (…)
“The difference this time is really in the debt affordability,” said Anne van Praagh, head of credit strategy & research at Moody’s Investors Service. (…) And with credit spreads—the difference in yield between corporate bonds and Treasury debt—hovering near multiyear lows, investor demand continues to hold down borrowing costs for most companies. (…)
This is the optimistic, but static, viewpoint. Things quickly change with rising interest rates and widening spreads.
TECHNICALS WATCH
Lowry’s Research remains upbeat seeing no signs of a major market top as
- Buying Power just “matched its most recent new high” and Selling Pressure “has receded at an accelerated pace.”
- mid and small cap stocks have lately been leading rather than lagging as they typically do near tops.
The positive breadth among mid and small cap stocks, though, suggests the bull market’s underlying condition remains healthy with the current pullback representing only an interruption in an ongoing primary uptrend. As such, near-term pullbacks should still offer buying opportunities in anticipation of new bull market highs in the months ahead.
