Economy Chugs On Despite Fears The U.S. economy continued to shrug off fears of a global economic downturn on the back of consistent job gains, wage growth and resilient consumer spending.
(…) U.S. employers added 215,000 jobs in March, the Labor Department said Friday, with growth in just about every domestically oriented sector. The unemployment rate, obtained from a separate survey of U.S. households, edged up to 5% in March, but that was largely due more Americans joining the labor force. (…)
Over the past three months, employment growth had averaged 209,000, a slight slowdown from the 223,000 average during the 12 months prior to March.
The steady pace of job growth has lured workers off the sidelines, bringing the share of Americans participating in the labor force up to 63% in March—its highest level in two years. The measure bottomed out at 62.4% in September, the lowest level since 1977.
Relatively moderate wage growth suggests the labor market still has considerable room to bring in more workers without spurring high inflation. Average hourly earnings of private-sector workers rose 0.3% last month to $25.43, after dipping the prior month. Wages were up 2.3% from a year earlier, slightly slower than the 2.6% year-over-year wage growth in December that marked the strongest improvement since 2009. (…)
Central-bank officials are waiting for signs of a breakout in wages that could push overall inflation closer to the Fed’s 2% target. The latest figures likely aren’t strong enough to push the Fed into action at its policy meeting this month, but they still leave open the possibility of a move in June. (…)
The Labor Department’s report showed the manufacturing sector shedding 29,000 jobs in March on top of February’s loss of 18,000, the worst-hit major sector of the economy.
The mining-and-logging sector alone—a category that includes energy firms—lost 12,000 jobs last month. The industry has cut 185,000 jobs since its peak in September 2014. (…)
Retail employment grew by 48,000 in March, bringing its 12-month gain to 378,000. (…) Low interest rates have also helped other rate-sensitive sectors such as housing. That has sent the construction sector on a tear, boosting jobs by 37,000 in March.
At Hull Associates, home-framing firm based in Arlington, Texas, headcount has climbed past pre-recession levels to 350 from fewer than 300 before the housing crash.
Workers who used to make $12 an hour in 2008 are now coming onto job sites at $14 or $15 an hour, President George Hull said. He raised wages by 5% to 6% over the past year to attract more workers. (…)
Gleanings:
- The labor force has now increased by more than two million in the past five months alone.
- When adjusted for the aging of the population, the employment-to-population ratio has now recovered to early-2000s levels.
- Over the past three months, employment growth had averaged 209,000, a slight slowdown from the 223,000 average during the 12 months prior to March.
- At 195,000, the number of jobs cranked out by the private sector slid in at 38,000 fewer positions than the past six-month average. Dig deeper, though, and you’ll note that the 4,000-job downward revision to January’s numbers masked more troublesome figures. The numbers behind that number: Temporary employment was revised downwards by 22,000 while government jobs were revised up by 23,000.
- March employment saw a rare 20,000 jump in government employment.
- The share of Americans who weren’t in the labor force and who found a job in March ran to the highest level since September 2008.
- Meanwhile, the share of Americans who don’t have a job and are quitting the workforce altogether has fallen back to where it was when the last recession began. Morgan Stanley sees few “discouraged workers remaining who could potentially keep reentering the labor force to continue offsetting the demographic downtrend of 0.2-0.3 percent a year in the participation rate.”
- Wages are in a curious see-saw pattern: +0.3% in March after –0.2% in February, +0.5% in January and 0% in December.
- Manufacturing lost 4,000 jobs in March after losing 15,000 in February. The manufacturing workweek shrank to a three-month low of 40.6 hours from 40.7 hours in February, equivalent to an additional 30,000 jobs plunge.
- Overall, the workweek was flat at 34.4 hours, tied for second lowest over the past four years.
- Firms tend to reduce workers’ hours and trim temporary staff to prepare for what’s to come. “It’s easier to cut hours and contract workers when the economy is slowing, and that is precisely what the data show,” observed AIG’s Jonathan Basile following the data’s release. “Neither the workweek or temporary employment are in a recovery mode.”
- Add that the initial jobless claims for the March 26 week rose 11,000 to an 8-week high of 276,000.
Challenger, Gray & Christmas, a global outplacement consultancy that compiles layoff announcements each month, said last week that there were 48,207 job cuts announced in March:
(…) the March figure was 31.7 percent higher than the same month a year ago (36,594), making it the fourth consecutive year-over-year increase.
Through the first quarter of 2016, employers announced 184,920 job cuts, up 31.8 percent from the 140,241 cuts tracked the first three months of 2015. (…)
Of the 184,920 job cuts announced in the first quarter, 50,053, or 27 percent, were directly attributed to falling oil prices. That is slightly (5.0 percent) higher than a year ago, when oil-related job cuts totaled 47,610. While there were fewer oil-related job cuts a year ago, they represented a larger portion of total job cuts, accounting for 34 percent of first-quarter layoff announcements.
“(…) it is not just the energy sector that is seeing heavier job cuts. Layoff announcement have increased significantly in the retail sector and computer sector, as well. While it may be too early to sound the alarm bells, the upward trend outside of the energy sector is somewhat worrisome,” said John Challenger, chief executive officer of Challenger, Gray & Christmas.
(…) the retail sector has also tallied significant gains in job cuts. To date, it has recorded the second highest number of job cuts, with 31,832, up 41 percent from the 22,502 announced in the first three months of 2015.
Meanwhile, the 17,002 job cuts in the computer sector are 148 percent higher than a year ago, when these firms announced 6,860 in the first quarter. (…)
So, all is not rosy in the jobs market.
And this from the savvy David Rosenberg:
The added challenge here is that we came off a Q4 where total labor input as measured by aggregate hours worked was 3% at an annual rate at a time when real business output was merely 1%, for a 2% annualized productivity decline. And here we have aggregate hours worked from the Establishment survey showing a 1.8% annualized expansion for Q1 at a time when tha Atlanta Fed tracker is suggesting just a 0.6% pace for GDP, which implies roughly a 1% drop in productivity.
Now a back-to-back contraction in productivity is not something you see every day – in fact, just three times in the past three decades. So this is a gap that is going to have to close at some point because CEO’s are not going to sit idly and cannibalize their profit margins by allowing their productivity ratios to deteriorate to perpetuity.
I will add this:
Despite numerous anecdotes of labor shortages and rising wages, average wages for the entire U.S. economy don’t seem to be taking off. But averages can be deceiving. The fact is that the two sectors that have shown significant job losses in the past year are manufacturing and mining (O&G) which together lost 166,000 jobs in the last 12 months. Meanwhile, retail and restaurant jobs swelled by 767,000, accounting for close to 30% of the total job gains over the year. The weighted average wages are $15.93 in retail and restaurant, nearly 40% lower than wages in the losing sectors. Total average wages are thus weighed down, potentially hiding the true wage pressures in the economy.
Private wages are up 2.3% YoY. A survey by the WSJ shows that 8 of 15 sectors are seeing wage gains above the mean, averaging +2.8% (employment-weighted). This is before most of the announced minimum wage hikes take effect.
According to the WSJ, an estimated nine million workers in California and New York earn less than $15 an hour, and thus could benefit from pending increases. That represents about 41% of workers in California and 38% of those in New York, excluding those who are self-employed, according to an Economic Policy Institute analysis of Labor Department data. The analysis found 53.6 million workers nationwide earned less than $15 an hour in 2015. This is 44% of all private-sector jobs!
California and New York are boosting their minimum wages by nearly 50% over 6 and 3 years respectively. Ever heard of communicating vases?
U.S. Auto Sales Up in March Amid Warning Signs U.S. auto sales rose 3% in March, but new warning signs emerged that car companies are stretching to keep demand humming after record results last year.
March’s selling pace came in at a disappointing adjusted annual rate of 16.57 million light vehicles, well below analyst expectations and the 17.5 million clip the industry reported in February. (…)
Discount spending is on the rise and new evidence emerged in March that sales to fleet customers such as rental agencies in some key cases boosted new-car tallies. Car loans stretching 84 months or longer and the share of vehicles leased both increased, according to researcher J.D. Power. (…)
In March, favorable weather and a pair of extra selling days in part helped some car makers post their best results for the month in a decade. A typically hotter spring selling season for car makers looms, and consumers continue flocking to higher-margin trucks and sport-utility vehicles, which made up roughly 57% of March’s U.S. sales. (…)
Hmmm…the U.S. consumer is not in a big spending mood in spite of the strong job market, low gas prices and highly favorable financing terms. Or it was because of Easter:
There were indications that the month ended on the weak side, partly caused by the Easter holiday occurring in the final weekend of the month and possibly reducing overall dealer traffic. Also, the year-over-year comparisons might have been a little tougher because the weather in January and February was relatively better than the previous two years when poor conditions led some purchases to be put off until March. (Wards) (charts below from CalculatedRisk)
Why auto specialists would be surprised by where Easter fell this year is a bit of a puzzle. Nonetheless, Wards keeps the faith, even though March numbers were 5% below forecast:
Despite the slowdown, a major spike in the SAAR in April from March is likely, and will be a key to whether the year meets WardsAuto’s current forecast of 17.8 million units. As in March, volume will be unusually high in April due to extra selling days. In fact, because April ends on a weekend, volume for the month will include deliveries through May 2, thereby giving it five weekends of dealer traffic vs. the typical four.
Because it is a rarity for two consecutive months to have more selling days than normal, making it difficult to develop accurate factors to calculate the SAARs, averaging the totals for both March and April will be the best way to judge the period’s results.
The fact remains that this apparent cyclical high is proving tough to traverse.
Let’s hope Wards is right because we sure need a vibrant auto industry given the rest of manufacturing…
Canada’s manufacturing sector grows in March for first time in 8 months
The RBC Canadian Manufacturing Purchasing Managers’ index (PMI), a measure of manufacturing business conditions, rose to a seasonally adjusted 51.5 last month from 49.4 in February.
It was the highest level since December 2014 and the first time the index has been above the 50 threshold that marks growth in the sector since August of last year.
The measure of new export orders rose to 53.1 from 51.9 with companies saying that the drop in the Canadian dollar had helped lift sales to U.S. clients.
Currency depreciation worked for Canada and for Europe. It does not seem to be working for Japan:
Japan Inc mood gloomiest in three years
(…) The Bank of Japan’s quarterly tankan index came in at a reading of +6 in March, down from +12 in December and below analyst expectations of +8. The reading, published on Friday, was the worst since June 2013. (…)
The quarterly survey is similar to ISM polls of purchasing managers in the US, but samples more than 10,000 companies and has a response rate of almost 100 per cent. The maximum possible reading is +100, the minimum -100. (…)
Conditions worsened most in core manufacturing sectors that sell to China or compete with it. For iron and steel, the reading fell by 22 points to -22; for production machinery it dropped by 10 points to a reading of +12. Electrical machinery was down 10 points to a reading of -7.
However, there was better news from the services sector, where the reading fell just 3 points to +22, highlighting buoyant conditions at home. Primed by negative interest rates, the construction sector was up by four points to +45, while the figure for real estate rose 2 points to +37. (…)
Hmmm…Japanese businessmen are not seeing much demand upswing from China just yet.
Russian Oil Output Rises to Record as Production ‘Freeze’ in Doubt
Russian production of crude and a light oil called condensate climbed 2.1 percent in March from a year earlier to 10.912 million barrels a day, according to the Energy Ministry’s CDU-TEK unit. That narrowly beat the previous high of 10.910 million barrels in January. (…)
Russian oil exports rose 10 percent to 5.59 million barrels a day, according to the Energy Ministry data.
EARNINGS WATCH
On a per-share basis, estimated earnings for the S&P 500 for the first quarter fell by 9.6% (to $26.32 from $29.13) during the quarter. This percentage decline was larger than the trailing 5-year average (-4.0%) and trailing 10-year average (-5.3%) for a quarter. In fact, this was the largest percentage decline in the bottom-up EPS estimate during a quarter since Q1 2009 (-26.9%).
At the sector level, nine of the ten sectors recorded a percentage decline in the bottom-up EPS estimate for the first quarter that was larger than the 5-year average for that sector. Six of the ten sectors recorded a percentage decline in the bottom-up EPS estimate for the first quarter that was larger than the 10-year average for that sector.
As a result of the downward revisions to earnings estimates, the estimated year-over-year earnings decline for Q1 2016 is -8.5% today (-8.3% last week), which is below the expected earnings growth rate of 0.8% at the start of the quarter (December 31). Seven sectors are projected to report a year-over-year decline in earnings, led by the Energy and Materials sectors. Three sectors are predicted to report year-over-year earnings growth, led by the Telecom Services and Consumer Discretionary sectors.
If the Energy sector is excluded, the estimated earnings decline for the S&P 500 would improve to -3.7% from -8.5%.
As a result of downward revisions to sales estimates, the estimated sales decline for Q1 2016 is -1.1% today, which is below the estimated year-over-year sales growth rate of 2.7% at the start of the quarter. Five sectors are projected to report year-over-year growth in revenues, led by the Telecom Services and Health Care sectors. Five sectors are predicted to report a year-over-year decline in revenues, led by the Energy and Materials sectors.
If the Energy sector is excluded, the estimated revenue growth rate for the S&P 500 would jump to 1.8% from -1.1%.
At this point in time, 121 companies in the index have issued EPS guidance for Q1 2016. Of these 121 companies, 94 have issued negative EPS guidance and 27 have issued positive EPS guidance. If 94 is the final number for the quarter, it will mark the second highest number of S&P 500 companies issuing negative EPS guidance for a quarter since FactSet began tracking the data in 2006. The percentage of companies issuing negative EPS guidance is 78%, which is above the 5-year average of 73%.
While the number of companies issuing negative EPS guidance is unusually high for Q1, the amount by which companies are guiding EPS estimates lower is smaller than average. The 121 companies that have given EPS guidance for Q1 2016 have guided earnings 6.7% below the expectations of analysts on average. This percentage decline is smaller than the 5-year average of -10.9%.
The Information Technology (25), Consumer Discretionary (18), and Health Care (17) sectors have the highest number of companies issuing negative EPS
guidance for the first quarter. This is not surprising, as these three sectors have historically had the highest number of companies provide quarterly EPS guidance on average.What is surprising, however, is the unusually high number of companies in the Health Care sector issuing negative EPS guidance for Q1. In the Information Technology sector, the number of companies issuing negative EPS guidance for Q1 (25) is just slightly above the 5-year average (23.6) for the sector. In the Consumer Discretionary sector, the number of companies issuing negative EPS guidance for Q1 (18) is again just slightly above the 5-year average (16.6) for the sector. However, the number of companies issuing negative EPS guidance in the Health Care sector for Q1 (17) is more than 50% above the 5-year average (10.9) for the sector.
Factset notes that 13 of the 17 HC companies guiding lower cited the strong USD as a negative factor. Hmmm…Maybe their hedges worked against them.
Since the end of Q4 2015, the number of companies issuing negative EPS guidance for the current fiscal year has increased by 13, while the number of companies issuing positive EPS guidance has decreased by 25. The Financials (+8), Health Care (+7), and Consumer Discretionary (+5) sectors have witnessed the largest increases in the number of companies issuing negative EPS guidance for the current fiscal year since last quarter. The Financials (-8), Consumer Discretionary (-7), Utilities (-6), and Health Care (-5) sectors have recorded the largest decreases in the number of companies issuing positive EPS guidance for the current fiscal year since the end of last quarter.
At the sector level today (with a minimum of ten companies issuing guidance), the Consumer Discretionary (72%) and Utilities (68%) sectors have the highest percentages of companies issuing negative EPS preannouncements for the current fiscal year, while the Information Technology (57%) sector has the highest percentage of companies issuing positive EPS preannouncements for the current fiscal year.
Guidance on Guidance
At this point in time, all 115 of the companies that issued EPS guidance for Q4 2015 have reported actual results for the quarter. Of these 115 companies, 80% reported actual EPS above guidance, 9% reported actual EPS in line with guidance, and 11% reported actual EPS below guidance. This upside percentage (80%) is slightly below the trailing 5-year average for companies issuing EPS guidance, but above the overall performance of the S&P 500 for Q4 2015.
Of the companies that have issued quarterly EPS guidance over the past five years, 81% reported EPS above guidance, 6% reported EPS in-line with guidance, and 13% reported EPS below guidance on average. Of all the companies in the S&P 500 that reported earnings for Q4 2015, 69% reported EPS above the mean estimate, 9% reported EPS equal to the mean estimate, and 23% reported EPS below the mean EPS estimate.
Could not resist doing this simple math:
About 120 S&P 500 companies routinely issue quarterly guidance. If 80% actually exceed their revised estimates, that is 96 positive surprises each quarter. Quarterly beat rates are around 65% or 325 companies meaning that roughly 30%, one in three, of each quarter beats are set up prior to quarter end. I bet you that most of them are in the HC and IT industries.
Another simple math:
STANLEY DRUCKENMILLER: ‘This is the most unsustainable situation I have ever seen in my career’
(…) For 25 years as a hedge fund manager, Druckenmiller compounded money at an annualized rate of return of 30%. Incredibly, he did it without a single down year. Druckenmiller has a dire warning for all of us. One that requires action. (…)
What you need to know about Stan Druckenmiller is that his incredible investing performance was rooted in his skills in making macroeconomic forecasts. When describing how he was able to compound money at such a crazy rate and not have a single down year, Druckenmiller said:
How did we do it? Very simple. While others were focusing on the present, we looked and focused on the future in terms of analyzing unsustainable situations.
And when I look at the current picture of expected tax revenues combined with benefits promised to future generations, this is the most unsustainable situation I have seen ever in my career.
The disaster that Druckenmiller sees coming for the United States is all about changing demographics and entitlement spending. They don’t add up to a sustainable situation. In 1940, entitlement payments, which include everything from disability payments to Social Security to Medicare, amounted to just over 20% of annual government spending in the United States. Today, entitlement spending has swelled to nearly 70% of the annual federal budget.
Things are about to get a whole lot more complicated. The 20-year baby boom that took place after World War II is now beginning to result in a retiree boom. For context, Druckenmiller points out that in 2030, the average age of an American citizen will be older than the average age of a resident of Florida today. This demographic trend is going to create an entitlement spending catastrophe.
The way the system works, the current workforce provides the tax revenue to support the current senior population. A huge rise in the retiree population relative to the number of people working results in a funding dilemma. Since 1980, the number of working-age people the country has had has outnumbered those age 65 and over by a count of 5-to 1. The country has had enough workers generating tax revenue to support the number of retirees. By 2030, that ratio is going to drop to 2.5-to-1.
By 2029, there will be 11,000 new seniors arriving every day and only 2,000 new adults being added to the workforce to pay for them. There is just no way that the workforce at that time is going to be able to fund the entitlements of these seniors. This is a problem because those are commitments that have been made and will have to be paid.(…)
The balance sheet of the United States, meanwhile, doesn’t account for the future payments that it has promised to its senior citizens. Again, like defined benefit pension payments, these are very real obligations. They should be recorded as liabilities of the United States. Here is how much the U.S. debt would increase, assuming no change in tax rates, if those obligations were included:
That chart makes the size of the problem abundantly clear. There are a lot of people already very concerned with the amount of debt the United States has. Imagine how they would feel if they were aware that with these liabilities conclude the number is 20 times larger.
This is a case of simple math. Either tax rates increase in a massive way or the payments to seniors have to be cut significantly. The status quo doesn’t work. There just isn’t going to be anywhere close to enough money coming in to fund the payments going out. The country can’t borrow its way out of a funding issue of this size.
This issue that Druckenmiller is so passionate about is a huge problem. One with no possible solution that will be popular with the American voters. Either higher taxes or lower benefits. Likely some combination of both. Both very unattractive options for big percentages of the voter base.
You can hear the politicians kicking this can further down the road, can’t you? Fixing this is going to require some real sacrifice by the American people. That doesn’t sound like a very appealing platform upon which to get re-elected. (…)
Global investment banking fees fall 29 percent in first-quarter, worst since 2009 Global investment banking fees fell 29 percent in the first quarter of 2016 from a year earlier as market volatility put a brake on dealmaking and equity and debt capital markets activity, Thomson Reuters data published on Monday showed.
Regionally, fees in the Americas totaled $8.7 billion, down 32 percent from last year. Fees in Europe were down 27 percent at $3.9 billion and the Asia-Pacific region saw an 18 percent decline to $2.6 billion.