March Jobs Report Shows Hiring Gradually Cooling U.S. hiring slightly cooled in March as employers added 236,000 workers. The unemployment rate fell to 3.5%.
More Americans jumped into the labor market in March, helping take pressure off wage increases. Average hourly earnings rose 4.2% last month from a year earlier, the smallest annual gain since mid-2021 when inflation was surging. (…)
Restaurants, bars, hospitals and nursing homes helped drive March’s job growth. Meanwhile, employers in sectors that boomed earlier in the pandemic as Americans were stuck at home—including construction, manufacturing and retail—cut jobs last month.
Average weekly hours also ticked down in March, suggesting a modest reduction in labor demand. (…)
Average hourly earnings on a three-month annualized basis returned to prepandemic levels, rising 3.2% in March and down from 4.9% in December. (…)
Employment, a lagging indicator, is confirming the Goods recession, offset by continued continued growth in services employment.
The slowdown in nominal labor income persisted in March after the January weather-related bump. Aggregate weekly payrolls were up 6.2% YoY in March, down from 7.2% in December and February. With inflation recently stabilized in the 5% range, March real labor income will likely come in around 1-1.5% YoY from 2.2% using the PCE deflator or around 0.5-1.0% from 1.2% using the CPI.
On a MoM basis (below), labor income rose only 0.1% in both February and March. Employment growth has stalled to the +0.1-0.2% range while weekly hours keep declining 0.2-0.3% per month.
Wage growth was steady around +0.3% per month in Q1, from +0.37% in Q4, Q3 and Q2’22 and +0.46% in Q1’22. There was some compositional effect in March but the slower trend looks solid.
In effect, wage growth, at 3.2% annualized in Q1 is back to its pre-pandemic range, even with an unemployment rate at 3.5%. The Fed’s narrative will need to change. This is no longer a “very, very strong labor market”.
“The jobs market has been holding up, but we’re seeing a lot of different indicators as we look at our proprietary credit card data with credit balances building, and things like that…what we’ve seen is that there’s pressure on all income tiers. We feel that all of those consumers are going to be quite discerning in all of their purchases” – Macy’s (M ) CFO Adrian Mitchell (via The Transcript)
Services inflation is intimately tied to wages. As the next chart suggests, CPI-Services will likely decelerate sharply in coming months from 7.3% to 4.0-5.0% which would imply near zero monthly growth over the next 3-6 months, a significant change from the +0.6% monthly average of the past 6 months.
Further monetary tightening from here could exacerbate the slowdown in employment and consumer spending, even more so if the personal savings rate keeps rising.
Source: The Daily Shot
Linkedin data show that the job openings to active applicants ratio exceeds pre-pandemic levels in 5 of 15 sectors. Among services, tightness is concentrated in accommodation and health while other service sectors look well manned.
Some NY Fed economists now argue that the participation rate is actually not as low as the numbers suggest:
(…) we show that demographic trends, specifically population aging, exert a powerful influence on labor force participation. In other words, the participation gap largely disappears once we control for population aging, indicating that participation has recovered a great deal since the large shock induced by the pandemic.
Other possible contributing factors, such as elevated retirement rates or disability, play only a minor role in explaining the participation gap. Population aging is likely to continue to exert strong downward pressure on participation going forward, as more of the baby boomer generation continue to enter retirement.
Participation Rate Is Higher after Adjusting for Aging and Excess Retirements
Sources: Current Population Survey; authors’ calculations.
Notes: The blue line shows the headline labor force participation rate (LFPR) reported by the Bureau of Labor Statistics. The gold line is the counterfactual LFPR holding fixed the population age structure in February 2020. The red line further adds the surplus of retired workers in the recent period compared to 2018-19, at the fixed age structure of February 2020.
But, in truth, whatever the reasons, it is what it is.
- 80% of Americans in their prime working years are employed — the highest level since 2001, according to Friday’s jobs report.
Data: Bureau of Labor Statistics. Chart: Axios Visuals
Goldman:
The labor market increasingly appears to be headed toward a somewhat more intense version of its pre-pandemic state, when it was quite tight by historical standards but nonetheless did not generate problematic wage pressures.
(…) labor supply has now fully recovered to trend from its pandemic decline. The labor force participation rate is back in line with estimates of its pre-pandemic demographic trend, and the immigrant population has grown quickly enough over the last year and a half to reverse a shortfall in the earlier part of the pandemic. The sharp decline in job openings coupled with the full recovery of labor supply has shrunk our jobs-workers gap from a peak of over 6mn to 4.1mn based on the JOLTS data or 3.1mn based on alternative measures of job openings.
But ING sees another 25bp even though it might be overshooting:
With next week’s core inflation number likely to come in at 0.4% month-on-month the odds must favour a final 25bp Fed rate hike in May. However, economic challenges are mounting with higher borrowing costs and reduced credit flow heightening the chances of a hard landing. (…)
Nonetheless, employment data is a lagging indicator – the last data point to turn in a cycle – and the outlook is becoming increasingly challenging. The economy has experienced the most aggressive period of monetary policy tightening for 40 years while recent banking stresses are likely to disrupt the flow of credit to the economy. Add in the fact that business confidence (be it the Conference Board measure of CEO confidence or the National Federation of Independent Business’ small business optimism index) is at recessionary levels and the housing market is in deep trouble and this is a toxic combination for job creation.
Tighter lending conditions signal a big rise in unemployment in the second half of 2023
Source: Macrobond, ING
Indeed, even before the events at Silicon Valley Bank the January Federal Reserve Senior Loan Officer survey had shown banks were becoming more cautious with credit flow likely to be restricted. This will inevitably get worse, putting struggling companies and households under intensifying pressures. The chart above suggests we should be braced for unemployment to rise from late second quarter/early third onwards.
This prognosis is also supported by the latest job lay-off and the revisions to initial claims data. There is always a delay between announcement of lay-offs and the actual job losses happening that results in a unemployment benefit claim. In addition, several states require all severance payments to have been finalised before a benefit claim can be lodged, which further extends the time frame. On top of that not everyone will immediately lodge a claim. The chart below suggests a big rise in initial jobless claims is coming imminently and this will translate into a rising unemployment rate, as already indicated by the Fed’s Senior Loan Officer survey.
Surging lay-offs point to more pain to come (YoY% change)
Source: Macrobond, ING
The Fed is done. In fact, it better be done…
BTW: Higher Jobless Claims Add to Signs of Cooling Labor Market Filings for unemployment benefits were larger than previously thought last month, according to new government calculations
Initial jobless claims, a proxy for layoffs, reached nearly 250,000 a week in mid-March, roughly 50,000 higher than previously reported, the Labor Department said Thursday. The change reflects revised calculations that strip out seasonal fluctuations in economic activity, the department added.
The March average of weekly claims was a seasonally adjusted 237,750, higher than the average level of less than 200,000 before the changes. Claims declined by 18,000 to 228,000 in the week ended April 1.
Claims totals remain close to the 2019 prepandemic average of about 220,000. (…)
The revisions better adjust for pandemic-related factors and provide a more accurate picture of current levels of claims, the Labor Department added. (…)
Goldman Sachs also cautioned against reading too much into the changes. “The apparent deterioration would reflect the end of a technical distortion rather than a sharp jump in the true pace of claims,” Goldman Sachs economists said.
Continuing claims, which reflect the number of people seeking ongoing unemployment benefits, increased by 6,000 from the previous week’s revised level to 1.8 million in the week ended March 25. That was the highest level for continuing claims since December 2021, the department said. Continuing claims are reported with a one-week lag.
This is not an insignificant revision. First, the trend is reversed, two, claims are now above their pre-pandemic level (black), when the Fed was easing.
REAL ESTATE
A $1.5 Trillion Wall of Debt Is Looming for US Commercial Properties Office, retail property valuations could fall as much as 40%
Almost $1.5 trillion of US commercial real estate debt comes due for repayment before the end of 2025. The big question facing those borrowers is who’s going to lend to them? (…)
Adding to the headache, small and regional banks — the biggest source of credit to the industry last year — have been rocked by deposit outflows following the demise of Silicon Valley Bank, raising concerns that will crimp their ability to provide finance to borrowers. (…)
Maturities climb for the coming four years, peaking at $550 billion in 2027, according to the MS note. Banks also own more than half of the agency commercial mortgage-backed securities — bonds supported by property loans and issued by US government-sponsored entities such as Fannie Mae — increasing their exposure to the sector. (…)
Conservative lending standards in the wake of the financial crisis provide borrowers, and in turn their lenders, with some degree of protection from falling values, the analysts wrote.
(…) when apartment blocks are excluded, the scale of the problems facing banks becomes even starker. As much as 70% of the other commercial real estate loans that mature over the next five years are held by banks, according to the report. (…)
European real estate issuers, meanwhile, have the equivalent of more than €24 billion due for repayment over the remainder of the year, Bloomberg Intelligence analyst Tolu Alamutu wrote in a note. (…)
From Axios:
In downtown areas, the office vacancy rate reached 17.6% in the last three months of 2022, up from 13.8% two years earlier, according to the real-estate services firm CBRE.
The 10% of office buildings in each market that had the largest increase in vacant space over that period were deemed the “hardest-hit buildings” (HHBs). Together, they accounted for 80% of the vacant space added to the U.S. office market during the pandemic (Q1 2020 to Q4 2022), despite making up only 17% of total office inventory by square footage. HHBs had an average vacancy rate of 38% at year-end 2022. If all these HHBs were removed from the country’s total office inventory, the overall vacancy rate of 100,000-sq.-ft.+ buildings would have been 14.9% instead of 18.9% at the end of Q4 2022.
Historically, monthly mortgage payments for newly purchased homes have been roughly on par with monthly apartment rent payments. However, the emergence of a cost-of-ownership premium results from relatively high home prices and rapidly rising mortgage rates. The average monthly mortgage payment for a newly purchased home, including taxes, has increased 70% since the end of 2019. Half of that increase came from higher mortgage rates, with the balance due to higher home prices.
Home prices have fallen by 9.7% since Q2 2022 but not enough to significantly offset the impact of higher mortgage rates. For monthly mortgage payments on newly purchased homes to come back into line with CBRE’s forecast rental rates at the end of 2023, home prices would have to decrease an additional 24% this year assuming no further rise in interest rates. By comparison, following the Global Financial Crisis, home prices declined by 19% from 2007 to 2012. This barrier to entry for home ownership likely will buoy multifamily demand as the housing market stabilizes over the near term. (…)
The relatively low number of homes for sale is another obstacle for would-be homebuyers. Since the beginning of the pandemic, active listings of for-sale homes have remained below trend. Nationally, active listings are 34% less than in Q4 2019. (…)
A little more than half of all active U.S. mortgages were originated since the start of the pandemic, according to Black Knight Inc. With most of these loans being used to refinance existing mortgages, this has led to nearly 97% of all active U.S. mortgages having interest rates below current levels.
Despite a spate of new multifamily construction deliveries over the next 24 months, CBRE expects any negative impact on market fundamentals will be temporary. The overall U.S. housing shortage and higher mortgage rates are keeping demand for rental property strong. While some additional home price correction can be expected, ultimately it will be lower mortgage rates that will have the biggest impact on monthly mortgage payments as inflation comes down and the Fed begins to lower interest rates.
Car Breakdowns Are Making More People Fall Behind on Their Loans Cars are staying on the road longer, reaching an age where they need substantial repairs or break down.
(…) Some lenders are getting spooked, tightening their standards so that drivers who want to buy older vehicles have fewer options for getting financing. Americans who already were discouraged by the rapid increase in car prices over the past few years could have an even harder time finding a car they can afford, or one that won’t guzzle up their savings after they buy it. (…)
Many consumers already struggled to pay the large car loans they took out to buy vehicles after prices surged in 2021 and early 2022. They are less likely to keep paying if they also have to foot steep bills to keep the cars on the road. The delinquency rate on subprime auto loans recently rose to its highest level in more than a decade. (…)
Before the pandemic, households spent an average of less than $600 per car on maintenance and repairs each year, according to the automotive market research company IMR Inc. In 2022, they spent nearly $800 per car on average. (…)
Some 19% of used cars that were registered in 2022 were between eight and 11 years old, up from 15% in 2018, according to data from credit-reporting firm Experian PLC. By contrast, 11% were between zero and three years old at time of registration in 2022, down from 14% in 2018. (…)
Just under 12 million vehicles were scrapped in 2021, down from nearly 16 million in 2020, according to S&P Global Mobility. As a proportion of total vehicles on the road, it was the second-lowest in 20 years. (…)
FYI: The average annual percentage rate for new vehicle loans hit a 15-year high of 7% in the first quarter of 2023, Axios Nathan writes. U.S. vehicle buyers agreed to an average monthly payment of $730, an all-time high, according to car research site Edmunds.
- The average buyer made a down payment of $6,956 — also a record high and up from $6,083 a year earlier.
Data: Edmunds; Chart: Axios Visuals
In the first quarter, a total of 649 variants of passenger cars, or around 20% of all vehicles on the market, saw transaction price drops of more than 10,000 yuan ($1,500), data compiled by research provider China Auto Market show.
Back in February, that percentage was just 12% of all cars, and it was as low as 6% this time last year. (China Auto Market collects more than 3,000 car model variants in its data set each month that were examined by Bloomberg.) (…)
Really, it’s a full-blown price war spanning gasoline to electric vehicles and ensnaring new-energy upstarts as much as it is legacy automakers. (…)
BANKING CRISIS?
From GS:
One month after the turmoil at small and midsize banks began, we have more visibility into the impact on the banking system and some preliminary evidence on the impact on the economy.
Near-term stress on the banking system has subsided. Deposit outflows from banks and inflows to money market funds have decelerated, banks’ liquidity needs have stabilized, money markets have continued to function smoothly, and the public’s focus on withdrawing deposits from small and midsize banks has faded.
However, regional bank equity prices remain depressed, pointing to ongoing concerns that past deposit losses, higher deposit betas, a higher cost of capital, the possibility of tighter regulation ahead, and an inverted yield curve will prove challenging.
The focus is therefore shifting to whether these challenges are causing banks to tighten their lending standards, reducing the flow of credit to businesses and consumers. Early surveys of bank lending standards report further tightening, though at roughly the same pace as in the months before the banking turmoil began. The Fed’s H.8 release reported a meaningful decline in commercial and industrial lending and real estate lending, though we suspect the former is a spurious effect of residual seasonality caused by a surge in lending in March 2020.
More data will become available ahead of the May 3 FOMC meeting. First, banks will start to report earnings next week and will likely discuss deposit flows, deposit beta expectations, and lending intentions. Second, the NFIB and NACM surveys will provide more information about credit availability. Third, additional H.8 reports will provide more data on lending, and several releases with source data on capital spending will shed light on the impact on the most lending-sensitive part of GDP.
Data: ICI, FactSet; Chart: Axios Visuals
Through March 29, deposits stabilized at smaller banks (black). Foreign banks are still bleeding.
Everybody is focused on bank liquidity. But since the Fed has guaranteed all deposits for the next year, the risk to the economy is really on the lending side, corporate liquidity.
Banks had already started to retreat in February (C&I loans down $13B)…
…but just in the 3 weeks after SVB, total bank credit dropped $172B with the biggest hits in C&I and CRE loans.
It got even worse during the first week of April. The -$243B decline in bank credit during the 2 weeks ended April 5 was more than twice the worst 2 weeks during the GFC.
Canada: The labour market ends a spectacular quarter in force
The Canadian labour market completed a spectacular quarter on a high note, beating consensus expectations by a significant margin (+27K). In the first three months of the year, headcount increased by 207K, with no less than 83% of these gains being full-time positions (+171K).
The private sector was the main driver of this strong quarter with an astonishing gain of 188K. While the regional diffusion in March was not that great with only 5 provinces showing employment gains, all provinces have posted increases so far this year.
It is true that such gains would usually have caused the central bank to question the current pause in monetary policy tightening, but they need to be placed in the current Canadian demographic context. In the first three months of the year, the population aged 15 and over grew by 204K, by far the largest quarterly increase on record. As a result, the ranks of the labour force swelled by 216K, preventing the unemployment rate from falling despite stellar job creation.
And there were some encouraging elements in this morning’s report for the central bank, particularly regarding the wage pressures that are partly responsible for the recent surge in inflation. Even though the unemployment rate remains near historic lows, average hourly earnings of permanent employees moderated faster in March than the consensus of economists had expected.
The Bank of Canada’s recently released Business Outlook Survey has eased our fears of a prolonged wage-price spiral. Intentions to raise wages have returned to more normal levels, which is consistent with declining business concerns about the severity of labour shortages.
All in all, given the encouraging developments on the inflation front, the Bank of Canada should maintain its pause in monetary tightening. The rate hikes have been very aggressive and will continue to weigh on the economy given the lag in their pass-through, not to mention the turmoil in the U.S. banking sector, which also calls for caution.
Like in the U.S., only the services-producing sector (+76k) registered job gains, while employment was down in all goods-producing industries (-41k).
The participation rate edged down 0.1pp to 65.6% in March, the same level of 12 months ago. Monthly sequential population growth was +0.25% in March, the fastest pace ever observed since the start of the series in 1976.
On a three-month annualized basis, wage growth increased to +2.7% from +2.1% in February, but remained below the 3.4% rate recorded in January.
EARNINGS WATCH
We have 20 early reporters in, all of which beat estimates, by an average +14.8%.
The good news stops here. Their aggregate earnings declined 21.8% YoY on a 4.0% gain in revenues which were 1.3% above forecasts.
The same 20 companies’ Q4’22 earnings were down 10.7% on a 3.7% gain in revenues. Sinking margins!
Estimates keep falling, albeit very slowly. Q1 earnings are now seen down 5.2% (-6.7% ex-E) from -5.0% (-6.6%) one week ago. Q2 is now seen down 4.0% (-3.9% on week ago) but wait, ex-E earnings are seen up 0.7% (+0.8%), ending a 4-quarter negative streak. That is in spite of ex-E revenues rising only 2.9% in Q2.
Trailing EPS are now $217.39, down 2.6% from their November 2022 peak. Curiously, 12-m forward EPS ($226.64) have risen in the past week and are now equal to their November level. That magic occurred simply swapping a negative Q1’23 for a positive Q1’24 (+13.9%!).
Source: Truist Advisory Services (via The Daily Shot)
- This year’s 20% rally in US technology stocks is decoupling from reality ahead of what’s predicted to be a gloomy reporting season, the latest MLIV Pulse survey shows. While investors have flocked to tech recently, the rotation is at odds with analyst calls for the steepest drop in quarterly profits for the sector since at least 2006. (Bloomberg)
- Samsung Forecasts Worst Profit in Over a Decade as Tech Slump Hits Memory Chips The South Korean company said it would cut memory-chip production, joining rivals in addressing the supply glut.
Samsung said Friday that its operating profit for the January-March quarter was expected to have dropped by around 95.8% from the prior year to 600 billion won, or roughly $455 million, in what would be the smallest quarterly operating profit since 2009. Revenue for the three-month period is expected to drop by 19% from a year earlier to 63 trillion won. (…)
Analysts polled by data provider FactSet on average had expected 1.4 trillion won in operating profit and 65 trillion won in revenue. (…)
Average contract prices of DRAM fell by up to 20% on a quarter-to-quarter basis in the first three months of the year, while similar prices of NAND flash dropped by up to 15% during the same period, according to TrendForce Corp., a Taiwan-based market research firm. Memory prices are poised for further declines in the second quarter, with DRAM projected to fall by up to 15% from the first quarter and NAND flash by up to 10%, according to TrendForce. (…)
Major memory-chip makers—including SK Hynix Inc., Micron Technology Inc., Western Digital Corp. and Tokyo-based Kioxia Holdings Corp.—have already announced that they would be reducing investments aimed at capacity expansion or lowering output to rein in the supply glut. (…)
Stocks Haven’t Looked This Unattractive Since 2007 The allure of shares dimmed when bond yields surged and the corporate-earnings picture continued to darken
The equity risk premium—the gap between the S&P 500’s earnings yield and that of 10-year Treasurys—sits around 1.59 percentage points, a low not seen since October 2007.
That is well below the average gap of around 3.5 points since 2008. The reduction is a challenge for stocks going forward. Equities need to promise a higher reward than bonds over the long term. Otherwise, the safety of Treasurys would outweigh the risks of stocks losing some, if not all, of investors’ money. (…)
The current equity risk premium is closer to the longer-term norm: The average premium since 1957 is around 1.62 points, BlackRock research shows. That means stocks should still offer a better return than bonds given their historical outperformance, Mr. DeSpirito added.
The equity risk premium falls when bond yields rise, or a stock’s price/earnings ratio jumps—either due to weaker earnings or higher stock prices. The earnings yield, meanwhile, is the ratio of profits from the past year to current stock prices. (…)
Valuations have historically plummeted during economic recessions, though some analysts say lofty valuations won’t prevent stock prices from continuing to rise.
“We have seen the peak for stock-market valuations, but that doesn’t necessarily mean we’ve seen peak prices yet in this cycle,” said Jawad Mian, founder of macro-advisory firm Stray Reflections.
The economy is much more resilient to high interest rates than it has been in the past, said Mr. Mian. High nominal growth—boosted by inflation—will continue to support earnings more than Wall Street’s consensus currently sees, preventing a significant drop in stock prices, he said. (…)
Since 1957, equities have beaten out fixed income more than two-thirds of the time when they were held for at least a year, BlackRock research shows. Stocks’ favorability improves as holding periods lengthen.
Focusing on stocks’ slim risk premium misses part of the picture, Mr. DeSpirito of BlackRock says. Fed intervention—suppressing short-term rates and buying up long-term bonds—created an abnormal risk-reward profile for stocks after the 2008 financial crisis. (…)
For the record, the 1.59 ERP in the WSJ article, is actually as of February 28 when 10-Y Ts were at 3.92% and not as of March 31 when yields were 3.48%. Factset also uses forward EPS which generally prove 5-10% too high.
As of April 6, the ERP using trailing S&P 500 operating earnings ($217.39) and 10-Y of 3.30% was 2.00.
The chart below plots the ERP and the Rule of 20 P/E, both using trailing EPS. The current ERP does indeed look expensive considering its 2007-2023 range but how useful is that when considering its longer term history?
Whereas the R20 P/E fluctuates within a stable long-term range around a 20 median value with a few occasional bubbles. As a “buy-low, sell-high” valuation tool, nothing beats the Rule of 20.
Yet, practically nobody uses it except Ed Yardeni. Maybe too simple for the sophisticated gurus of this world.
The CAPE ratio was useful until the GFC and, more recently, the Trump corporate tax cut played tricks with its 10-year average earnings data.
