THE BIG DEBATE
Job Market Slack Is History Faster wage growth shows the labor market has tightened to the point where the only way companies can get more workers is to pay them more
The Labor Department on Friday reported the economy added another 201,000 jobs, while the unemployment rate held steady at a low 3.9%. But the biggest news was an unexpected jump in average hourly earnings that pushed wages up 2.9% from a year earlier. That compared to a 2.7% gain in July, and marked the strongest growth since 2009. (…)
Sometimes one needs to be picky on stats. Most commentators are bouncing the +0.4% and +0.3% consecutive monthly rises in average hourly earnings in August and July respectively. The resulting 4.3% annualized growth is indeed scary. But the actual unrounded numbers are +0.37% and +0.26%, making the annualized +3.8% number somewhat less dramatic.
But the reverse is true if we consider the larger cohort of production and nonsupervisory employees which comprise 80% of the labor force. Last 3 months rounded numbers show +0.6% or +2.4% annualized. The unrounded stats total +0.663%, +2.7% annualized, same as the last 2 months and not as dramatic.
Another way to look at it is observing that the amplitude of monthly gains has widened somewhat on the upside. But in truth, no reason yet to panic on wages.
Although, as NBF points out
The U.S. labour market is creating jobs at the fastest pace since 2015 according to the establishment survey. The latter showed non-farm payrolls rising a consensus-topping 201K in August, pushing up the tally for the first eight months of the year to a stunning 1.6 million. Also encouraging, given their tendency to move in synch with the economic cycle, were further gains in construction and temporary employment which point to continued expansion in Q3. The unemployment rate remained unchanged at 3.9%, although the U6 “wide” measure, which includes persons marginally attached to the labour force and those employed part time for economic reasons, fell further to 7.4%, the lowest since April 2001.
Clearly the U.S. labour market is getting tighter, and wages are heating up as a result. The private sector’s average hourly earnings rose 2.9% on a year-on-year basis, the highest since May 2009. And wage growth is not isolated to a single sector. As today’s Hot Charts show, most major industries in the U.S. are now seeing stronger wage growth than last year. The employment data will further reinforce the Federal Reserve’s view that tighter monetary policy is warranted.
The interest on wages is two-fold: consumer income and expenditures, 70% of GDP, and corporate profits, equity markets’ primary fuel.
Regarding consumer expenditures, the Payrolls Index, up 5.2% YoY in August, suggests growth in nominal expenditures sustained in the 4.5-5.5% range:
The problem is rising inflation (black line above) which is eroding real spending power. The blue line below is the Payrolls Index minus CPI, rising only 2.0% YoY in July and likely the same in August after we get the August CPI on Sep. 13.
Employment growth is decelerating again: +185k over the past 3 months from +192k over the past 6 months and +194k over the past 12. On a YoY basis: +1.6% in August from +1.7% in May and +1.4% in January. Unless wages accelerate markedly, payrolls will decelerate below inflation and stifle the economy.
Or inflation wanes.
The challenge to the U.S. economy is summarized in this simple chart: inflation (CPI) is now accelerating faster than wages (blue), negating any real income growth for individual employees. At the aggregate level, the rate of growth in the number of employed Americans has resumed its slow downtrend while the pool of available workers has shrunk to its 2007 level. In all, the basic fundamentals for consumer spending are not promising unless wages accelerate, which would pressure corporate margins, or inflation decelerates which could hurt revenue growth. Investors can’t have it both ways.
Here’s an interesting chart plotting YoY changes in the CPI against unit labor cost. Amplitudes vary but trends are generally in sync except in 1987 and recently when ULC decelerated sharply while inflation accelerated. If history is any guide, these two lines will meet again.
If it’s because inflation decelerates, it will likely cause a deceleration in revenue growth:
If it’s because labor costs accelerate, it will likely impact profit margins which, at the national level (NIPA), remain 200 basis points below their 2014 peak on a pretax basis. At 12.0%, Q2’18 after tax margins are up spectacularly from 10.6% in Q2’17 but pretax margins are up only marginally from 13.3% to 13.7%. The impact of tax reform only has 2 quarters to go.
Ed Yardeni charts the close relationship between NIPA and S&P 500 profits:
Analysts currently see 2019 EPS up 10.2% to $179 on S&P 500 companies (accelerating from +8.2% in Q1 to +11.3% in Q4), a tall order considering:
- nominal GDP growth and corporate revenues (NIPA) are still growing at around 5% annually;
- other than compensation, operating costs have been accelerating in 2018;
- compensation costs seem set for 3%-plus growth in 2019;
- interest expense will also be rising on record corporate debt;
- the actual long term growth rate in profits is 7%.
U.S. Manufacturing Thrives as the Rest of the World Sags
This is Moody’s Sep. 6 headline posting this spectacular chart which could very well be used by President Trump to underscore the success of its economic policies:
But that would be flake news since the ISM manufacturing survey is proving to be totally out of whack with the reality as this next chart illustrates:
Markit’s U.S. PMI survey is a much better reflection of the reality and is pretty well in sync with the rest of the world’s PMI which, incidentally, is also a Markit product so all surveys have very similar methodologies.
Moody’s explains that the ISM survey captures both changes in actual activity and confidence and that
(…) sentiment has been boosting the ISM manufacturing index every month since November 2016. Anticipation and implementation of the Trump administration’s tax cuts and increased government spending have likely boosted manufacturer sentiment. Also, rising equity prices and a strong domestic economy are also reasons for manufacturers to be upbeat.
Trump Preparing Tariffs on Further $267 Billion in Chinese Imports President Trump said tariffs on another $267 billion in Chinese goods are ready to go and could be rolled out on short notice, signaling no end in sight for the trade dispute.
President Trump said Friday that tariffs on another $267 billion in Chinese goods are ready to go and could be rolled out on short notice, reinforcing earlier threats and signaling no end in sight for the growing trade dispute.
Speaking aboard Air Force One en route to Fargo, N.D., Mr. Trump said the tariffs would be in addition to the tariffs on $200 billion in Chinese goods the administration has been preparing, which he said will “take place very soon, depending on what happens.” (…)
The public comment period on the second, $200 billion round of tariffs ended Thursday, the last step before a decision. Trade associations, which oppose tariffs, were gearing up for an announcement as early as Friday.
A senior administration official told The Wall Street Journal on Friday that China tariffs “are coming,” but said that the timing remains unclear.
Mr. Trump later signaled that the timing of the $200 billion is not finalized, saying that it “could take place very soon depending on them—to a certain extent it depends on China.”
Elsewhere in the WSJ:
(…) Others familiar with the administration’s deliberations think that the Office of U.S. Trade Representative Robert Lighthizer could take weeks to make a move to demonstrate that it carefully considered the comments, numbering more than 4,000 by Thursday’s deadline. The office took three weeks after the end of the first comment period to announce tariffs. (…)
Several trade associations are considering suing the trade representative to stop additional U.S. tariffs on Chinese goods, by arguing the administration has exceeded its legal authority and has acted arbitrarily. (…)
On the other hand, few in Beijing expect much improvement before the U.S. midterms. That would leave very little time to conclude a deal in November, before the G-20 summit. Chinese officials believe that if Republicans fare poorly in the elections, the president will be weakened in talks with China. (…)
The administration and its allies think the Chinese are misreading U.S. politics.
A wounded Trump presidency is even more likely to push China hard, egged on by Democrats, they say. (…)
Kudlow Says U.S. Willing to Talk With China as Tariffs Loom
(…) While China’s response to U.S. demands has been unsatisfactory, Trump is still speaking to Xi, and would be open to meeting in person, said Kudlow, director of the White House’s National Economic Council. An opportunity could take place when world leaders gather at the UN General Assembly in New York this month and the Group of 20 summit in Argentina in November, he said. (…)
Trump Presses Apple: Shift Production to U.S. President Trump called on Apple to shift production to the U.S. and out of China, reviving a longstanding criticism and pressuring the iPhone maker to help fulfill the administration’s economic goal of restoring American manufacturing.
(…) Apple assembles most of its products, including the iPhone, in China. The Cupertino, Calif.-based company directly employs at least 80,000 people in the U.S. and claims responsibility for two million jobs around the country, including its own employees and those of suppliers, app developers and entrepreneurs who offer products across its devices. It spent $50 billion last year with more than 9,000 U.S. suppliers maintaining manufacturing operations across 38 states.
Apple said in July that it employs about 10,000 people directly in China and indirectly accounts for three million jobs there through its supply chain, which includes contract manufacturer Foxconn Technology Co. The company has also said it provides work for 1.5 million app developers in China. (…)
The company said in its filing to the U.S. Trade Representative that the administration’s proposed $200 billion in tariffs wouldn’t only “divert our resources and disadvantage Apple compared to foreign competitors” but also lead to higher “consumer prices, lower overall U.S. economic growth, and other unintended economic consequences.”
In his tweet, Mr. Trump rebutted those claims, “Apple prices may increase because of the massive Tariffs we may be imposing on China—but there is an easy solution where there would be ZERO tax, and indeed a tax incentive. Make your products in the United States instead of China,” he said. (…)
China’s Consumer Inflation Rises Further as Producer Prices Ease
The consumer price index rose 2.3 percent from a year earlier, compared with a projected 2.1 percent increase in a Bloomberg survey of economists, which was also the reading in July. The producer price index climbed 4.1 percent, compared with a 4 percent estimate and a 4.6 percent gain the previous month. (…)
Food prices rose 1.7 percent in August, much faster than the 0.5 percent increase in July, according to the statistics bureau statement. Food, alcohol and tobacco prices were up 1.9 percent, contributing 0.55 percentage point to the overall inflation. Healthcare costs jumped 4.3 percent, and transportation and communication costs were up 2.7 percent. (…)
Trouble Spreads to More Emerging Markets
(…) South Africa unexpectedly dipped into recession in the second quarter, with weak growth exacerbating continued jittersabout the rand and raising the risk of a credit downgrade. Meanwhile, inflation in the Philippines jumped to 6.4% in August, from 5.7% in July, exceeding most economists’ expectations and pressuring the central bank to raise interest rates–a troubling prospect as economic growth slows.
Indonesia’s government tried an array of measures to lift its currency, which fell to levels not seen since the Asian financial crisis that wrecked emerging markets two decades ago. As strong economic data out of the U.S. lifts the dollar and U.S. rates rise, global investors are more inclined to pull money from emerging markets and put it in bonds at home. That hurts emerging-market currencies. (…)
Moody’s: Above-Average Baa Industrial Spread Warns High-Yield
A well-below-average U.S. high yield bond spread of 361 bp remains atypically thin vis-a-vis a recent above-trend long-term Baa industrial company bond yield spread of 191 bp. The long-term medians for these spreads are 470 bp for the high-yield spread and 174 bp for the long-term Baa industrial spread. As derived from the historical record, a Baa industrial spread of 191 bp has been associated with a 497 bp median for the high-yield spread.
It was during 2007’s first half that the high-yield bond spread was previously so far under what otherwise might be inferred from the Baa industrial spread. High-yield investors would have done well to heed the caution expressed by the Baa industrial spread in view of how the average high-yield bond spread ballooned from the 286 bp of 2007’s first half to the 700 bp of 2008’s first half.
EARNINGS WATCH
Preannouncements for Q3 continue to be on the negative side:
But the +19.3% estimated growth ex-Energy for Q3 has not changed in the last 2 weeks and is only down from +19.8% in early August.
TECHNICALS WATCH
Lowry’s Research is not worried by the weakness in its Buying Power index in the last 2 months, arguing that the “ongoing downtrend in Selling Pressure together with new
highs in the Adv-Dec Lines suggest a healthy, intact bull market, with selective Demand limited primarily to stocks in the small cap market segment.”
However, I am more worried because the Selling Pressure Index has been rising, somewhat, in recent weeks. On the other hand, Ned David Research’s “Volume Demand vs. Volume Supply” indicator (via CMGWealth), using a broad market equity index, shows continued domination from buyers:
Downside to the 200 dma is greatest among small caps: -8.6% on S&P 600 and Nasdaq (-7.0% on NDX). S&P 500 is 5.0% above its 200 dma.
That said, most other technical indicators I follow are still flashing green such as this 13/34–Week EMA Trend Chart (also from CMGWealth):
FAANGs PARTING WAYS
FB: faced the bear, –25.4%, below it 200 declining dma:
Tempted by bottom fishing? Read this first: Americans are changing their relationship with Facebook
My 35 year old geek son tells me that most of his friends have significantly reduced their use of Facebook and Instagram and that the bulk of FB’s subs growth now comes from poorer countries where FB provides free internet to its users. Advertisers are not attracted to these low income users.
AAPL: down 3.6% from its Sep. 5 high, 17% above its rising 200 dma. Beware China tariffs retaliation.
AMZN: down 4.8% from its Sep. 4 high, 20.7% above its rising 200 dma:
NFLX: down 17.6% from its June 21 high, still 12.6% above its rising 200 dma.
GOOGL : down 8.8% from its July 27 high, 4.7% above its rising 200 dma.
And TSLA, after its “almost privatization” went up in smoke: down 32.1% from its Aug. 7 high, 17.2% below its declining 200 dma:
Sadly, Elon Musk is challenging Trump for …
