Labor Supply in a Tight Labor Market
With the unemployment rate at a 30-year low and employment continuing to expand at a robust pace, many economists and policy makers are scrutinizing labor statistics for signs of tightness in the labor market. Some are concerned that the demand for labor will outstrip supply, leading to upward pressure on wages that could possibly ignite inflation. Many economists wonder how long wage gains can remain moderate in the face of strong employment growth, low unemployment, and, presumably, a dwindling supply of potential workers.
The above is from the Bureau of Labor Statistics (BLS) dated June 13, 2000.
In June 2000, wages were not growing any faster than they had since 1997 in spite of the slide in the unemployment rate to 3.8% in April 2000. Six months later, wage growth spiked at +4.3% and a recession started in March 2000. Keep this in mind reading what follows and everything else clamouring how great the economy is. Wherever the Fed wanted to take us since 2009, we are there.
Investors got a dose of good news about the U.S. economy after the Labor Department released its May unemployment report, which showed a healthy gain in jobs that pushed the unemployment rate to 3.8%, the lowest since April 2000, and a modest gain in wages.
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World Stocks Rise in Synchrony After U.S. Jobs Report
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Global shares shrug off trade tensions as U.S. data reassures
Here are some important facts:
- The actual unemployment rate fell from 3.93% to 3.76%.
- The diffusion index rose from a strong 64% to an even stronger 67.6%. Employment strength is widespread.
- In May, the unemployment rate for workers 25 years and older with less than a high-school diploma was 5.4%, down from 6.2% a year earlier and lowest since the stat is collected in 1992.
- In the first quarter of this year, median weekly earnings for Americans without a high-school diploma surged by 10% from a year earlier. So even non-skilled workers are few and enjoying higher wages.
- In the last 12 months, the number of full-time workers has increased by about three million while part-timers have dropped by 457,000.
- Workers age 25 to 34 made up 1.04 million of the 2.58 million jobs added over the last year.
- These last 2 stats may well explain the recent surge in spending and credit.
- Wages for nonsupervisory production workers (80% of the working population) rose 2.8% YoY and +3.6% annualized in the last 3 months.
Wherever the Fed wanted to take us since 2009, we are there. Core CPI is now +2.1% YoY and core PCE prices +1.8%. They were +2.3% and +1.7% respectively in April 2000.
A jobless rate of 3.9% or less has seen an annualized return from the S&P 500 of 5.65% since 1950, he writes. That’s not terrible, except in comparison with an average annual return of 13.21%, when the unemployment rate is 3.9% or higher. Moreover, when the jobless rate is 3.9% or lower, monthly stock returns have been negative more than 44% of the time. By comparison, monthly equity returns were negative only 35% of the time when the jobless rate was above 3.8%. (Jim Paulsen, chief investment strategist at Leuthold Group) (Barron’s)
From the ISM manufacturing PMI last week:
- “Very difficult to hire skilled and unskilled labor.” (Food, Beverage & Tobacco Products)
- “Sales remain strong. Lead times and direct material costs are soaring.” (Machinery)
- “Suppliers are seeing price increases and trying to pass them on.” (Miscellaneous Manufacturing)
- “Industry demand is causing price increases. Fuel prices are also on the rise, and there have been (price) increases associated with that.” (Primary Metals)
- “Severe allocation, long lead times and upward price pressure, particularly in the electronic components market, continue to hamper our ability to meet customer demand and our shipping schedule.” (Computer & Electronic Products)
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COMMODITIES REPORTED UP/DOWN IN PRICE AND IN SHORT SUPPLY
Commodities Up in Price: Aluminum (19); Aluminum Based Products; Brass; Capacitors; Caustic Soda (11); Cobalt; Copper (7); Corrugate (20); Corrugated Boxes; Corrugated Cartons; Electrical Components (2); Freight (4); Paper; Resistors; Steel — Galvanized; Steel — Hot Rolled (18); Steel — Hot Rolled Plate; Steel — Stainless (2); Steel — Stainless Steel Bar; Steel — Stainless Steel Sheet; Steel Based Products; and Wood (2).
Commodities Down in Price: None.
Commodities in Short Supply: Aluminum; Capacitors (11); Electrical Components (2); Electronic Components; Freight; Memory; Resistors (7); Steel Based Products; and Steel – Hot Rolled (2). (The number of consecutive months the commodity is listed is indicated after each item.)
U.S. Light Vehicle Sales Slip
Total sales of light vehicles declined 1.5% during May (+0.7% y/y) to 16.91 million units (SAAR), following a 1.8% April decline to 17.17 million units, according to the Autodata Corporation. The decline left sales 8.9% below the 18.57 million unit high reached last September. May sales declined 5.3% since December, following a 1.7% twelve-month shortfall during 2017.
Sales of light trucks declined 2.2% (+8.7% y/y) to 11.48 million units. (…) Passenger car sales were fairly steady m/m at 5.44 million units. (…)
Imports’ share of the U.S. vehicle market was steady at 23.2% last month, up from 19.9% in 2015. Imports’ share of the passenger car market increased to 28.3% from 27.7% last year. Imports share of the light truck market held steady at 20.8% versus a 12.7% low during 2014.
The effects of last year’s hurricanes are well behind us now as these CalculatedRisk charts illustrate. Maybe these as well:
- In the last 12 months, the number of full-time workers has increased by about three million while part-timers have dropped by 457,000.
- Workers age 25 to 34 made up 1.04 million of the 2.58 million jobs added over the last year.
Trump’s Trade Policies Threaten Millions of Jobs, U.S. Chamber of Commerce Says
(…) The administration disputes the business community’s views and says existing trade agreements have led to chronic deficits that cost U.S. jobs. (…)
This argument has much less credibility these days…
US-China trade war nears as talks end without deal Fruitless negotiations in Beijing bring clash over tariffs a step closer
China Launches Probe of Foreign Chip Makers
(…) Nearly 90% of the $190 billion worth of chips used in the country are imported or produced in China by foreign-owned companies, according to International Business Strategies Inc., a research firm. (…)
Trade and Political Uncertainty Takes the Shine Off Corporate Optimism
Executives are less optimistic about the U.S. economy and their own company’s prospects, according to the second-quarter economic outlook survey by the American Institute of CPAs released Thursday.
The share of executives that are upbeat about the economy fell to 74%, down five percentage points from last quarter, amid concerns about trade and political uncertainty. Optimism about their own company’s outlook fell one percentage point to 70%, according to the survey of 831 certified public accountants that hold various leadership positions at their companies, including chief financial officer or controller.
(…) “It’s hard to plan when you don’t know maybe some major decisions will be made.”
Profit growth estimates slipped to 4% from 4.4% in the first quarter, while revenue growth forecasts eased to 4.8% from 5%.
Still, the share of businesses who said they planned to hire immediately rose to 30% from 27%. However, the availability of skilled workers remained the top challenge for companies for the fourth quarter in a row. (…)
Interesting survey of 831 CEOs, CFOs and controllers May 8-23. They remain very optimistic overall with rising hiring plans.
Worth noting:
- Employee Salaries & Benefits are forecast to rise 2.8% in the next 12 months, up from +2.7% in Q1 and +2.5% in Q4’17.
- Concerns about inflation jumped from 27% to 49% in the last 6 months.
- Prices charged are seen rising 2.5%, from +2.1% while Input prices are seen rising 3.2% from +2.7%.
The above stuff is from a survey. This next story is from the ground floor and must be read:
U.S. steel producers are benefiting from tariffs that make it more expensive for companies to buy the metals overseas. But some U.S. firms that use the metals to make everything from refrigeration parts to wheels say the tariffs have led to higher materials prices that are forcing them to charge more for their products. These firms say that in some cases, customers are turning to foreign suppliers that use cheaper, tariff-free metals to make the same products they can then export to the U.S. without bumping up against the new trade barriers. (…)
Pioneer Service doubled the price of some refrigeration and climate-control parts to account for higher steel costs, she said. In response, the customer tapped a Chinese competitor to supply the parts. “This is really hurting manufacturing,” Ms. Muthana said.
One option for manufacturers with established supply chains abroad is to shift production outside the U.S. to take advantage of lower costs.
“A few of our customers have moved some of their production back to Europe and Canada because of the increases in prices for raw materials,” said Jerry Pines, chairman of Millenia Products Group, a fabricator based in Itasca, Ill. Mr. Pines said the effect of tariffs on pricing and availability “has made the marketplace the most difficult place to operate in the 50 years I have been in the steel business.”
Indeed, manufacturers facing higher costs of components made from steel and aluminum say they have little choice but to take action.
Tool maker Stanley Black & Decker Inc. is considering replacing American suppliers with foreign ones for components of products made in the U.S.
“All options are open,” CEO Jim Loree said in an interview. “If that made sense in a given situation, there is a high probability we would pursue that.”
Lippert Components Inc., an Indiana maker of parts used to make RVs and boats, has begun importing some additional components made from steel and aluminum and is considering importing more.
“We’re finding alternative sources,” CEO Jason Lippert said. “There’s cheaper alternatives overseas.”
Jeffrey PizzoIa, chief operating officer of Ohio wheel maker Americana Development Inc., is among the manufacturers that have filed requests with the Trump administration to impose tariffs on finished goods imported from China. Attempts to pass on higher steel tariffs have helped push customers to take their business to Chinese suppliers, he said.
“We’re just asking the U.S. government to level the playing field,” Mr. PizzoIa said. “The tariffs are just pushing it perhaps to a breaking point for us.” (…)
Like saying: Mr. President, you created chaos and it’s not working as intended. Please do more chaos.
A Distressed-Debt Titan Sees Drought Ending in $1 Trillion Flood
Oaktree Capital Group’s Jay Wintrob expects to see a flood of troubled credits topping $1 trillion as rising interest rates overwhelm low-quality loans and bonds.
When the cycle turns it will be faster and larger than ever as “fallen angels” proliferate, said Wintrob, Oaktree’s chief executive officer, at the Bernstein Strategic Decisions Conference on Thursday. “There will be a spark that lights that fire,” he said.
The supply of low-quality debt is significantly higher than prior periods, Wintrob said, while the lack of covenant protections makes investing in shaky creditors riskier than ever. Those flaws could mean debt will fall into distress quickly, and Oaktree is prepared with about $20 billion saved for future investing opportunities, he said.
(…) the duration of bonds has increased, which could make the coming price drops even more significant than during the turn of the last credit cycle in 2008. (…)
“We’re living in a low-return, high-risk world.” (…)
(…) So far this year, companies have filed more than 450 documents with the SEC tacking suffixes onto Ebitda, according to Intelligize, a financial-information firm.
Because these metrics aren’t part of official accounting rules, they aren’t audited. Managements are also free to change the definitions, says Howard Schilit, chief executive of Schilit Forensics, an accounting-analysis firm, and co-author of the book “Financial Shenanigans: How to Detect Accounting Gimmicks and Fraud in Financial Reports.”
In recent years, “managements have always wanted to put as positive a spin as possible on their results so the stock will keep rising,” he says. “Now they can do that with a lot less risk. You don’t have to break the rules. When you use these newfangled unaudited measures of earnings, there are no rules.” (…)
Hence the need to use seasoned aggregators with long established rules to provide aggregate earnings that are consistent over time and across industries. The problem today seems to be more with fixed income investors desperately seeking yields and willing to accept much lower protection, if any…
EARNINGS WATCH
Q2 Sees Second Largest Increase in S&P 500 EPS Estimate Since 2011
The Q2 bottom-up EPS estimate rose by 0.2% (to $39.07 from $38.98) during the last 2 months. On average, the bottom-up EPS estimate usually decreases during the first two months of a quarter.
The estimated (year-over-year) earnings growth rate for Q2 2018 is 18.9%. The estimated (year-over-year) revenue growth rate for Q2 2018 is 8.6%.
Corporate pre-announcements for Q2 have not worsened much:
Something to watch because the earnings landscape is becoming more tricky with potential hidden land mines:
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wages are accelerating and the pressures are uneven among industries;
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input costs are rising unevenly as well (e.g. tariffs, raw materials);
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the U.S. dollar has been rising and could keep rising;
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interest expense will begin to bite more seriously.
Meanwhile, trailing EPS now total $140.27 which I pro forma to $146.60 assuming 7% accretion from tax reform. Trailing EPS are set to reach $151 after Q2 if estimates are met.
The Rule of 20 P/E is 20.7 but would be 20.1 using post Q2 pro forma EPS. Only 6 weeks to go before we start another earnings season.
BUYBACKS TO PLAY A BIGGER ROLE IN Q2
@trevornoren
Thomson Reuters’ numbers indicate that buybacks will add 2.3% to the aggregate earnings growth rate in Q2 to 20.1% and 2.5% in Q3 to 23.0% vs +1.2% in Q1 to 26.4%.
TECHNICALS WATCH
“over Lowry’s 93 year history, a bull market has never ended with Selling Pressure at a new low and the Adv-Dec Lines at new highs. Rather, both conditions have occurred only during healthy, ongoing bull markets. That’s something probably worth remembering as the market continues its wild news induced swings.”
OTHER SIGNs?
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Value Investors Face Existential Crisis After Long Market Rally Many value investors have drifted away from the hallmark of the strategy championed by the likes of Benjamin Graham and Warren Buffett: actively picking stocks the market has overlooked.
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What I Did at Summer Camp: Stocks and Personal Finance!
WHAT’S IN A NAME?