U.S. Economy Poised for Spring Rebound as Jobless Rate Falls Hiring increased in April, and the unemployment rate fell to its lowest level in a decade, signs the U.S. economy is picking up speed after a lackluster winter.
(…) The pickup in hiring last month was broad-based, with particularly strong gains in business services and health care. (…)
After seeing the latest numbers, economists at forecasting firm Macroeconomic Advisers increased their projection for second-quarter growth to 4%. (…)
“This is an unambiguously strong economic report and suggests that consumers will have the wherewithal to increase spending in the second quarter,” said David Berson, economist at Nationwide Mutual Insurance Co. (…)
The economy has added an average 185,000 jobs a month in 2017, roughly matching 2016’s pace of job creation and a slower pace than in 2014 and 2015. (…)
So far, there is only modest evidence that the low unemployment rate is putting upward pressure on incomes and inflation. (…)
One explanation for why wages haven’t grown even faster is worker productivity has declined so far this year. Low productivity makes it difficult for businesses to generate higher profits, invest and raise workers’ pay.
Another reason could be some underlying slack remaining in the labor market. An alternative measure of unemployment and underemployment, which includes those who have stopped looking and those in part-time jobs who want full-time positions, was 8.6% in April. While the lowest since 2007, it remains slightly elevated above prerecession levels.
But the smaller spread between the alternative measure and the more broadly reported rate suggest that the slack is diminishing.
Softening wage growth could prove temporary, if employers start to struggle to find qualified workers. (…)
The Low Unemployment Rate Is a Warning, Not All-Clear, Sign(…) That misses one important point. The 4.4% rate looks a lot like a cycle low for unemployment, noted Gluskin Sheff economist David Rosenberg. If 4.4% isn’t the cycle low for unemployment, it’s extremely close to it, and there is one thing that uniformly follows the cycle low in unemployment. “While the cycle-low unemployment rate is obviously going to be rejoiced in the ‘here and now,’ ” Mr. Rosenberg wrote, “history teaches us that six months hence, the expansion ends and the recession begins.” (…)
“The jobless rate is a lagging indicator,” he wrote. The leading indicator is Fed policy. With the central bank raising rates, the yield curve will continue to flatten, then invert. “Brace for that,” he wrote. What comes next is inevitable. (…)
“The best time to celebrate,” he wrote, “is when the unemployment hits its cycle-high and (is) poised to come down, because it is that point that both the expansion and bull market has the longest runway,” he said. “We were at that point seven years ago, and have hit the other extreme today.”
Mommy, is this a cycle trough?
JOBS MIX KEEP AGGREGATE WAGES LOW
Smart analysis from NBF:
As we had suspected March was just a blip for the U.S. labour market, the latter bouncing back spectacularly as non-farm payrolls grew a consensus-topping 211,000 in April. The breadth of the increase in the goods sector, continued strength in services sector employment and record full-time employment all point to a resilient labour market. The consensus-topping results are consistent with a sharp acceleration of U.S. GDP growth in the current quarter after a soft Q1. The Fed will feel
vindicated about its decision to tighten monetary policy in December and March and will likely pull the trigger again in June, more so with the jobless rate now at a decade low of just 4.4% (ditto for the wide measure which is at just 8.6%).The only blemish to the employment reports is wage inflation which remains milder than the Fed would have liked ─ hourly earnings were growing at an annual pace of just 2.5% in April. That’s in part because the participation rate has stabilized after several years of decline, with new entrants into the labour force keeping wages under wraps. Moreover, job creation has been largely titled towards sectors with low wage inflation. As today’s Hot Chart shows, sectors that experienced solid employment growth over the past year, including mining/logging and education/health, also had some of the smallest wage gains. But as we’ve seen in recent months, soft wage inflation is not sufficient to prevent tighter monetary policy because the Fed’s broader outlook seems to be giving FOMC members confidence that inflation will eventually pick up as economic growth accelerates.
(…) The Federal Reserve’s survey of regional economies last month noted firms are reporting higher turnover rates and more difficulty holding on to workers in industries ranging from hospitality to manufacturing to energy. Construction firms in Memphis, Tenn., and Little Rock, Ark., reported labor shortages caused employers to raise wages to attract employees. (…)
NCGS Inc., a Charleston, S.C., company that runs clinical trials for drug companies, is now reviewing employees’ compensation as frequently as every three months, versus the prior practice of annual reviews.
“You can’t wait to evaluate salaries,” Chief Executive Nancy Snowden said. “That doesn’t exist anymore because there’s so much competition.”
The company is undertaking the largest expansion its 33-year history and doesn’t want to lose critical talent. Average salaries at NCGS are up about 8% from a year ago. In-demand jobs include clinical nurses and regulatory-compliance experts.
(…) For businesses, it is time to think differently about growth and labor costs. Profit growth for big companies in the first quarter was strong despite the sluggish economy because executives kept a tight lid on spending, including on workers. Unless higher labor costs are offset by stronger growth, it could mean that the first quarter marked peak profitability.
Investors have been winners in the long-running battle between capital and labor. That could be changing.
In all, the writing is on the wall: unless the economy really cools off, the labor market is tight enough for wage pressures to intensify in 2017. The Employment Cost Index is now rising at a 3.5% annual rate in Q1 and the number of anecdotes about wage increases are mushrooming by the day.
This chart plots unemployment claims divided by the working age population. The pool of available worker has shrunk to the lowest in 40 years.
The number of full time workers is only 3.4% above its 2007 peak level but it has been accelerating sharply so far in 2017 (+4.3% a.r. since December 2016). Meanwhile, the real weekly salary of full time workers recouped its 2009 level only in Q1’16 but has also been accelerating since even though it remains only 1.4% above its 2009 level:
Accelerating labor costs will be challenging for corporate America’s margins but could keep the economy healthy enough to help top line growth. This payrolls index (hourly earnings X hours X employeds) has also accelerated lately reaching +4.1% YoY in April.
Because consumers can’t keep borrowing to sustain spending indefinitely, especially with the Fed firmly on the hiking trail.
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U.S. Consumer Credit Increased by $16.43 Billion in March Outstanding consumer credit, a measure of non-real-estate debt, rose by $16.43 billion in March from the prior month, climbing at a 5.2% seasonally adjusted annual rate, the Federal Reserve said.
Total outstanding credit had increased at a 4.4% rate in February.
Revolving credit outstanding, mostly credit cards, increased at a 2.4% annual pace in March. Nonrevolving credit outstanding, mainly student and auto loans, rose at a 6.2% annual pace. (Charts from Haver Analytics)
Something is not consumer bullish in this Bespoke Investment chart:
Canadian Wage Gains Fall to Record Low as Jobs Run Stalls
Canada added 3,200 jobs during the month, Statistics Canada reported in Ottawa, less than the 10,000 employment gain forecast by economists. The pace of annual wage rate increases fell to 0.7 percent in April, the lowest in records dating back to the late 1990s.
Canada’s unemployment rate fell to 6.5 percent, the lowest since October 2008, but this reflects the departure of 45,500 people from the labor force. About half of those were youth, meaning many young people looking for work have stopped looking.
While the number of jobs added was relatively small in April, one-month does not make a trend and the recent employment picture has been strong. The country has had positive job gains for six straight months, and over the past nine months has added 277,000 jobs. That’s the best performance since 2012.
Other positive signs include hours worked numbers that show gains of 1.1 percent over the past 12 months and the falling unemployment rate.
All the job gains were self-employed and public sector. Canada lost 50,500 jobs in the private sector.
Yet, the Canadian economy has outperformed the U.S. in each of the last 3 quarters and 4 of the past 5. Since August 2016, Canada has created an average of 34,200 jobs per month which, population-adjusted, is equivalent to +340k in the U.S..
China’s Trade Surplus Increases in April China’s trade surplus widened in April, though both exports and imports grew less than expected amid signs that global trade momentum may be slipping.
Exports rose 8% from a year earlier compared with 16.4% in March, the General Administration of Customs said Monday. Imports climbed 11.9%, also below forecasts, after a 20.3% rise in March. China’s trade surplus increased to $38.05 billion from $23.93 billion the previous month. (…)
China’s exports to North America, Europe and Japan were up between 7% and 11% year on year in dollar terms in the first four months of 2017. (…)
China remained the world’s largest exporter in 2016 for the eighth consecutive year, accounting for 13% of the global total even as exports become a less-important growth driver for the country. Exports accounted for 18% of China’s economy last year, down from a peak above 32% in 2006.
Saudi Arabia and Russia Signal Oil-Cuts Extension Into 2018
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Brimming U.S. oil storage tanks to feel OPEC cuts last The energy industry scrutinizes U.S. oil stockpile data every week for evidence that OPEC supply cuts are ending a global crude glut, but growing domestic output means the world’s largest oil consumer may be the last place to feel the cuts.
EARNINGS WATCH
From Factset’s weekly summary:
Overall, 83% of the companies in the S&P 500 have reported earnings to date for the first quarter. Of these companies, 75% have reported actual EPS above the mean EPS estimate, 7% have reported actual EPS equal to the mean EPS estimate, and 18% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is above the 1-year (70%) average and above the 5-year (68%) average.
In aggregate, companies are reporting earnings that are 6.2% above expectations. This surprise percentage is above the 1-year (+4.3%) average and above the 5-year (+4.1%) average.
In terms of revenues, 66% of companies have reported actual sales above estimated sales and 34% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is above the 1- year average (53%) and above the 5-year average (53%).
In aggregate, companies are reporting sales that are 0.9% above expectations. This surprise percentage is above the 1-year (0.0%) average and above the 5-year (+0.1%) average.
The blended earnings growth rate for the first quarter is 13.5% this week, which is higher than the earnings growth rate of 12.6% last week and 9.0% at the end of the first quarter.
If the Energy sector is excluded, the blended earnings growth rate for the remaining ten sectors would fall to 9.3% from 13.5%. If the Energy sector is excluded, the blended earnings growth rate for the index would fall to 5.7% from 7.6%.
At this point in time, 83 companies in the index have issued EPS guidance for Q2 2017. Of these 83 companies, 58 have issued negative EPS guidance and 25 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 70%, which is below the 5-year average of 74%.
Nearly 50% of the remaining 82 S&P 500 companies to report Q1 results are consumer-centric companies, including 25 retailers, most of which being “old-style” as opposed to the more “in-style” companies like Amazon (38%), Ulta Beauty (+24%) and Netflix (+566%) and the fast growing home improvement companies such as Lowe’s (+21%). Given the weak consumer data throughout Q1, forthcoming results are likely to be much les buoyant.
U.S. Companies Strike an Earnings Gusher Earnings season has offered plenty of reasons for investors to be optimistic. Even more good news is on the way.
(…) Wall Street analysts, who normally lower their earnings forecasts throughout a quarter, have cut them for the current quarter at the slowest pace since 2014, according to FactSet. They forecast second-quarter earnings growth of 7.6%, compared with an 8.8% projection at the end of March. (…)
OUT OF BREADTH?
The Blog of HORAN Capital Advisors writes that the five largest companies in the S&P 500 Index are technology stocks, Apple (AAPL), Alphabet (GOOGL), Microsft (MSFT), Amazon (AMZN) and Facebook (FB). These 5 stocks account for 13.1% of the Index and Capital Advisors calculates that these five stocks account for over 50% of the index’s return this year.
But Lowry’s Research counters by explaining that
Over our 92 year history of bull and bear markets, one of the most reliable indications that a major market top is near has been the NY all-issues Adv-Dec Line and, since the early 1990’s, our Operating Companies Only (OCO) Adv-Dec Line. As has been noted in many prior reports, divergences between these Adv-Dec Lines and highs in the major price indexes historically appear about 4-6 months prior to a final bull market top.
As of last Friday, Lowry’s analysis
shows few of the signs of a weakening primary trend. To the contrary, ongoing trends of expanding Demand and contracting Supply, together with positive breadth and the current strength exhibited by small cap vs. large cap stocks, suggest this bull market still has a long way to run.
In as much as I think that Lowry’s technical work is as smart as it can be, I am wondering if the sharp decline in the share of money actively managed and the huge flows into ETF products is not changing the game for them and for everybody scrutinizing relative trends and money flows.
Here are some other thoughts on the market technicals from Jim Carroll, Managing Partner, LongRun Capital Management. (Via The Daily Shot)
The S&P 500 finally punched through to a new high today on good jobs numbers and expectation of a favorable outcome from this Sunday’s French election. Under the surface, there is still work to do from a breadth perspective. As shown in the chart below, the number of stocks on bullish chart patterns has declined since the last S&P high on March 1st. This indicates that new highs for the indices (Nasdaq has also notched new highs) are being driven by a smaller number of strong names. This is not a certain death knell for the rally, but the direction of bullish % needs to reverse in order to sustain the positive momentum.
ETFs
More on this risk in this Wealthtrack video.
Wall Street frets as trading activity trails off Second quarter slowdown comes as volatility falls and investors become cautious
(…) Big investment banks reported generally solid profits over the first three months of the year, as investors reset their portfolios to take account of higher base interest rates, and as companies front-loaded efforts to raise money. For all bar four of the top 14 banks, first quarter trading revenues were higher than a year earlier. In debt trading, all 14 apart from UBS and Barclays reported year-on-year rises.
But activity faded in April and, so far in May, it has been quiet, according to traders — suggesting many banks will struggle to sustain that bright start to the year. (…)
Trump’s Fiscal Plans, Fed’s Asset Unwinding Could Fuel Rate Rise
President Donald Trump is flirting with tax and spending plans that could widen the budget deficit, just as the Fed flirts with plans to shrink its $4.5 trillion portfolio of bond and other holdings. Larger deficits could mean that the supply of U.S. Treasury securities hitting the markets is rising just as demand for these securities diminishes with the Fed unwinding. (…)
Treasury Secretary Steven Mnuchin and his staff are already considering how to handle the challenge of raising large amounts of debt. Last week, the Treasury sought the counsel of its Borrowing Advisory Committee, composed of major Wall Street bond market participants.
The committee cautioned that under plausible scenarios, the Treasury might have to more than double the amount of debt it auctions for 10-year and 30-year bonds. (…)
US Tax Reform May Put Speculative Grade Issuers at Risk A significant cut in the US corporate tax rate could pressure the corporate credit profiles of speculative grade issuers with large debt burdens and a high cost of debt should it be applied alongside an elimination of interest expense deductibility.
(…) The loss of the tax shield generated by interest expense would effectively make debt more costly. Taken in isolation, the elimination of interest expense deductibility would ultimately increase cash taxes paid. This is less of a concern for investment grade issuers, but could have a greater impact on speculative-grade issuers, especially those in the ‘B’ category and below. Rising interest rates will compound this negative cash flow impact.
In the hypothetical example below, we illustrate the effects of tax reform on FFO for a typical ‘B’ credit at varying levels of leverage and cost of debt. Assuming the non-deductibility of interest expense and a reduction in the corporate tax rate to 15% from 35%, we find that the impact to cash flows becomes increasingly negative with greater levels of leverage and cost of debt. This analysis assumes a change in the tax rate and the loss of 100% interest expense deductibility (assumes no interest income), and all else equal. (…)
How lucky do you feel?
(…) In a securities filing Friday, Verizon said given S&P’s change of view “we no longer expect to be able to achieve an upgrade to our pre-Vodafone credit rating” by 2018 or 2019. The company declined to comment further.
The comments could add to mounting investor pressure on Verizon to make a big acquisition that eases its dependence on the cellphone business, analysts said.
(…)
Senate Tackles Rewrite on GOP Health-Care Bill Republican senators aim to begin a formal full rewrite of the House GOP health-care bill, driven in part by a sense that the House version made insurance less expensive for young people but costlier for older Americans—an influential, mostly GOP voting bloc.
OMINOUS SIGNS
My on going tab on signs we have finally gone full circle:
- Charles Schwab Profit Rises as New Accounts Surge New retail brokerage accounts tallied 235,000 during the quarter, up 44%.
- Personal anecdote: a 53 year old door installer was watching his stock ptf. on his cell phone while doing work at my house this week…In fact, he asked us for access to our wi-fi network, not being able to get his own unlimited cell phone plan…
- Heard on NPR, a one hour “show” (between 4 and 5 pm) on on-line trading and how day-trading and/or “swing-trading” can “easily” take you to financial independence, whether markets go up, down or sideways. That “show” is really a one-hour advertising for OnlineTrading Academy which claims that “You don’t have to work on
Wall Street to make money like Wall Street.” - Beef Stroganoff for Your Dog? Pet Food Goes Upscale Pet-food companies are selling dishes, such as meat lasagna and beef stroganoff, that look and smell like human food. Appealing to human beings is helping the industry charge more, boosting revenue even as sales volumes slip.
1 thought on “THE DAILY EDGE (8 May 2017)”
The red line for turning points in the economy seems about right with the unemployment peg at 4.4%.
The unemployment rate extreme drop in the late 1960’s was reversed with the roughly 33% drop in US military servicemen from 1969-1972 due to the draw down of US forces in Vietnam.
http://historyinpieces.com/research/us-military-personnel-1954-2014
The extremely low unemployment rates of the 1950’s are from an unlikely combination of events, so I think those may be a bit of an outlier to the 4.4% peg.
As far as recessions go, I believe Rosenberg and other economists should look at the following when anticipating recessions:
1. Manufacturing in the US accounts for 12% of GDP
http://data.worldbank.org/indicator/NV.IND.MANF.ZS?locations=US
I believe the number was 55% in 1955, but I can’t find the source.
2. Service industries have faster and greater inventory adjustment flexibility than manufacturing entities. Most of the post-war recessions going into the 1973-1974 recession were of the inventory adjustment kind.
The higher percentage of the economy devoted to service industries today, combined with the FIRE component, appears to be lengthening the US business cycles.
3. Improved logistics and the tech economy are combining to reduce inventory cycle extremes.
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