Financial Review

July Jobs Report

Sinclair Noe — August 4, 2017

Podcast: Play in new window | Download (Duration: 12:01 — 6.9MB)

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DOW + 66 = 22,092
SPX + 4 = 2476
NAS + 11 = 6351
RUT + 7 = 1412
10 Y + .04 = 2.27%
OIL + .49 = 49.52
GOLD – 9.50 = 1259.40
BITCOIN + 9.23% = 3149.74 USD
ETHEREUM + 2.85% = 229.39

The Dow closed at a record high – the 8^th straight record close and the 34^th record close this year. For the week, the Dow rose 1.2%, its second straight weekly rise, as well as its fourth positive week of the past five. The S&P rose 0.2% on the week, while the Nasdaq ended lower by 0.4%.

The economy added 209,000 new jobs in July. The unemployment rate dropped from 4.4% to 4.3%, that’s a 16-year low.

The government also raised its estimate of new jobs created in June to 231,000 from 222,000. May’s gain was reduced to 145,000 from 152,000, however.

Over the past 3 months, the economy has added 195,000 jobs per month on average. Payroll gains averaged 180,000 in the first half of 2017, compared with 193,000 in the second half of 2016.

During the first six months of Trump’s term, the economy has added 1,027,000 private sector jobs. July marked the 82nd straight month of job growth, a record.

The U6 measure for unemployment was unchanged at 8.6%; that reading includes unemployed workers plus underutilized or people working part-time for economic reasons.

Wages increased 0.3% in July to an average of $26.36 an hour. But over the past 12 months, wages have risen just 2.5%, the same as in the prior month. Wages usually rise 3% to 4% a year when an economy is running at full throttle.

Several factors appear to be holding wages down, including low productivity, global competition, automation, a reluctance among many Americans to switch jobs and a reluctance among employers to pay for workers.

Employment in food services and drinking places rose by 53,000 in July.

The hospitality industry has added 313,000 jobs so far, this year.

Professional and business services added 49,000 jobs.

Health care employment increased by 39,000.

Manufacturing added 16,000 jobs.

Construction, wholesale trade and financial activities each gained 6,000 jobs.

And there were 4,000 government jobs added.

President Trump tweeted self-congratulations on what he called an excellent jobs report. That might be an exaggeration. Trump once pledged he would be “the greatest jobs president”. So far, he’s off to a moderate start.

So far, he’s only the eighth-greatest among post-war presidents. In terms of relative job growth, the first six months of Trump’s term lags several of his predecessors, including (in order): Carter, Nixon, Johnson, Clinton, Bush (the elder), Kennedy, and Eisenhower.

And in terms of absolute job creation, he is lagging Clinton, Reagan, Carter, and Obama (in order). To be fair, there’s little evidence that job growth—especially so early in a president’s first term—has much to do with a new administration’s actions or policies. Recent job growth is more likely a legacy of the final stages of the Obama years.

The same goes for Obama’s first six months, which came shortly after Lehman Brothers collapsed and the global financial system seized up during the end of George W. Bush’s tenure. But we don’t measure with a lag.

It was a good jobs report. If there was a blemish in the month’s numbers, it came from the distribution of jobs to lower-income sectors. Job creation was strongly titled to part-time, which gained 393,000 positions, while full-time fell by 54,000.

The Labor Force Participation Rate increased in July to 62.9% from 62.8%. This is the percentage of the working age population in the labor force. A large portion of the recent decline in the participation rate is due to demographics. The Employment-Population ratio increased to 60.2%.

It’s unclear how long the current growth can continue. The monthly jobs figures are volatile; only two months ago, the May jobs report showed less than 150,00 new jobs. But beyond the month-to-month data, there is reason to think the recovery can keep going.

The labor force participation rate for workers age 25-54, workers in their prime working years, increased to 78.7%. New post-recession high for share of working-age adults who have jobs.

The labor force grew by 349,000 people in July; the so-called participation rate — the share of adults who are either working or actively looking for work — has been essentially flat for the past year and a half.

That’s an impressive trend given the ongoing retirement of the baby boom generation, which puts downward pressure on the participation rate, and it is a sign that the labor market is strong enough to pull workers off the sidelines.

The Federal Reserve will likely look at the July report as confirmation that everything is on track for one more rate hike later in the year. A mild nudge in wages not enough to worry about inflation. With unemployment so low, economists have been watching for signs that the economy is nearing “full employment,” the point at which essentially everyone who wants a job has one.

That mark is significant because standard economic theory suggests that once the economy runs out of spare workers, companies will have to start boosting pay to attract employees. That would be a welcome development for workers but would also likely spur the Federal Reserve to raise interest rates to try to keep the economy from overheating.

Minneapolis Fed President Neel Kashkari suggested the report doesn’t change his mind that the Fed should hold off raising interest rates anytime soon. Kaskhari has said all year he wanted the Fed to hold off hiking rates until inflation firms.

He said this jobs report showed no hint inflation would move higher. In fact, the Fed’s inflation gauge has softened as the year has progressed, even with strong job gains. Kashkari said the Fed has repeatedly declared the unemployment rate has fallen as far as it could, only to be surprised by strong job growth and labor force participation and weak wages.

If Kashkari is correct, it would mean the labor market has more slack than the unemployment rate suggests.

And if you need proof that there is still significant slack in the labor market, look no further than Amazon. Thousands of Americans lined up in the searing heat on Wednesday for Amazon’s Jobs Day, when it had said it would hire 50,000 workers for fairly low-paying, physically demanding jobs in high-pressure warehouses.

Perhaps the Fed could have sent a staffer to observe the lines and talk to some of the people in them for insight into the real economy. The jobs offer between $12 and $15 an hour, well above the federal minimum wage. Crucially, they also offer healthcare benefits, absent in a lot of lower-paying jobs.

Workers know all too well the labor market is far from great, but policymakers in Washington are bent on insisting otherwise. With the official unemployment rate at a historically low 4.3%, Fed officials seem determined to raise interest rates and shrink their balance sheet despite inflation that continues to slip below their 2% target, indicating more room for the economy to grow more evenly.

Companies big and small are rushing to fill a near record number of job openings, but what they aren’t doing is offering bigger paydays. Less skilled workers are much easier to find and companies are unlikely to pay them more than they must.

Underemployment is still rampant, and wages have long been stuck in a rut. The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers), at 5.3 million, was essentially unchanged in July.

There are 1.79 million workers who have been unemployed for more than 26 weeks and still want a job. This was up from 1.66 million in June. But consider that the economy only needs to add 100,000 new jobs per month to keep pace with population growth, if we continue at the current pace, we will get to full employment – that mythical place where everybody who wants a job gets a job.

We’re not there yet, but it was a good jobs report.

Financial Review

Wound Tight

Sinclair Noe — July 28, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW – 15 = 18,456
SPX + 3 = 2170
NAS + 15 = 5154
10 Y un = 1.51%
OIL – .82 = 41.10
GOLD – 5.10 = 1335.60

The Federal Reserve FOMC wrapped up their FOMC policy meeting yesterday, announcing no change in interest rates – no surprise there. The Fed’s statement said, “Near-term risks to the economic outlook have diminished”; a signal that the Fed is considering a rate hike in September, although it is doubtful they actually will hike rates in September.

Traders cut their bets on a September Fed move from 20% just before the announcement to just 17%. Benchmark 10-year U.S. government bond yields fell back to 1.5%.

The dollar took its biggest tumble in almost two months and stocks were mixed as cautious sounds from the Fed left focus firmly on Japan’s next round of money-printing measures. The greenback was down 0.5% against six other major currencies. The yen notched its fourth rise in six days, as news that Tokyo had unveiled a $265 billion fiscal stimulus package left traders wondering how aggressive the Bank of Japan would be when it meets tomorrow. Costs to insure against dollar/yen swings hit their highest in 8 years.

Tomorrow is going to be a very interesting day as the Bank of Japan monetary policy meeting wraps up, we’ll also get results of the stress tests on Eurozone banks, plus new growth figures from the Eurozone, plus the first estimate of second quarter GDP in the US. We also continue with earnings reporting season and we had a couple of big reports after the closing bell, which will surely influence tomorrow’s trading – more on that in a moment.

So, maybe tomorrow will be a big day, one way or the other, on Wall Street. Something has to give; the market is wound tighter than a 2-dollar watch. LPL Financial, noted on Twitter  that today marked the 11th straight day the S&P 500 closed inside a 1% trading range, the first time this has ever happened in at least 45 years.

Meanwhile, the VIX index — also known as the “fear index” and measures market volatility — is approaching a low hit back in January 2007 and is well below its long-run average. Typically, this kind of consolidation is followed by a move to the upside, but we are entering into the August-through-October period, which is typically the most volatile for the markets. The dog days of summer don’t last. So, enjoy the calm while you can.

The nation’s trade gap widened in June to $63.3 billion, as imports rose faster than exports. Meanwhile, wholesale inventories were unchanged and retail inventories inched higher.

The number of people who applied for unemployment benefits last week rose by 14,000 to 266,000, that’s bouncing off historic lows, and still a low number that reflects a fairly strong labor market. Whatever the case, claims have been below the key 300,000 benchmark for 73 weeks and counting — a feat last duplicated in the early 1970s. The nation’s official unemployment is 4.9% – in the range generally considered as maximum employment or the full employment level.

In a June 6 speech, Federal Reserve chair Janet Yellen said that “the economy is now fairly close to the FOMC’s goal of maximum employment.” And there was a minor change in the wording of yesterday’s FOMC policy statement. In describing the jobs market, the FOMC chose not to refer to “underutilization of labor resources” – a phrase it’s used in the past to suggest the U.S. was still short of maximum employment. Instead, it pointed to “some increase in labor utilization.”

In other words, the Fed is signaling that the labor market is in good shape; they are saying they have fulfilled their mandate for maximum employment; that, in and of itself, is not a reason to raise interest rates, but it is no longer a restriction.

Oil markets continued to slip today, pushing crude prices back to fresh three-month lows; down about 20% from the highs of early June. Low oil prices continued to weigh on European oil majors Royal Dutch Shell and Total in the second-quarter of 2016. Royal Dutch Shell said profit crashed by more than 70% in the second quarter to $1 billion, while Total’s adjusted net income fell 30% to $2.2 billion. Between late May and the middle of June, the price of Brent crude rose above $50 per barrel, but has since come off to trade in the low $40s.

Oracle has agreed to acquire NetSuite, a cloud company, in a deal valued at $9.3 billion. Oracle is paying $109 a share. The deal is expected to close in 2016, subject to regulatory and shareholder approval. Oracle expects the acquisition to be “immediately accretive” to earnings. The NetSuite purchase is at the heart of Oracle’s fight to remake itself for the modern world of cloud computing. This transition has shaken up the software business for the last several years, as companies like Google, Microsoft and Amazon have created markets worth billions, and older companies like IBM, Hewlett-Packard and Oracle have struggled to change the way they make and sell their products.

This was a big afternoon for earnings reports from mega-tech companies. Let’s start with Alphabet, Google’s parent, posted a 21.3% increase in second-quarter revenue, exceeding analysts’ expectations, driven by strong advertising sales on mobile devices and for video content.

The strong revenue growth suggests that Google is successfully navigating the transition to mobile. Advertisers typically pay less for user clicks on mobile ads than on desktop ads, Google’s traditional strength, but the strong earnings performance suggest that is beginning to change.

Alphabet’s consolidated revenue rose to $21.5 billion in the quarter, from $17.7 billion a year earlier. Net income rose to $4.88 billion, or $7 per Class A and B common stock, from $3.93 billion, or $4.93 per share. Google’s ad revenue increased 19.5%. Alphabet gained about 5% in after-hours trade at around $804 per share.

Amazon.com reported a 31% rise in quarterly revenue, powered by blockbuster growth in its cloud services unit and an increase in subscriptions for its Prime loyalty program. Net sales rose to $30.4 billion from $23.2 billion a year earlier. The company’s net income rose to $857 million, or $1.78 per share, from $92 million, or 19 cents per share, a year earlier.

That doesn’t sound like strong margins but remember that Amazon continues to plow money back into the business. It’s a beat across the board, with Amazon setting another record-high quarterly profit for the third consecutive quarter. Amazon gained about 2% in after-hours trade.

On Tuesday, Apple reported better than expected earnings; today Apple rose, giving the S&P 500 its biggest lift. Yesterday, Apple announced it had sold its billionth phone, but that left plenty of market share for Samsung. Strong sales of its flagship Galaxy S7 propelled Samsung Electronics to its most profitable quarter in two years. Operating profit rose 18%. Samsung anticipates solid earnings to continue in the second half and is expected to unveil its new Galaxy Note smartphone next week – before Apple launches new iPhones in September.

Ford Motor reported weaker-than-expected profit in the second quarter, and said its full-year earnings forecast was at risk with U.S. auto sales expected to fall in the second half, sending shares tumbling. Auto sales in the United States and China were lower than anticipated in the quarter, and Ford reported its first quarterly loss in the Asia Pacific in three years.

It’s worth noting that Ford notched its most profitable first half in North America in company history. Still, Ford dropped about 8% today. The dynamics of the US market are getting more sluggish. New car and truck sales are still good — on track to come in over 17 million for the year, a bit lower than last year, but millions above a so-called replacement-rate market — but the automakers are beginning to smell a downturn, so incentive spending has been creeping up.

Toyota is in danger of losing its crown as the world’s biggest automaker this year as sales fall behind Volkswagen. Toyota, which has held the title for four years running, sold 4.99 million vehicles in the six months through June, compared to the 5.12 million of VW (despite the German automaker’s emissions scandal). General Motors holds third place with 4.76 million vehicles sold in the first half of 2016.

The U.S. homeownership rate fell to the lowest in more than 50 years as rising prices put buying out of reach for many renters. The Census Department says the share of Americans who own their homes was 62.9% in the second quarter, the lowest since 1965. It was the second straight quarterly decrease, down from 63.5% in the previous three months.

First-time buyers have been struggling to find affordable properties as low mortgage rates and an improving job market spur competition for a tight supply of listings. Home prices rose 5.2% in May from a year earlier, according to the S&P CoreLogic Case-Shiller index released this week.

The largest publishing event of the summer isn’t a novel or a tell-all biography. It’s a script. Harry Potter and the Cursed Child, the top pre-order for both Amazon and Barnes & Noble, is slated to hit shelves on Sunday.

Financial Review

Another Strong Jobs Report

Sinclair Noe — December 4, 2015

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW + 369 = 17,847
SPX + 42 = 2091
NAS + 104 = 5142
10 YR YLD – .05 = 2.28%
OIL – 1.01 = 40.07
GOLD + 25.30 = 1087.90

The economy added 211,000 jobs last month, beating estimates of about 200,000. The unemployment rate held steady at 5% as more workers entered the labor pool. The Labor Force Participation Rate increased in November to 62.5%, from 62.4% in October. The last two months’ jobs numbers were revised higher. The government said 298,000 new jobs were created in October instead of 271,000. September’s gain was raised to 145,000 from 137,000. Over the past 12 months, the economy has added 2.64 million jobs.

Let’s break down jobs by sector: Employment in construction rose by 46,000 in November, with much of the increase occurring in residential specialty trade contractors (+26,000). Over the past year, construction employment has grown by 259,000.

Professional and technical services added 28,000 jobs. Over the year, professional and technical services have added 298,000 jobs.

Health care employment increased by 24,000 over the month, following a large gain in October (+51,000). In November, hospitals added 13,000 jobs. Health care employment has grown by 470,000 over the year.

Employment in food services and drinking places continued to trend up in November (+32,000) and has risen by 374,000 over the year.

Retail trades added 31,000 and has increased by 284,000 over the year.

Mining lost 11,000 jobs; this area includes jobs in oil drilling and support services. Since a recent peak in December 2014, employment in mining has declined by 123,000.

Information lost 12,000 jobs over the month. Within the industry, employment in motion pictures and sound recording decreased by 13,000 in November but has shown little net change over the year.

State and local governments added 8,000 jobs in November, while the federal government added 6,000 jobs.

The past five years of job growth have been in the private sector. Government jobs are still 561,000 below the peak.

The number of persons working part time for economic reasons increased in November. These workers are included in an alternate measure of unemployment known as the U6, which increased to 9.9% from 9.8%.

In November, average hourly earnings for all employees on private non-farm payrolls rose by $.04 cents to $25.25, following a $.09 cent gain in October. Over the year, average hourly earnings have risen by 2.3 percent, falling from a 2.5% pace in October that raised hopes of rising wages in the months ahead. The average workweek for all employees on private non-farm payrolls edged down by 0.1 hour to 34.5 hours in November.

Prepare for liftoff. Unless there is some catastrophe in the next 12 days, the jobs report was strong enough to lock in a Federal Reserve rate increase at the upcoming December 16^th FOMC meeting. This was the last major economic report before the Fed policy meeting, and recent speeches from Fed Chair Janet Yellen and other policymakers leaves little doubt about their intentions.

In yesterday’s testimony to Congress’s Joint Economic Committee, Yellen stated her view that given existing demographics the United States needs to create about 100,000 jobs per month to absorb the natural growth of the labor force. Any job creation above that would be consistent with continued improvement in the labor market, either further cutting the unemployment rate or else drawing new people into the labor force out of the ranks of the discouraged; and that is exactly what we saw in this month’s jobs report – more people entered the work force.

Yellen has not quite come out and said explicitly that 100,000 new jobs is the green light for a December rate hike, but she’s dropped about as many hints as the Fed ever does about the future course of economic policy. When the Fed hikes rates on December 16^th, it will be one of the best communicated rate hikes ever.

There is no question that the labor market has shown improvement. The economy has added jobs for 69 consecutive months, gaining more than 13.7 million jobs. The unemployment rate dropped down to 5% in October and even as more people moved into the labor force in November, the unemployment rate held steady.

This is quite simply a historic time for job growth. And don’t give me the garbage about how you don’t’ believe the numbers. The statistics are imperfect, I grant, but they are the most accurate information available and there is no evidence they have been doctored – none. And this slow, steady, and strong job growth doesn’t fit into many political narratives but you should look at the numbers rather than narratives.

We are now at what the Fed would like to call full employment; that point where everybody who has some job skills and wants a job, can find a job; the point where there are just enough jobs to stimulate growth without pushing inflation above target. The problem is – we’re not there yet. Millions of working age people left the workforce in the downturn and they have not returned. The percentage of the population working was unchanged at 59.3, which is only a tenth of a percentage point higher than it was a year earlier.

The uptick in the participation rate, though small and based on historically low levels, is an encouraging indication of progress for those who had dropped out of the labor force. It suggests that labor-market slack still is greater than the 5% unemployment rate would strictly indicate.

And wages just have not been growing, which means no wage push inflation. For many people, a pay increase only comes with a second, or third job. So, we’re not yet at the point where demand pushes economic growth. The economy can probably add millions more jobs and the unemployment rate could drop to about 4% before we really see full employment.

Yesterday, Yellen said, “I think we’ve seen some welcome hints” of wage increases, but she cautioned, “it’s tentative evidence; we don’t know if it will last.”

Meanwhile the European Central Bank cut interest rates yesterday and extended their quantitative easing program. The Bank of Japan recently added more stimulus to prop up their economy. The divergence has resulted in a stronger dollar which hurts US exports, as seen in a separate report today showing the U.S. trade deficit widened in October as exports fell to a three-year low, suggesting that trade could again weigh on economic growth in the fourth quarter. The Commerce Department said the trade gap rose 3.4 percent to $43.9 billion, a sign that the worst of the drag from a stronger dollar was far from over. September’s trade deficit was revised up to $42.5 billion from the previously reported $40.8 billion.

The blowout year for mergers and acquisitions just keeps getting bigger. According to Dealogic, global M&A volume just soared to $4.3 trillion, pushing 2015 to date ahead of 2007’s total, when the previous record of $4.29 trillion of mergers was struck. U.S. targeted M&A volume hit a record high in September and currently stands above $2 trillion for the first time ever. What’s driving the deal making? Cheap debt, which might change if the Fed hikes rates.

Uber is raising more money, and the new valuation will make it larger than 80% of the S&P 500 stocks, including old, established names like Dow Chemical, BlackRock, and Netflix. Bloomberg reports the car-booking startup is looking to raise as much as $2.1 billion in a financing round that would give it a valuation of $62.5 billion. Uber has increased actual U.S. gross revenue about 200 percent this year and is profitable in more than 80 cities around the world, and the number of U.S. trips completed this year has increased 250 percent compared with the same period last year.

So, why is the Fed on a near-certain track to raise interest rates? Normally Wall Street reacts badly to the prospect of rate hikes, but today’s triple digit rally in the Dow Industrials and the NASDAQ Comp, are just an indication that a Fed rate hike has been baked into the cake and the strong jobs numbers really are an indication of a stronger economy, which should be reflected with higher valuations.

The Fed’s easy money policies have driven Wall Street for the past 7 years, and there has to be some concern that if the Fed takes the punchbowl away, the party might be over. But that might be part of the reason why the Fed is no longer willing to keep monetary policy at the emergency levels of 2008. The Fed has to be concerned that an overabundance of free money is spoiling corporate America, resulting in unicorn valuations. We know how that story ends and it is ugly. The thinking is that it is better to tap on the brakes now, even though the economy is growing slowly, rather than waiting for the economy to go much faster and slam on the brakes, only to swerve into the ditch, again.

Also, remember the exhortations of Former Fed chair Bernanke, repeated by current Fed chair Yellen, that there is only so much we should expect from monetary policy. Economic growth must be supported by fiscal policy. The House and Senate have taken a concrete step toward reviving the Export-Import Bank, by voting to renew the bank’s funding as part of a five-year highway and transportation construction measure. Obama signed the bill into law today, hours before current funding was scheduled to run out. The highway bill is a good example of fiscal policy adding to economic growth; spending on infrastructure is an investment that pays dividends in jobs and increased productivity, and taking on infrastructure projects while rates are still low just makes sense.

But today’s jobs report signals that rates won’t stay low for long. And that means higher mortgage rates, higher credit for auto loans and credit cards, and all manner of debt. And it is coming sooner rather than later.

Financial Review

April Jobs Report in Moderation

Sinclair Noe — May 8, 2015

 

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW + 267 = 18,191
SPX + 28 = 2116
NAS + 58 = 5003
10 YR YLD – .03 = 2.15%
OIL + .49 = 59.43
GOLD + 5.00 = 1187.20
SILV + .13 = 16.43

The economy added 223,000 new jobs in April. The unemployment rate dropped to 5.4% from 5.5% to mark the lowest level since mid-2008. The results were fairly close to estimates. Not too much, not too little. Wall Street actually liked the “Goldilocks” report and the Dow jumped to triple digit gains; the bond market, which is usually only happy when it rains saw strong initial selling, but then pushed bond yields slightly lower, and the dollar spiked briefly then held near lower levels. Once again we are reminded that the jobs report is probably the single most important economic report to follow because it affects almost everything else in the economy.

The number of jobs added in March was revised down to 85,000 from 126,000, reflecting the smallest increase in almost three years. The February jobs report was revised higher by 2,000 from 264,000 to 266,000. Payrolls for February and March were revised down by a combined 39,000. Typically, revisions add to prior months numbers. In 2014, for example, the government upgraded every monthly employment report except for one to show stronger job creation that originally estimated. The past three months have delivered average job gains of just over 191,000 jobs per month. That’s down from last year’s 260,000 average, but still decent. Another consideration: more people are hired in April than any other month of the year if seasonal adjustments are thrown out. And the number of jobs created in April with seasonal adjustments has exceeded the annual average in seven of the past 10 years.

By the way, revisions are to be expected. The Bureau of Labor Statistics’ monthly Employment Situation presents numbers compiled from two data sources: the payroll records of some 143,000 businesses and a telephone survey of about 60,000 households. The numbers are then seasonally adjusted. And over the next two months, the BLS revises the numbers “to incorporate additional sample reports and recalculated adjustment factors,” which can easily lead to big shifts in the data. It doesn’t mean the data is wrong, it just means that it is an almost impossible task to count all jobs every month with absolute accuracy, and this is a more or less accurate measure.

The average wage of American workers rose by 3 cents to $24.87 an hour in April, or a 0.1% increase. The increase means wages in the past 12 months have risen at a 2.2% rate. The amount of time people worked each week was unchanged at 34.5 hours. Workers are getting slightly higher wages on average, but the typical worker doesn’t feel any richer after taking inflation into account. Anemic wage growth has been one of the disappointing themes of the post-financial crisis recovery.

Last week we saw a report showing a big 0.7% Q1 jump in the employment cost index, and that had some people suggesting that the US economy has gone “beyond full employment.” Today’s numbers don’t show hardly any wage pressure. Despite the best year for hiring in more than a decade, the share of the nation’s income going to workers remains near an all-time low. You need strong wage increases to create a wage/price spiral, and the 0.1% increase in hourly wages wasn’t strong. One side note: the April report looks only at hourly wages, and not the wages of salaried workers.

Worker productivity slipped in the first quarter while labor costs surged, according to a Labor Department report Wednesday. The report marked only the third time in 25 years that productivity has suffered back-to-back quarterly declines. Lower productivity is usually a negative for the economy because it suggests that workers are becoming less efficient. It might also reflect weak capital expenditures by businesses.

Private sector jobs grew by 213,000, and the government sector added 10,000. Professional and business services added 62,000 jobs, health services added 61,000; mining and logging, which includes oil exploration and drilling, lost 15,000 jobs – reflecting ongoing weakness due to lower oil prices. Manufacturing employment was flat, reflecting the lingering effects of a stronger dollar that has curbed the sale of U.S. exports by making American goods and services more expensive.

Construction added 45,000 – construction jobs are a particularly positive sign of economic growth, but it might just be a sign of pent-up demand following a harsh winter. Home sales staged a big comeback in March, a possible sign that more Americans are eager to make expensive purchases. People bought existing homes at an annual pace of 5.19 million. The National Association of Realtors said those gains are expected to extend into April based on figures on signed contracts released by the Realtors. This could help spur additional growth in the construction sector as builders seek to meet demand. The combined employment in residential building construction and housing-related specialty trades posted the biggest advance since January 2006.

Among the major worker groups, the unemployment rate for Asians increased to 4.4 percent. The rates for adult men (5.0 percent), adult women (4.9 percent), teenagers (17.1 percent), whites (4.7 percent), blacks (9.6 percent), and Hispanics (6.9 percent) showed little or no change in April.

The rapid gains in employment over the past year, however, still have not made a huge dent in the number of people forced to work part time or those who have been unemployed for longer than six months. Some 6.6 million Americans can only find part-time jobs and while that is historically high, it is down from a peak of 9.2 million in 2010. Total employment is up 3 million from the peak and up 11.7 million from the employment recession low. Still, 2.5 million have been out of work for at last half a year. And there are about 15 million unemployed Americans who say they would like a job, even though they might not be actively looking.

The BLS has six measures of unemployment, numbered U-1 through U-6. U-3 sits in the middle and is the official rate. But U-3 leaves out a few sizable groups, “discouraged workers,” “marginally attached” and “part time for economic reasons.” Broadly speaking, this is a group that’s working either intermittently, or not at all and not even looking. The U-6 captures all those folks, and is the broadest measure of unemployment. It hit 10.8% in April, down from 10.9% a month ago and 12.3% a year ago. Think about how different our national conversation would be right now if we were talking about a 10% unemployment rate instead of a 5% rate.

The Labor Force Participation Rate increased 0.1% in April to 62.8%. This is the percentage of the working age population in the labor force. The higher number would indicate that more people are looking for work, or at least that employers are cutting fewer and fewer jobs. A large portion of the recent decline in the participation rate is due to demographics, as the boomer generation moves into retirement. The four-week average of the number of Americans applying for unemployment benefits fell to 279,500 last week, the lowest level in 15 years, according to the Labor Department. This figure tends to anticipate stronger hiring, though it’s possible that companies facing uncertainty are refraining from layoffs while delaying hiring until they get a better sense of the economy.

The unemployment rate and the Labor Force Participation Rate only tell part of the story, so we look to a subset, the participation rate and employment population ratio for people age 25-54, the prime working years. The 25 to 54 participation rate increased in April to 81.0%, and the 25 to 54 employment population ratio was unchanged at 77.2%; that’s still lower than it was at the lowest point of the previous two U.S. recessions.

All investment questions these days seem to revolve around when the Federal Reserve will raise interest rates, the April report didn’t provide any clear answers. The rebound in the April job report gives the Federal Reserve the green light to raise interest rates later this year, but no reason to rush. The data gives support to the consensus view at the Fed that weak first-quarter growth was an aberration, a blip in an otherwise decent economy. The unemployment rate at 5.4% is now closing in on the 5% rate, which many Fed officials consider consistent with full employment. Even without wages or inflation picking up, Fed policymakers will feel uncomfortable with rates sitting at zero as the unemployment rate closes in on 5 percent.

And what today’s report shows is that the economy is plodding along to recovery, slowly and consistently. It wasn’t a great report today, but it did not confirm the weakness of the March report, either. This slow improvement means the Fed can take their time before raising rates because the economy is not likely to get super-heated. So, forget about a rate increase in June, there is no need.

Many economist now think a September rate hike is possible. Fed policy makers have said some of the headwinds holding back the US will probably fade and give way to “moderate” growth; they have also said they will be data dependent; they have also indicated that it might be better to actually see the economy reach full employment before taking action – no need for a premature rate hike that might choke off growth.

Traders who use futures contracts to bet on the timing and pace of Fed rate hikes are wagering that the central bank will not move until December. Odds implied by Fed Fund futures show investors seeing a mere 7% chance the Fed raises rate in July, from 10% ahead of the jobs report. September odds slip to 22% from 27%. October odds down to 38% from 45%, and December odds to 55% from 62%. And a positive response from stock traders today says they don’t’ think today’s jobs report was strong enough to warrant quick response from the Fed. Of course, a lot can happen between now and then.

Financial Review

Groping Along

Sinclair Noe — March 30, 2015

 

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DOW + 263 = 17,976
SPX + 25 = 2086
NAS + 56 = 4947
10 YR YLD + .01 = 1.96%
OIL – .19 = 48.68
GOLD – 13.40 = 1186.00
SILV – .28 = 16.79

The Commerce Department reports consumer spending rose just 0.1% in February; that follows a decline in January. The small increase in spending in February and outright decline in January suggest the economy failed in early 2015 to match the pace of growth at the end of last year. Gross domestic product is forecast to expand just 1.4% in the first quarter, down from 2.2% in the fourth quarter and 5% in the third quarter. Part of the problem might be harsh winter weather; if that is the case, we might expect a rebound in consumer spending in the spring.

Or maybe the American consumer is tired of spending, and is actually starting to save. The saving rate jumped in February to 5.8 percent, the highest since December 2012 and up from 4.4 percent just three months earlier. The savings rate slumped to as low as 1.9 percent in the run-up to the recession, a sign too many Americans were spending beyond their means. Since then, consumers have been trying to clean up their finances.

The National Association of Realtors said its pending-home-sales index rose 3.1% to 106.9 after a downward revision to January’s numbers. Total existing-homes sales in 2015 are forecast to be around 5.25 million, an increase of 6.4%, and the national median existing-home price is expected to increase around 5.6%.

The Commerce Department released the personal consumption expenditures price index, or PCE index, for February. It was up 0.3% for the past 12 months. The PCE is the Federal Reserve’s preferred measure of inflation. The oil price crash, a strong dollar and weak overseas economies have all kept inflation at bay. Some slack in the economy may also be keeping prices muted, but even after taking out food and energy, inflation came in at 1.4%, up very slightly from 1.3% in January. So, inflation is still well short of the 2% target established by the Federal Reserve. And we know the Fed has lowered its target for the unemployment rate to around 5%. We also know that the targets are not firm.

Full employment is that point where most people can find jobs and where the unemployment rate has dropped low enough where it just starts to spark inflation. Former Federal Reserve chairman Ben Bernanke gave a speech and answered questions today at Johns Hopkins. Bernanke said he doesn’t know where the so-called full-employment level is now, saying the Fed “is in some sense groping” to determine it.

One reason why it is difficult to determine full employment is because wages have been stuck in the mud; so, even as people have found jobs, their wages haven’t been enough to kick start inflation. Many of the jobs lost during the downturn were good paying jobs that were replaced in the recovery with lower paying jobs or part-time work. So, when it comes to pinpointing the full employment number, Bernanke says: “Nobody really knows that number with any precision,” adding, “and the Fed will continue to grope to find out what the right number is.”

In addition to a speech, today also marks the first day of Ben Bernanke’s blog. His first post dealt with why the Fed has kept rates artificially low for a long time and hurt savers. Of course, the simple answer is that rising rates would slow the economy at a time when the economy was not yet recovered from a massive downturn; and in that regard, the economy determines rates more than the Fed. What Bernanke didn’t really address is how lower rates pushed investors to chase yield, pushing them into the stock market, and what the effect of higher rates might be on the equity market.

Still, what was also important about the Bernanke blog was why he chose this topic for his first blog post. It almost seems he is trying to get us ready for a Fed rate hike. Dam the torpedoes, higher rates ahead. But it doesn’t look like the bond market is paying attention. Rates remain low despite the Fed warnings that they want to hike rates at some point this year. It looks like the setup for a letdown.

The big economic report this week is the jobs report.  U.S. exchanges will be closed on April 3 in observance of Good Friday, the day when the government releases its official employment report for March. Good Friday isn’t a federal holiday. It’s expected that the economy added about 255,000 net new jobs in March.

The pace of first-quarter profit warnings from S&P 500 companies is running slightly ahead of the same time a year ago, and well ahead of the five-year average. Ahead of the start of earnings reporting season, which unofficially kicks off when Alcoa reports results on April 8, about 84% of the companies that have provided first-quarter outlooks gave negative outlooks. That’s above the 81% that warned for the first quarter of 2014, and higher than the five-year average of 68%. Many of the companies blamed the negative effects of currency movements, lower commodity prices or both, for the negative pre-announcements.

Meanwhile, revenues of S&P 500 companies are expected to decline 2.8% in the first quarter from a year ago, which would mark the worst year-to-year drop since the third quarter of 2009. One sector is holding up well, healthcare is expected to see revenue growth of 9.1%. The energy sector, however, more than makes up for it. The average price of oil in Q1, at $48.65 a barrel, had been cut in half from a year ago ($98.56). So revenues are expected to plunge 38%. And earnings for the energy sector are expected to drop 64%.

But it’s not just the energy sector. Expect declining earnings for utilities, materials, telecom services, consumer staples, and IT. Look for possible earnings growth in consumer discretionary, financials, and healthcare. Oil & gas companies are blaming the oil bust for the collapse of their revenues and earnings. The rest of the companies are blaming the strong dollar in near unison. But ironically, they’re not pointing at the strong dollar and at oil as a force in lowering costs. Cost reductions are the result of superior management; sales and earnings declines are the fault of the strong dollar.

And of course, there will be a spillover effect into the second quarter; in fact revenues are expected to drop even more; down 3.1%, compared to first quarter declines of 2.8%. And earnings, after the decline of 4.6% in Q1, are expected to fall 1.8% in Q2, down from of an estimated growth of 4.2% and 5.3% respectively at the beginning of the year. Of course, part of this is ongoing game of ratcheting down expectations, only to beat expectations when earnings are reported, but more and more it looks like the economy might not be as strong it is sometimes portrayed.

Chinese stocks took off today after policy makers signaled the country had capacity to ease monetary policy and boost sluggish growth. Policymakers with the People’s Bank of China said that China’s policy makers had to be “vigilant” against the risk of disinflation and suggested that the nation had “room to act.” China’s central bank has already taken a series of easing steps since November, cutting interest rates twice and slashing banks’ reserve requirements.

Greece’s biggest creditor, Germany said this morning that the euro zone would give Athens no further financial aid until it has a more detailed list of reforms and some are enacted into law. Greece submitted a list of reforms on Friday. Greek Prime Minister Alex Tsipras spoke to the Greek parliament today; he said that Greece’s list of “short-term measures” to creditors included curbing fuel and tobacco smuggling, checks on bank transfers and fighting sales tax fraud. He said, “It’s time for the ‘haves’ to start paying and for the looting of the middle class and salaried workers to stop.” In the negotiations with the creditors, he said, “We are seeking an honorable compromise with our partners, but do not expect an unconditional surrender.”

A renewed Eurozone crisis poses the biggest risk to the global economy, according to a Fitch Ratings poll at its March sovereign credit briefing in Hong Kong and Singapore. The report showed that 41% of the respondents in Hong Kong and 45% in Singapore pointed to fresh Eurozone instability as the most likely thing to derail the global economic recovery. Whether by design or due to the combination of Greece submitting a lot of not-fully-fleshed out reforms right before the Easter holiday, it looks like Greece stays in the sweatbox for the next two weeks.

Monday is for mergers. Typically, the final details of a merger get worked out over a weekend and the announcement comes on a Monday. We had a boatload of deals announced this morning.

UnitedHealth Group announced plans to buy Catamaran Corp., the fourth-largest pharmacy-benefit manager in a$12.8 billion deal.

Teva Pharmaceutical Industries is acquiring Auspex Pharmaceuticals in a deal valued at $3.2 billion

Horizon Pharma said it planned on purchasing the pharma company Hyperion Therapeutics for $955 million, in cash and debt commitments.

Switzerland’s Dufry has agreed to buy airport tax and duty free seller World Duty Free in a deal that values the latter at about $3.9B, including debt. Dufry will pay about $1.5 billion for the Italian Benetton family’s 50.1% stake in the airport retailer. The deal is the second high-profile foreign takeover of an Italian company in less than a week after ChemChina bought a majority stake in tire maker Pirelli last Sunday.

In Asia’s biggest block deal this year, Chevron has sold its entire stake in Caltex Australia, the country’s biggest refiner, for$3.7 billion.