All posts by joel

May Employment Report

KEY DATA: Payrolls: +280,000; Private Sector: +262,000; Revisions: +32,000; Unemployment Rate: 5.5% (up 0.1 percentage point); Hourly Wages: 0.3%

IN A NUTSHELL: “It’s time the Fed faces the reality that businesses aren’t hiring lots of workers because the economy is weak.”

WHAT IT MEANS: The soft economy was then; a much better economy is now. It really looks like temporary factors slowed first quarter growth. Nothing says “good economy” more that strong job growth and that is precisely what we got in May. Indeed, the details of the report were almost universally good. On the payroll side, job increases were pretty much across the board. About the only real weakness was due to the problems in the oil patch. Between direct cut backs in mining and indirectly through reductions in manufacturing industries such as fabricated metals and machinery, the energy sector caused payrolls to fall by over 20,000 workers. With oil prices having rebounded somewhat, those cuts should fade. Meanwhile, the services sector is hiring like there is no tomorrow. Temporary help companies are seeing more business and that may be due to the inability of firms to find suitable workers. Even the government is back in the job creation business and not all of the gains were in education.

On the unemployment side of the report, the modest uptick in the unemployment rate can be discounted. In April, the rate was 5.44%. In May, it was 5.50%. An increase that small is not significant. More importantly, the labor force rose solidly and the labor force participation rate increased. Over the year, the participation rate has actually gone up, so it is hard to argue the 0.8 percentage point drop in the unemployment rate over the year is anything but real.

On the wage side, a portion of the report that the Fed members have been paying close attention to, average hourly wages rose solidly and are now up 2.3% over the year. That is nothing spectacular, but it is accelerating, which is what the Fed wants to see. With aggregate hours increasing sharply, it looks like May personal income will be up big-time.

MARKETS AND FED POLICY IMPLICATIONS: One month of strong job gains doesn’t make the Fed hike in June, but it sure does raise the ante of a move sometime soon. The Fed members believe that they need some cover to raise rates even though most of them feel that they have overstayed their welcome at 0%. With job growth coming back and wages and total compensation on the rise, the conditions are nearly in place for the long-anticipated start of the process of rate normalization. I suspect the FOMC will note in the June 16-17 statement that it would like to see some confirmation of the improving growth. We get another jobs report before the July 28-29 meeting and given that the three-month average of 207,000 jobs created is probably below trend, don’t be surprised if the June report is strong as well. That would put pressure on the members to begin tightening right away. Chair Yellen said she would not be limited by the press conference schedule (there is none set for July), but it is likely she would want to face the press.   A September hike looks to be in the cards.

May Challenger Layoff Estimates and Weekly jobless Claims

KEY DATA: Layoffs: down 20,548/ Claims: down 8,000

IN A NUTSHELL: “The turnaround in oil prices is also turning around the labor market data as layoffs are declining.”

WHAT IT MEANS: Tomorrow is Employment Friday, so any labor market data will be swamped once the numbers are released, but you can get some insight into the pressures that are developing by looking at things other than the unemployment rate. The latest employment numbers point to further tightening in the labor market. Layoff announcements had been soaring as the oil patch started drying up. To put things in perspective, Challenger, Gray and Christmas reported that for the first four months of this year, layoff notices rose by a little over 28,000 from the same period last year. Meanwhile, the energy sector’s announcements rose by nearly 57,000. About 30% of all layoffs were in Texas. In other words, except for the energy firms have been holding tightly to their workers. With the rise in oil prices, energy sector layoffs have largely stopped – and so have overall layoff announcements.

Despite the weaknesses in energy and related industries, jobless claims have been low and they stayed down. Keep in mind, layoff announcements don’t necessarily become layoffs. The rise in energy prices may reduce actual payroll cut backs. Jobless claims declined last week and the level remains so low that payroll gains are highly likely to accelerate as we go forward.

MARKETS AND FED POLICY IMPLICATIONS: Payroll cuts in mining and machinery (support industry for the energy sector) totaled 20,000 in April and there still was a 223,000 rise in total employment. Don’t be surprised if in tomorrow’s employment report, we see a lot smaller job loss in those two industries. That should help drive the total gain to well above what we saw last month. The Fed will be watching the employment report closely, not just when it comes to employment but also what is happening with wages. But the hourly wage number doesn’t account for lots of other, more imaginative ways businesses are compensating employees. When you consider total compensation, it is clear that the upward trend is accelerating. In today’s revised first quarter productivity report, inflation-adjusted compensation per hour soared at a 6.5% rate over the quarter and was up a decent 2.2% over they year. Labor costs are reflecting the tight labor market and if hourly wages in the employment report doesn’t reflect that yet, we should be asking if we should even follow that number. For businesses, it’s all about total compensation and that is what we need to watch. If investors are focusing on the right numbers, they will have to start thinking that Fed has all the ammunition needed to start doing what the members really want to do: Raise rates.

May ADP Jobs Estimate and April Trade Deficit

KEY DATA: ADP: 201,000; Services: 192,000/ Trade Deficit: $40.9 billion ($9.7 billion narrower)/ May Vehicle Sales: 17.8 million units annualized (up 1.4 million units annualized)

IN A NUTSHELL: “Moderate job growth continues and with the trade deficit narrowing sharply and vehicle sales soaring, it looks like we could have a really good second quarter growth number.”

WHAT IT MEANS: Maybe the economy really is as strong as I think. Yesterday, we got the May vehicle sales numbers and they were the strongest in nearly a decade. We are talking housing bubble peak time here. And with gasoline prices down, people are buying bigger, gas-guzzlers again, so the May retail sales report should be really good. Today, ADP released its estimate of private sector job growth in May and it was solid, though nothing spectacular. However, the slide in job growth looks to be over. A positive sign was that payroll gains in the services component of the economy were pretty good. This is the largest portion of the economy and if the hiring reflects improving sales, then that too points to better consumption numbers. There were some concerns raised by the report. Large firms just don’t seem to be hiring. Strong additions to payrolls had helped create the robust jobs numbers we had been getting, so the moderation in hiring in this sector is a warning that we shouldn’t expect Friday’s government payroll increase to be huge. In addition, manufacturing remains soft, but the recent Supply Managers’ numbers seem to indicate that may be changing.

One of the major reasons the economy contracted in the first quarter was a widening in the trade deficit. That too seems to be in the past. The trade deficit, which everyone thought had soared because of the West Coast port strike, narrowed sharply in April. Exports expanded while imports fell. That is good news. Where we go from here is unclear, but the March deficit was so out of whack that it is likely that trade could be largely a nonevent in the second quarter GDP report. When you consider that trade reduced growth in the first quarter by nearly two percentage points, it is clear that the expected economic rebound should be pretty sharp.

MARKETS AND FED POLICY IMPLICATIONS: For an extended period, we had been getting disappointing economic numbers. That is changing, which is exactly what most economists had expected. If the winter, the dock strike and the collapse of petroleum prices were the causes of the slowdown, then the warmer weather, the end of the dock strike and the rise in oil prices should reverse the decline. They have. Friday we get the May employment numbers and it looks like an increase at least as great, if not higher than the 223,000 we saw in April is likely. I think it will be at least 250,000, but I have been too optimistic lately so that is a warning. The unemployment rate is likely to remain at 5.4% or even decline and the number of underemployed should come down as well. Those results would signal a further tightening in the labor market. Fed members have been somewhat dour about the condition of the economy. But the Fed has been behind the curve, when it comes to the economy, for decades and there is no reason to think that has changed. As for the markets, these data show a stronger than perceived economy but with employment Friday coming up, the reaction should be muted.

April Consumer Spending, Income and Construction and May Supply Managers’ Manufacturing Index

KEY DATA: Consumption: 0%; Income: +0.4%/ ISM (Manufacturing): +1.3 points; Orders: +2.3 points; Employment: +3.4 points/ Construction: +2.2%;

IN A NUTSHELL: “Despite continuing consumer cautiousness, the manufacturing sector is pulling out of its winter hibernation.”

WHAT IT MEANS: To spend or not to spend, that seems to be the question that is puzzling households right now. It is not as if they don’t have the money. Disposable (after tax) personal income rose solidly in April, even after adjusting for inflation. On a year-over-year basis, real income has grown by 2.4% or more for the past six months, the best stretch since 2006. In April, that increase was 3.5%, which is pretty decent. I am not saying that income growth is great, but it is no longer weak. The problem, though, is that wage gains have not been spectacular and workers have decided to save much of the gain. The savings rate rose to 5.6% and has averaged 5.4% this year. That is about one percentage point higher than during the expansion in the 2000s, which helps explain the sluggish nature of growth. In April, spending was essentially flat. A sharp drop in durable goods consumption and small decline in nondurable purchases offset a modest rise in services demand. We get May vehicle sales tomorrow so we will know if the sluggishness in that segment of the economy continued or, as expected, has turned around.

One sector that looks to have picked up some steam is manufacturing. The Institute for Supply Management’s May manufacturing index rose nicely and for all the right reasons: Orders rose strongly, hiring picked up solidly and order books started filling again. Production grew at a slower pace, but it is still expanding decently. The increasing demand and backlogs should lead to a rise in output soon. Fourteen of eighteen industries expanded and only one, petroleum and coal, said that orders fell. In other words, we are looking at a broad based improvement.

Another sign that the economic lethargy we saw in the first quarter is fading was a sharp rise in construction activity in April. Public and private, residential and nonresidential, all posted strong increases. It looks like the huge decline in energy sector spending may have ended.

MARKETS AND FED POLICY IMPLICATIONS: Incomes are growing, the manufacturing sector is coming back and construction is on the rise, so why am I not enthused about today’s data? Because we continue to see consumers holding back. Second quarter consumption growth is not off to a great start and we need a major pick up in shopping if growth is to beat expectations. The May vehicle sales numbers will be one sign, but until households get back online and start visiting the malls, economic growth will remain subdued. I still hold out hope we will get stronger growth but I am not sure many others share that belief. Investors have to start realizing that it is a robust economy, even if that means higher interest rates, which will support higher equity prices. I am not sure many share that view either.

Revised First Quarter GDP Growth and Corporate Profits

KEY DATA: GDP: -0.7% (down from +0.2%); Profits: -8.7%

IN A NUTSHELL: “The winter, a dock strike, lower energy prices and a strong dollar combined to hurt growth.”

WHAT IT MEANS: Oh, my, the economy contracted in the first quarter. Get out the towels for all those crocodile tears that I am shedding. Yes, my sarcasm has reached new heights. As it was in 2014, first quarter growth was negative. It wasn’t a big deal last year and it isn’t a big deal now. The biggest reason for the negative number was a widening in the trade deficit that subtracted nearly two percentage points from growth. The ending of the dock strike led to a sharp increase in imports and the strong dollar hurt some sales. The dock strike’s impacts are fading and the dollar seems to have largely peaked. Don’t be surprised if the April trade deficit, which comes out next Wednesday, is much lower than the huge gap recorded in March. The second big problem was business investment in structures. Lower energy prices led to a collapse in oil patch spending on rigs. But the rising energy prices have largely halted that reduction. The recent durable goods orders report points to rising business investment. Finally, the cold restrained consumer spending. That segment of the economy remains somewhat uncertain as the latest retail sales numbers were unimpressive. Those numbers, though, don’t include services, which just happens to account for nearly 40% of the economy. Services demand was solid in the first quarter. Also, the “softness” in vehicle sales is hardly supported by the positive comments coming out of the vehicle makers. May sales come out early next week and I suspect they too will point to improving household demand. Interestingly, the income side of the ledger actually posted a 1.4% rise, so maybe things really weren’t that bad in the first part of this year. Inflation remains in check.

Corporate profits tanked, also not a major surprise. The strong dollar in the first part of the year affected sales and currency translations.

MARKETS AND FED POLICY IMPLICATIONS: There are all sorts of issues with the first quarter GDP numbers that have been highlighted recently. It seems the economy is always weaker to start the year, for whatever reason that may be. It could be seasonal adjustment issues or measurement issues or whatever, but this has been a pattern for quite some time and the Bureau of Economic Affairs is trying to figure out why. That said, the real issue for the Fed, interest rates and the equity markets is where do we go from here. Recent data point to the economy picking up steam and next week we get May vehicle sales and job growth and April consumer spending and trade deficit. Most of those could be pretty good and that would change the thinking about the state of the economy. Basically, if you don’t like the economic numbers, wait a week and they will change. The decline in first quarter activity happened last year and the economy was strong for the final three quarters and I would not be surprised if a similar pattern was repeated this year.

April Durable Goods Orders and May Consumer Confidence

KEY DATA: Orders: -0.5%; Excluding Aircraft: +0.1%; Capital Spending: +1%/ Confidence: +1.1 points: Present Conditions: +3 points: Expectations: -0.2 point

IN A NUTSHELL: “You know how business were supposedly no longer investing? Well forgeddaboutit!”

WHAT IT MEANS: If the Fed is data driven, then it must have been driven crazy by the weak data we got for several months. That is no longer the case. Now I am not saying that conditions have started to boom, but they are getting better. A clear sign that companies are once again moving forward comes from the April durable goods orders report. Yes, overall demand fell, but since aircraft orders are in this number, it is crucial to remove them. Basically, there is a long lag time between when Boeing or other civilian or defense aircraft companies get new orders and production ramps up – if it even does. Excluding aircraft, orders were up, though modestly. The details were somewhat mixed. Demand for metals, machinery and vehicles was up while orders for electrical equipment, computers and communications equipment fell. But the real story was in the capital goods category. Excluding defense and aircraft, the best measure of private sector investment activity, capital spending jumped for the second consecutive month. It appears that businesses are getting more confident about the future.

Problems remain in the oil patch and the Dallas Fed’s manufacturing index declined in May. However, there was a rebound in expectations, which may be following the price of oil. Cut backs in energy companies have been a key factor in the recent slowdown and any turnaround would be good news.

The winter weather and continued disappointing wage increases had put a lid on consumer sentiment, which is why the rise in the Conference Board’s Consumer Confidence Index was nice to see. It wasn’t a large increase, but maybe the decline is over. While views about current conditions improved, there was some slippage in the outlook for the future. With the attitude toward future labor market conditions brightening, that too could reverse itself soon.

MARKETS AND FED POLICY IMPLICATIONS: The foundation for the first Fed rate hike is being built one number at a time and today’s data, be it the capital goods orders, consumer confidence, new home sales or housing prices, all added to the structure. But the base is going up slowly and the Fed members will need a lot more solid reports before we can assume they will move. Next week we get April spending and income data, May supply managers’ numbers, job openings and help wanted reports. And most importantly, the next employment release is Friday, June 5th. A lot can happen in ten days so buckle up. Indeed, I suspect investors will get more and more worried as we approach the jobs numbers. Nothing would change views on when the Fed will hike rates first than a strong report. Right now, I am not sure the markets are prepared for one and given the frequency of large swings in the payroll growth data, that cannot be ruled out.

April New Home Sales and March Housing Prices

KEY DATA: Sales: +6.8%; Median Prices: +8.3%/ Case-Shiller National Prices (Year-over-Year): +4.1%/ FHFA Home Prices (Year-over-Year): +5.2%

IN A NUTSHELL: “Housing market demand is continuing to improve and a lack of supply is helping drive up prices.”

WHAT IT MEANS: The wicked winter’s woes seem to have faded at least when it comes to the housing market. New Home sales rebounded from a strange collapse in March as demand soared in the Midwest and rose solidly in the South. But the improvement was not across the nation as there was a modest downdraft in the West and the Northeast remained in the doldrums. Indeed, while demand for the first four months of the year compared to the same period in 2014 was up by anywhere from 12% to 43% in the rest of the nation, it was down by 24% in the Northeast. I am so glad that is where I live. Prices also increased solidly, but firming sales were only part of the story. Supply is not rising and the inventory of new homes for sale has been largely flat for most of this year. That contributed to a jump in home prices. Hopefully, the higher prices will convince builders to dig a little more. There has been an interesting pattern in the distribution of sales: They seem to be centering more on middle-level homes, those in the $200,000 to $500,000 range. Over 68% of the homes are sold so far this year have been in that range compared to only 63% last year. Most of the increase has come from the lower-priced segment, which is good news for developers.

There are other signs that home prices are rising solidly. The S&P/Case-Shiller Home Price National Index was up solidly in March, as was the more closely-watched 20-City Index. (I prefer the national number as it brings into play a lot of smaller metropolitan areas. And any index that doesn’t include Philadelphia should be dismissed anyway!) More seriously, in March, every one of the twenty cities seasonally adjusted indices was up. A similar result was seen in the Federal Housing Finance Agency’s (FHFA) House Price Index. In March 2014, prices increased solidly. Forty-eight states posted gains over the year in the first quarter.

MARKETS AND FED POLICY IMPLICATIONS: As with the weather, the housing market seems to be heating up. This sector had been pointed to as an indicator of the softening of economic activity, but that is not longer the case. But what we really need to see is the higher prices inducing builders to actually build more homes. That would accelerate growth and provide some comfort to the Fed, which really does want to raise rates. Fed Chair Yellen made that clear last week when she commented that a rate hike this year was still likely. And as I have said before, rising rates could accelerate the recovery in the housing market, at least for a while, as it would force lackadaisical buyers to actually make decisions. Investors will likely see this as pointing to improving but not soaring growth. Keep in mind, new home sales need to nearly double before we get to robust levels, so the sector still has a lot of improvement left in it.

April Consumer Prices and Real Earnings

KEY DATA: CPI: +0.1%; Excluding Food and Energy: +0.3%/ Real Earnings: 0.0%; Year-over-Year: +2.3%

IN A NUTSHELL: “The only downward price pressures were in food and energy and gasoline prices have already turned, so all that is left is food.”

WHAT IT MEANS: Inflation has been a non-starter for a long time but it seems to be starting up again. The Consumer Price Index rose modestly in April, but the details tell a different story. About the only places where prices declined were in energy, including gasoline, and airline fares. I don’t know where the government gets its airline fares from but I haven’t seen any declines in my travels. As for energy, we all know that prices at the pump have jumped and the decline in natural gas costs also seems to be over. So, expect a strong rise in this component next month. Food prices were flat, but there are contradictory factors at work in this sector. Imported food costs are down but avian flu is driving up egg prices. Food may continue to restrain the overall index for a while, but not by much. As for other categories, the cost of services continues to rise solidly, led by shelter and medical care expenses. Those two categories make up almost 40% of the index and there is every reason to think that solid increases will be sustained. Vehicle prices are also rising and with demand solid, that should continue as well.

The modest rise in overall consumer prices kept worker incomes, adjusted for inflation, from falling in April. Over the year, incomes are up decently and the gains are slowly accelerating. That is good but not great news for workers.

MARKETS AND FED POLICY IMPLICATIONS: While inflation is not a major concern, the pattern of prices is changing. It used to be hard to find any category where costs were going up but now the opposite is true: Most categories are posting increases.   Inflation is rising in the services component and only some commodity price declines are keeping consumer prices from rising more strongly. This report is decent enough that the Fed doesn’t have to say that inflation is too low anymore. Of course, it is the Personal Consumption Expenditure deflator, not the Consumer Price Index that the Fed watches, and that is running a little cooler. But they trend together, so don’t be surprised if the Fed’s benchmark inflation index also shows an upward trend. Basically, inflation is neither holding the Fed back from moving nor pushing it to hike rates, which in my mind, reduces the barrier to a rate hike. If you approach the Fed’s thinking as being biased toward a move, then this report keeps a rate hike in play. Whether investors will see it that way is anyone’s guess. It is the day before the Memorial Day weekend and if the lack of traffic going into Philadelphia this morning is any indicator, people have already headed out. I hope everyone has a good one.

April Existing Home Sales, Leading Indicators and Weekly Jobless Claims

KEY DATA: Sales: -3.3%; Prices (Year-over-Year): +8.9%/ Leading Indicators: +0.7%/ Claims: +10,000

IN A NUTSHELL: “While housing sales are still yo-yoing, an improving economy and rising prices should lead to better activity in the months ahead.”

WHAT IT MEANS: It’s the housing two-step: One month up, the next month down. That said, the market is improving as the trend in demand is up. In April, the National Association of Realtors reported a small drop in existing home sales. But demand did jump in March to the highest rate in eighteen months. One major reason for the failure of sales to rise more consistently is a lack of supply. The inventory of homes for sale did jump, but it is still lower than last April. It is hard to sell homes when product is limited. That may change as prices are surging in almost all regions. The lack of available houses for sale is forcing buyers to bid up prices. While that may seem to be a negative for the market, it is not. As equity increases, more people will be able to move and that will raise supply and increase sales. Also, rising prices, in a manner similar to rising mortgage rates, would force buyers to make decisions more quickly and that too could increase the sales pace.

But maybe the biggest impact on the housing market could come from the economy itself. The Conference Board’s Leading Economic Index surged in April after a strong rise in March. If you believe this measure does portend future activity to at least some extent – and I do – it looks like we are in for strong growth in the months ahead. The Conference Board’s measure of current activity improved, further pointing to an end of winter slump.

Jobless claims rose last week but that is hardly the story. The level remains quite low and the four-week moving average, which smooth’s out the weekly ups and downs, is at historic lows when you adjust for the size of the labor market.

MARKETS AND FED POLICY IMPLICATIONS: We still have not fully recovered from the damage done by the housing bubble and the biggest problem remains home values. You cannot sell your home if you are under water and if you want to buy a new house, you need enough equity to put down on your next home. The worry about rising prices, at least for now, is misplaced. We need higher prices to reduce the biggest impediment to higher sales: Low inventory. Thus, I welcome higher prices. The jump in the leading indicators points to improving activity ahead and the claims numbers show that firms are holding on to their workers as tightly as possible and that combination can only lead to higher wages. The Philadelphia Fed’s May Manufacturing Business Outlook report indicated that to attract workers, nearly half the firms are raising wages. It is not the case for all new workers, but with a majority of the respondents hiring, how they will get those workers without raising salaries is anyone’s guess. Solid job gains and a further rise in wages would be enough to push the Fed to tighten. The members want to get back to a more normal rate structure and the sooner the better.

April Industrial Production

KEY DATA: IP: -0.3%; Manufacturing: 0%; Oil and Gas Well Drilling: -14.5%

IN A NUTSHELL: “The energy sector contraction is slowing things down, but there are other sectors where the economy’s underlying strength is showing through.”

WHAT IT MEANS: No good deed goes unpunished and that is the case with the lower energy prices. The precipitous drop in oil prices has led to a massive reduction in energy sector activity that has yet to be offset by consumers spending their windfall. Nothing shows that more than the April industrial production numbers. Output fell for the fifth consecutive month, led by declines in utilities and mining. Oil and gas drilling is down 46.5% over the year. But there were some solid output gains, especially in durable goods manufacturing. Strong demand led to a ramping up of assembly rates in the vehicle sector. There were also robust increases in the electrical equipment and appliances sector, wood products and minerals. This helped the durable goods segment post a modest rise. But there was weakness in the non-durables component. In addition to energy, the food sector also came in with a large decline. I cannot say for certain, but the growing avian influenza epidemic may be having an impact on that segment of the economy. That offset decent gains in printing and petroleum products. In other words, there were a lot of ups and downs in this report.

Two other releases added to the uncertainty about the economy. Surprisingly, the University of Michigan’s mid-month reading of consumer sentiment dropped sharply. What is totally bizarre is despite some of the lowest jobless claims numbers on record, workers are once again worried about losing their jobs. It used to be that if you looked to your left and someone was gone, you got worried. If you looked to your right and that person was also no longer there, you panicked. Now, even though everyone is still working next to you, people are concerned. A second report, the New York Fed’s Empire State Manufacturing Index, indicated that activity and orders picked up in early May, but the rate of growth was nothing spectacular.

MARKETS AND FED POLICY IMPLICATIONS: Today’s numbers raise the possibility that the expected spring sprint is turning into a slow walk. The economy is growing, but the hangover in the oil patch and consumer uncertainty is keeping activity from expanding at a strong pace. Second quarter growth should be good, but the hopes for a repeat of the over-4% rise posted in the spring of 2014 are becoming dashed. That should keep the Fed on hold at least through June. With the FOMC being data driven and given it is unclear how long the data have to be strong to actually elicit a rate hike, it is hard to rule out any future meeting. But we will have to have strong May and June employment and consumer spending numbers if July is to come into play. That is probably how investors will read today’s data as well.