Labor Market Outlook: Hiring Intentions Hit Record Level

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Includes: DIS, NCLH, NWL, RCL, XLP, XLY
by: Thomas Hughes
Summary

The NFP number was a blow-out but there were hints it would be strong.

Unemployment falls to a new almost-60-year low.

Wages are rising but inflation is low.

All Signs point to consumer-driven economic strength.

We are witnessing the end of the minimum wage, the power is in the hands of the workers.

The Non-Farm Payrolls figure was a blow-out number. At 263,000 it was more than 70,000 above estimates and bolstered by revisions to past data. The previous two months saw a net increase of 16,000 which puts this month's net gain at 279,000. Gains have averaged 169,000 for the past three months, average gains for the past two years are closer to 200,00.

The Unemployment number is also a blow-out, falling 0.2% to 3.6% and a near-60-year low. The unemployment rate is accompanied by a steady labor force participation rate and labor force to population ratio. While both the participation rate and labor to population ratio are down from historic "norms" this isn't a problem and can be attributed to demographic mix. The fact they are holding steady is a sign incoming Millennial-age and previously-discouraged workers are balancing out outgoing/retiring Baby Boomers.

The only bad news is in the wage data and that is more like the data is so good it's bad. Average hourly earnings rose another 0.2% over the last month and are up 3.2% YOY. In terms of the consumer, consumer health, and our consumer-driven economy the news is great. Regarding inflation it's not awesome, 3.2% is well above the FOMC target rate and a burden for businesses, but there are mitigating data.

The First-Quarter Labor Cost and Productivity figures are also outstanding. Labor cost in the quarter fell due to rising productivity. Productivity rose 3.6%, offsetting an increase in hours worked and wages paid, creating a negative effect on labor cost. In this environment not only is wage inflation not affecting input prices, but productivity will also aid corporate profits. At the same time, the FOMC can afford to patiently wait for data to show the need for rate hikes or not because the economy appears to be safely chugging along all on its own.

The CME's Fedwatch Tool is showing a 50/50 chance of a rate cut by the end of the year but I think that unlikely. Not only did Jerome Powell hint we shouldn't expect a rate cut the data clearly shows underlying strength in the economy. Yes, there has been some volatility in the labor data over the past few months, especially in the jobless claims data, but that is churn within the market, not an indication of labor market reversal. I think the market is mispricing the odds of a rate hike. In my view, economic pressures outside the labor market will increase by the end of the year and put rate hikes back on the table.

Looking at the Challenger, Gray & Christmas report on planned layoffs there are an unusually large number of layoffs this year already. The April figure was down from March but up 11% YOY. The YTD count of planned layoffs is up 31% from last year. This data is alarming at face value but offset by the fact most job cuts are due to restructuring, bankruptcy, or store closures, and the amount of planned hiring more than makes up for the lost jobs.

The Challenger report also gives details on the number of planned hires each month. The number of planned hires in April spiked to 258,302, the highest level in two years, and puts the YTD figure at 44% of last year's FULL YEAR TOTAL and a record high. Let that sink in, the planned hiring for this year has hit a record high and likely to maintain that spot all year. This record is backed up by the JOLTs report which shows 7.1 million available jobs.

The NFP only shows only 5.8 million unemployed workers, that's a big shortfall from the 7.1 million available jobs. A shortfall that will guarantee future hiring, further declines in unemployment, and steadily rising wages. No business can afford to pay minimum wage any longer, and they all know it, so when you hear one of them boasting about raising their wages know they have no choice. If they don't raise their company "minimum wage" they'll lose their workforce. The power is now in the hands of the people.

I've said it before and I'll say it again, the consumer is in good shape and will drive spending this year and several years into the future. I expect to see the Consumer Staples (XLP) and Consumer Discretionary (XLY) sectors both post solid results over the next 8 quarters at least. The real strength, I think, will be in the discretionary names.

The XLP Consumer Staples SPDR is moving higher and looks bullish but is range bound and beneath resistance targets. It may continue higher and set new highs but the XLY chart looks much, much better.

The XLY Consumer Discretionary Sector SPDR has already broken to new highs and is consolidating above previous resistance now-turned-support. The indicators are bullish, particularly MACD, and point to higher prices. The MACD peak is noteworthy because it is an extreme peak and convergent with the new all-time high, both signs of underlying market strength and a high likelihood the bull market will continue.

What we've seen from consumer names so far is promising. Newell Brands (NWL), the owner of Rubbermaid, Calphalon, Crockpot, Sunbeam, and other top consumer brands, reported a strong quarter and saw its shares rise 12.0%. The company says sales were at the higher-end of expectations and balanced by cost-management. Newell is a good proxy for the broader consumer market because its products span the range of consumer level and categories across the staples and discretionary categories. At current price levels, it yields about 5% with relatively safe 40% payout ratio.

There are still quite a few consumer names left to report this quarter but it will be a week or two before we get the rush of them. Over the next week, there are two names I think bear watching and they are Disney (DIS) and Norwegian Cruise Lines (NCLH). Both rely on consumer health as part of their business model and both are scheduled to report earnings late next week.

Disney is riding high on the release of Avengers: Endgame, those results won't be in the report but they will add color to the conference call. The company has been delivering solid results in recent years and that is not expected to change now. Norwegian Cruise Lines results have been foreshadowed by Royal Caribbean (RCL). Royal Caribbean reported earnings on May 1st beating consensus estimates for revenue, EPS, and net yields while providing upbeat guidance for the year.

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Disclosure: I am/we are long xly, xlp. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.