NEW YORK (July 5) - The June jobs report printed this morning at a robust 224,000 new jobs. The consensus estimate had been just 160,000. Revisions for April (-8,000) and May (-3,000) netted 11,000 fewer jobs.
The revisions resulted in average three-month jobs creation of 171,000 and six-month average jobs creation of 172,000. That compares to 147,000 average three-month and 173,000 six-month new jobs for May 2019. Job creation was up 7.7% from the same month last year, which had printed at 208,000. It was up over 211% from May, which printed at an ever more dismal revised 72,000 new jobs.
The unemployment rate was 3.7%, up from May, but down 3/10ths of a percentage point from June 2018. The U-6 Unemployment at 7.2% was up 1/10ths of a percentage point from May and down 6/10ths of a percentage point since last year.
Nominal average weekly wages increased by 2.84% year on year at a rate higher than inflation. Real wages increased by just 0.84%, assuming the April Trimmed Mean PCE annual inflation rate of 2.0%, as illustrated below.
Analysis: Details and Outlook
In March, we urged investors who were in or near retirement to move toward cash. But since then, our confidence has improved in light of a number of events. Today's robust jobs report confirms the sense we had in our May jobs report that while May's jobs report was deeply disappointing, other data did not support a downturn. The Fed's more dovish stance on interest rates, a headline 3.1% 2019Q1 (revised) GDP report that still vastly exceeded expectations, and the strongest (revised) labor productivity in 2019Q1, at 3.4%, since 2014Q3 have supported our more optimistic view.
Nevertheless, we still have considerable concerns about the global economy and its impact on the US. These concerning data points are discussed further below (in "Other Macro Data") and include:
- Germany's substantial slowdown, as well as that of France and Italy; China reducing its reserve ratio over obvious concerns about its economy and the rollover of dollar, euro, and pound denominated debt it owes American, European, and British banks.
- Continuing yield curve inversions.
- The length of the recovery.
- No deal Brexit.
- Overall concerns about demographics.
All things considered, we are neutral for now, but leaning toward a more positive "green light" outlook depending on future data.
We continue to anticipate 2019Q2 to print at just 1.9% to 2.4% after what we viewed as an outlier in 2019Q1 data.
Let's look at our exclusive jobs creation by average weekly wages for the May jobs report:
May Jobs Creation by Average Weekly Wage Source: The Stuyvesant Square Consultancy, compiled from BLS Establishment Data for May 2019. June jobs creation, despite being robust, still occurred in a moderate wage job categories. The number of people employed in June was 157,005,000. 156,758,000, up 247,000 from May's 156,758,000 and up 1,413,000 from the same period last year. Some 162,981,000 individuals were in the workforce, up 335,000 from the 162,129,000 who were in the workforce last month. The labor participation rate ticked up 10 bps to 62.9% last month, and unchanged from the same period last year.
The JOLTS survey for April, the latest available data, released June 10th showed 25,000 fewer job openings from March, but 343,000 more jobs than had been created in April of 2018. Nevertheless, the year-on-year increase in jobs creation has decreased significantly and consistently from the year-on-year change from the January 2019 JOLTS report, when 1.686 million new jobs had been created.
Oil Pricing And Geopolitical Concerns
Fuel prices continue below the $3 per gallon threshold at $2.804. Gasoline prices for June are 4.8% lower than last month and 5.6% lower than last year.
Oil prices, as measured by West Texas Intermediate crude, have fallen 4.35% from last month as of July 3rd, but are 4.08% higher than the same day last year.
The flashpoint in the Strait of Hormuz that we have been expecting for some time since the Joint Comprehensive Plan of Action (JCPOA) was abandoned escalated in mid-June, with additional attacks on shipping in the region, compounding attacks on four other ships that occurred in May that we discussed in our last report.
Iran has said several times it would cease all flow of oil through the Strait of Hormuz if it could not sell oil because of U.S. sanctions. The regime has engaged in more missile testing, causing the U.S. to request even stronger sanctions from the UN. In February, it announced it had developed an indigenous surface-to-surface missile, Hoveyzeh. Iran runs the risk of a catastrophic war with the USA if it continues its belligerence in the region. As of July 1st, the USS Abraham Lincoln (CVN 72) CSG is posted at the Strait of Hormuz and the Boxer ARG is posted at the Gulf of Aden off the coast of Yemen, where Iranian surrogates are reportedly fighting with Shi'a Houthi rebels. Clearly, the national command authority will continue to deter, if not intimidate, Iran's leadership from pursuing misadventures in the region, particularly given that the U.S. has now completely shut down Iranian oil exports. Having both a CSG and an ARG in the same immediate theater increases the odds that continuing aggressive move by Iran will result in an overwhelming reply and, possibly, war.
A Lessening Of Concerns
In earlier months, we had concerns that higher rates and a stronger dollar would impinge developing nations' ability to repay dollar- and euro-denominated debt they owe to American and European banks. While the Fed has signaled it will be more dovish, we note, nevertheless, that the DXY:CUR is still relatively strong compared to recent months
But important developing economies, particularly India, where the USD:INR exchange rate had ended 2018 at 1:70, have recovered. (The INR traded at its lowest point in history in October, 1:74. As of today, it was 1:69). War tensions with Pakistan also seem to have allayed.
Other Macro Data
For April, the TSI printed at 0.8, down from 1.3 in March and up from 0.2 last year. We are disappointed to see debt service as a percentage of household debt creeping upward. We had been heartened that people are taking home more cash from the 2017 tax cut, so that debt service accounted for a lesser percentage of disposable income. But data released early last month for 2018Q4 showed a slight increase; 2019Q1 showed a continuation of that trend which is disconcerting for longer-term growth. (Debt service as a percentage of disposable income ran over 13% prior to the Great Recession; today, it is approaching 10% and climbing).
We would like to see M-2 velocity continue the improvement it seemed to be on track to in 2018. We are disheartened that it is flat and negative so far in 2019. We note these other developments since our last jobs report:
The wholesale trade report for April, reported June 7th, showed sales up 2.7% year-on-year and 0.4% month-on-month. Inventories were up 7.6% from last year and 0.8% month-on-month. The inventory to sales ratio was 1.34, up from the 1.28 and up from April of last year.
Building permits for May, released June 18th, up 0.3% from April, but down 0.5% from May of last year. Housing starts declined 0.9% month-to-month and dropped 4.7% year-on-year.
The ISM Manufacturing report for May, released July 3rd, showed continuing growth at 55.1%, higher than the 52.1% reported for April. The ISM non-manufacturing report for June, released July 3rd, printed at 55.1%, down from the 56.9% in May.
Personal Income & Outlays for May, released June 28th, showed disposable personal income up 0.5% in current dollars and 0.3% in chained 2012 dollars. Personal income in current dollars was up 0.5%.
Personal consumption expenditures (PCE) for April were up 0.4% in current dollars. In chained 2012, PCE was up 0.2%.
The IBD/TIPP Economic Optimism Index, released July 7th, jumped 6.4 percentage points to 56.6 (anything above 50 indicates growth).
For now, we continue to be heartened by the Fed moving away from tightening rates too much, too quickly. Inflation for personal consumption expenditures, less food and energy, or "Real PCE", is at the Fed's target of 2%; it had slipped somewhat in the last couple of prior months. The April reading had been quite troubling because it was nearly twice the 2% target and could deter the Fed from reversing its December 2018 hike that we believe was erroneous. But it has returned to the 2% rate in May. It bears close monitoring.
We continue to believe that moves toward normalization should take place more slowly and only after growth had become decidedly more robust over several more quarters; at least four quarters of a consistent 3% GDP growth. We would also like to see more stable growth in Gross Domestic Investment, aside from inventory growth, with growth in that component of GDP of at least 1% to 1.5%, excluding the aforementioned inventory. The yield curve, with which we have been gravely concerned for the last year, continues inversion. The Fed rate hikes, which have their greatest effect on short-term rates (and why we use the 3Mo/10Yr curve) in 2018, were premature and outpaced the economy's growth. We started 2018 with a spread of the 3-month/10-year yield curve two of nearly 102 bps, just half the 200 or so bps that started 2017. As of today, July 5th, the 3-month/10-year yield curve was inverted by 19 bps.
While we agree with the Fed's John Williams that the "the yield curve is not a magic oracle" of predicting recession, we believe that Fed's tightening is far more likely to cause recession than President Trump's tariff policy. (Milton Friedman's Nobel Prize would seem to hold with that view, as he blamed the Great Depression on Fed policy far more than the Smoot-Hawley tariffs that have become legend in conventional wisdom and four decades of propaganda promulgated in Paul Samuelson's text in Econ 101 classes at America's leading universities). That said, we're not willing to ignore the "herd instinct" of ignorant investors who buy into the grand lie that "tariffs cause (or worsen) depressions." Nevertheless, we would like to see the president engage America's Asian and European allies to step up to join a "coalition of the willing" to challenge China's decades-old unfair trade practices and thefts of intellectual property because the one-on-one dispute could simply trigger mutual retaliation.
There is more power in American dealings with Xi from a multilateral "we" than a unilateral "us". We are simply not seeing any holistic appetite among investors for increased risk, as signaled by moving away from Treasuries and into "risk-on" assets, which would tend to drive rates higher. (Treasury yields are directly proportional to risk appetite, so the higher the rate, the more the market's appetite for risk. As investors avoid market risk, they invest more in Treasuries, thereby lowering interest rates). With Asia, Europe and North America all showing evidence of a slowdown, we think it is vitally important for the finance ministers and central bankers of all three major economies agree a strategy to address what we foresee as a very challenging time for their economies.
We're circumspect about the rate of GDP growth reflected in the last three reported quarters. We think the 2018Q4 GDP of 2.6% will likely presage continued moderate growth below 3% for 2019. 2019Q1 was an outlier, skewed by a strong 1.03% increase in net exports, as we explained here. Our doubts will continue until we see two consecutive quarters of increases in all four categories of GDP (i.e., Personal Consumption Expenditures, Net Exports, Gross Domestic Investment, and Government Consumption Expenditures). We expect 2019Q1 to print at 1.9 to 2.4 percent, unchanged from our last jobs report. The narrowing/inverting yield curve, concerns about China and Europe, the increasing likelihood of a "No Deal" Brexit, the situation with Iran, and North Korea's return to testing IRBMs, capable of hitting Japan, all give us pause. We would not be surprised if 2019 yielded growth for the full year at 2 % or less, all things being equal. We don't think there is sufficient capital growth prospect for equities to justify equity risk given the risks of a sharper market downturn or a grey or black swan event. Moreover, the rate cut widely anticipated by the markets seems, to us, a jump ball at this point. In equities, we're inclined to mostly stand pat with these sectors from our 2018Q4 summary, but in less proportion and with some changes as follows and to include stop loss orders or hedging:
Outperform: Consumer discretionaries in the mid- to high-end retail sector; trucking on speculation of consolidation and acquisition; companies or REITs that own real estate in sectors identified as "opportunity zones" under the Tax Cut and Jobs Creation Act of 2017; and CHF.
Perform: Consumer staples, energy, utilities, telecom, and materials and industrials. Lower-end consumer discretionaries like dollar stores; the asset-light hospitality sector on speculation of stabilizing franchisee property values and room rental costs; certain leisure and hospitality; and healthcare.
Underperform: Financials; and technology; lower-end, low-quality QSRs (e.g., MCD, DPZ, YUM, etc.) on greater US delivery competition and a slowing economy; lower end hospitality on gasoline prices; currencies of developing nations, such as INR; and the GBP and EUR.
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Additional disclosure: Disclaimer: The views expressed, including the outcome of future events, are the opinions of the firm and its management and do not represent, and should not be considered to be, investment advice. You should not use this article for that purpose. This article includes forward looking statements as to future events that may or may not develop as the writer opines. Before making any investment decision you should consult your own investment, business, legal, tax, and financial advisers.