New York (August 2nd) - The July jobs report printed at a robust 164,000 new jobs, in line with the consensus estimate. But revisions for May (-10,000) and June (-31,000) netted 41,000 fewer jobs.
The revisions resulted in average three months job creation of just 140,000, jobs and for the six months. That compares to 157,000 average three months and 165,000 six months new jobs for June 2019 and 214,000 and 215,000 jobs for those same periods, respectively, for June of last year.Job creation was down 0.6% from the same month last year, which had printed at 165,000. It was up 15% from June, which printed at a revised 193,000 new jobs.
The seasonally adjusted unemployment rate was 3.7%, unchanged from June, but down 2/10ths of a percentage point from July, 2018. The seasonally adjusted U-6 Unemployment, at 7.0%, down 2/10ths of a perrcentage point from May, and down 3/10ths of a percentage point since last year.
Nominal average weekly wages increased by 2.61%, year on year, at a rate higher than inflation. Real wages increased by just 0.61%, assuming the June Trimmed Mean PCE annual inflation rate of 2.0%. However, month-on-month average weekly wages declined by about a nickel and average weekly hours declined slightly, by 1/10th of an hour.
In our March jobs report, we urged investors who were in or near retirement to move toward cash. Our confidence had improved since then, but we are growing more circumspect, led by the decline in average GDP (discussed in our 2019Q2 GDP report); today’s average jobs creation for the three and six months, cited above, and particularly the revisions; and the July decline in month-on wages and hours.
Still, we are not not substantially less confident than we were in our June jobs report or our 2019Q2 GDP report. The Fed’s more dovish stance on interest rates, including Wednesday’s rate cut, 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 all supported our more optimistic view.
Nevertheless, we still have concerns about the global economy and its impact on the US. (Euro-area GDP increased just 0.2%, down from 0.4%. China's GDP increased just 6.2%, the lowest on record. Japan’s GDP for 2019 isn’t due for print until August 9th.)
Our concerns include
All things considered, we are neutral for now, still at a “green light” outlook, but growing circumspect in our outlook based on today's jobs data.
The 2019Q2 printed at 2.1%, midway of our predicted 1.9% to 2.4%. We expect that number to print lower in subsequent revisions, to 1.9 or 2.0 opercent. We anticipate 2019Q3 to print around 1.7 to 2.2, but geopolitical concerns are troubling and we expect that number to be volatile as circumstances change. Keep apprised of our outlook by checking our jobs reports here on SeekingAlpha.
Let's look at our exclusive schedule of jobs creation by average weekly wages for the July jobs report:July Jobs Creation by Average Weekly Wage Source: The Stuyvesant Square Consultancy, compiled from BLS Establishment Data for July 2019.
The number of people employed in July was 157, 288,000,up 283,000 from June’s 157,005,000 and up 1,324,000 from the same period last year. Some 163,351,000 individuals were in the workforce, up 370,000 from last month. The labor participation rate ticked up 10 bps to 62.9% last month and from last year, to 63%.
The JOLTS survey for May, the latest available data, released July 9th, showed 49,000 fewer job openings from April, but 197,000 more jobs than had been created in May 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.
An addition to our model, advance U.S. retail and food services sales for June 2019 (which is adjusted for seasonal variation and holiday and trading-day differences, but not for price changes) were $519.9 billion, an increase of 0.4percent from the previous month, and 3.4 percent above June 2018.Another addition, June durable goods, printed up 2% from May.
OIL PRICING AND GEOPOLITICAL CONCERNS
Fuel prices continue below the $3 per gallon threshold,at $2.823. Gasoline prices for July are 0.68% lower than last month and 3.59% lower than last year.
Oil prices, as measured by West Texas Intermediate crude, have fallen 3.24%from last month as of August 1st, but are 26.69% lower than the same day last year. Prices plummeted over $4 on President Trump’s threat yesterday to widen trade tariffs against China.
The flash point the Straits 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. That situation, though, seems now to be back to “simmer” from “boil” and the US and Iran seem to be posturing diplomatically for the time being. We don’t expect any further aggression by Iran in the coming months.
The Iranian Republic has said several times it would cease all flow of oil through the Straits of Hormuz if Iran 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 29th, both the Kearsage ARG and the USS Abraham Lincoln (CVN 72) CSG are posted near the Straits of Hormuz and it appears the Reagan CSG seems to be moving in from the Pacific, either to add additional US firepower to the region or tow relieve the Lincoln CSG.
Clearly, the national command authority will continue to deter, if not intimidate, Iran’s leadership from pursuing misadventures in the straits, particularly given that the US has now completely shut down Iranian oil exports. Having both a CSG and a a ARG in the same immediate theater increases the odds that any 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. Those concerns have been allayed, somewhat, with Wednesday’s rate cut, but the dollar is still going to be European and Japanese investors' currency of choice as rates there continue to be lower than the USA. We expect them to move pari passu for the foreseeable future. While the Fed has signalled it might be more dovish, we note, nevertheless, that the DXY:CUR is still relatively strong compared to recent months
With developing economies, particularly India, where the USD:INR exchange rate had ended 2018 at 1:70, we’re seeing recovery, presumably because the Fed has pulled back. (The INR traded at its lowest point in history in October, 1:74. As of today, it was 1:69.56)
OTHER MACRO DATA
For May, the latest available data, the TSI printed at -0.3, up from -0.4 in April and down from +0.8 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 for 2018Q4 showed a slight increase and 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 continues to decline as of 2019Q2. With the Fed dropping rates Wednesday, that decline will likely continue, absent either a substantial pickup in the economy or if the Fed were to stop paying interest on excess deposits, a position we have advocated.We note these other developments since our last jobs report:
The wholesale trade report for May reported July 10th, showed sales up 0.1%, year-on-year and 0.4% month-on-month. Inventories were up 7.7% from last year and 0.4% month-on-month.The inventory to sales ratio was 1.35% up from the 1.26% in April, and up from May of last year.
Building permits for June, released July 17th, down 6.1% and down 6.6% from June of last year. Housing starts declined 0.9%, month-to-month, but jumped 6.2% year-on-year.
The ISM Manufacturing report for July, released July 3rd, showed continuing growth at 51.2%, down from 51.7% reported for June. The ISM Non-manufacturing report for June, released July 3rd, printed at 55.1%, down from the 56.9% in May. (The number will be revised early next week)
Personal Income & Outlays For June, released July 30th, showed disposable personal income up 0.4 % in current dollars and 0.3% in chained 2012 dollars. Personal income in current dollars was up 0.4%.
Personal consumption expenditures (PCE) for April were up 0.3% 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.) June data has not yet been revised.
FEDERAL RESERVE ACTIVITY
For now, we continue to be heartened by the Fed moving away from tightening rates too much, too quickly.
Trimmed mean inflation for personal consumption expenditures, less food and energy, or "Real PCE" for the Dallas Fed is at the target of 2%, year on year. The real PCE price deflator, reportedly the Fed’s measure, printed at 1.6% for June. We saw the Wednesday Fed rate cut as exactly the "mid-cycle adjustment" -- or correction -- Chair Powell said it was. As we have said for some time that the Fed's December rate increase was overstated. Still, we could not help think that Chair Powell was simply accommodating the president's threatened treaty threat from Thursday.
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 yesterday, August 1st, the 3 Month/10 year yield curve was inverted by 17 bps.
While we agree with the Fed’s John Williams that the yield curve that “the yield curve is not a magic oracle” of predicting recession, we believe that the Fed's tightening last year 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”. A coalition of the willing strategy would also lend itself to a more predictable tariff regime as our allies would, perhaps, temper the presidents sometimes seemingly impetuous “on-again, off-again” tariff threats because, presumably, all parties would agree to a consensus. This would allow businesses to operate with greater certainty with respect to US tariff policy.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; indeed, we see just the opposite. (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 and Europe both showing evidence of a slow down, as is the US now, we think it is vitally important for the finance ministers and central bankers of all the major economies to 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 lower growth for 2019. 2019Q1 was an outlier, skewed by a strong 1.03% increase in Net Exports, as we explained here. 2019Q2 GDP, while beating expectations, also signaled a decline as the average GDP growth had declined for four quarters had declined to just 2.3%.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 2019Q3 GDP to print at 1.7 to 2.2 percent, unchanged from our 2019Q2 report. The narrowing / inverting yield curve, concerns about China and Europe, the virtual certainty 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. In equities, we’re inclined as follows:
Outperform: trucking and delivery services 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 discretionaries across all sectors; consumer staples, energy, utilities, telecom, and materials and industrials; the asset-light hospitality sector on speculation of stabilizing franchisee property values and room rental costs; certain leisure and hospitality; and healthcare; currencies of developing nations, such as INR; and the GBP and EUR
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.
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