Today's jobs report beat expectations of 89,000 jobs, but were mostly in the lower-wage sectors.
Average three-month and six-month jobs have both declined since August.
The slowdown continues, but recession doesn't appear on the horizon.
The US is the less sick man in the global recovery ward.
NEW YORK (November 1) - The October jobs report printed at 128,000 new jobs this morning, well above the consensus estimate of 89,000. Revisions for August (+51,000) and September (+44,000) netted a stunningly high 95,000 new jobs.
Job creation was down 54% from the same month last year, which had printed at 277,000. It was down 29% from September, which printed at a revised 180,000 new jobs.
The seasonally adjusted unemployment rate ticked up to 3.6% from 3.5% last month. The seasonally adjusted U-6 Unemployment at 7% was also up 1/10th of a percentage point from September, but down 50 bps from last year.
Nominal average weekly wages increased by 2.74% year on year at a rate higher than inflation. Real wages increased by 1.14%, assuming the monthly Trimmed Mean PCE of 1.6%.
Summary And Analysis
This morning's jobs report was fair at best, but turbocharged by 95,000 revisions in prior months. Increases from revisions may affect forecasts for prior months, but they do not necessarily harbor an improved prospective outlook.
Our confidence in the economy has generally improved since March, when we urged investors to move toward cash, but we remain circumspect, led by the decline in average GDP discussed in our 2019Q2 GDP report. (As of Wednesday's GDP report, average GDP for the four preceding quarters has fallen further, to just 2%; not great, but clearly better than the rest of the G7).
We're troubled by the overall decline in average jobs, which signals a slowing economy as well as the disproportionate number of low-wage jobs in this month's report. Trump Administration officials' efforts to spin today's number to over 300,000 should be taken with a grain of salt and perhaps considered an effort to obfuscate the declines in average jobs data and the weight of low-wage jobs that made up the "beat", as seen in the charts below. Author's chart from today's BLS data.
Today's ISM Report showed a modest improvement over last month. As we discussed in our August jobs report, we foresaw a slowdown, but not a recession in 2019. We can say now that we're confident of that forecast through 2020Q2, barring a "black swan".
The Fed's more dovish stance on interest rates, a headline 3.1% 2019Q1 (revised) GDP report, that still vastly exceeded expectations, a reasonably good 2.0% 2019Q2 GDP, a 2019Q3 GDP that printed at 1.9%, 30 bps above estimates, and a strong increase in (revised) labor productivity in 2019Q2 at 2.3% all support our more optimistic view.
Nevertheless, we still have considerable concerns about the global economy and its impact on the US. Euro-area GDP increased just 0.2% in 2019Q3, unchanged from 2019Q2. China's GDP increased just 6.0% in 2019Q3, the new lowest on record and down 20 bps from the 6.2% record low of 2019Q2. Japan's 2019Q2 GDP printed August 9th at just 0.4%. (Japan's 2018Q3 data will not print until November 14th).
Domestic political considerations are also now weighing much more heavily on our outlook this month than last.
Yesterday's virtually party-line vote for impeachment signals even wider division in an already divided electorate and could foretell another government shutdown when the current continuing resolution runs out November 21st.
Moreover, the decline in Joe Biden's fortunes in early primary states signals that the moderate wing of the Democrats will likely be subsumed by others much more progressive, principally Elizabeth Warren or Bernie Sanders, whose policies might tend to roil markets.
Our concerns about the rollover of dollar-, euro-, and pound-denominated debt China owes American, European, and British banks continues, renewed by the continuing decline in CNY in USD:CNY. While the yuan has improved somewhat since last month, it is still near a five-year low relative to the dollar. Among our other concerns:
- Yield curve inversions and volatility signal ongoing concerns that have troubled us for some time;
- some disconcerting recent data on housing starts;
- the length of the recovery;
- continuing concerns and uncertainties about Brexit;
- our overall concerns about US demographics and the aging of the population; and
- the simple length of the recovery. (While recoveries don't die of "old age", there is still a business cycle that merits respect).
All things considered, we are still at a "green light" outlook, but dependent on future data. The slowing US economy we identified back in our August jobs report continues, but we reiterate our sense that a recession (i.e., two consecutive quarters of negative growth) is unlikely through at least June 2020. The closest possible start of a recession we foresee is 2020 Q3, but again which would not be identified until after the November elections. A "black swan" would obviously alter that view.
The 2019Q2 GDP originally printed at 2.1%, revised, the lower end of our predicted 1.9% to 2.4%. But, as we expected, that number printed lower on its final revision. Our 2019Q3 estimate of 1.5% to 2%, which we had reduced last month from 1.7% to 2.3%, covered Wednesday's 1.9% GDP print. Geopolitical and domestic political concerns continue to be troubling and we expect the GDP number to be volatile as circumstances change. Keep apprised of our outlook by checking our jobs reports here on Seeking Alpha.
Let's look at our exclusive schedule of jobs creation by average weekly wages for the October jobs report:
October Jobs Creation by Average Weekly Wage Source: The Stuyvesant Square Consultancy compiled from BLS Establishment Data for October 2019
As can be seen, October jobs were created mostly in lower-wage sectors, and higher-wage sectors had few new jobs created. Indeed, higher-wage net manufacturing (durable goods +/- non-durable goods) lost a net 36,000 jobs.
The number of people employed in October was 158,510,000, up 241,000 from September's 158,269,000 and up 1,928,000 from the same period last year. Some 164,364,000 individuals were in the workforce, up 325,000 from last month and 1,670,000 from last year. The labor participation rate ticked up slightly to 63.3% from last month and up 40 bps from 62.9% last year.
The JOLTS survey for August, the latest available data, released October 9th showed 123,000 fewer job openings from July and 291,000 fewer jobs than had been created in August 2018. 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 1.666 million more new jobs year-on-year had been created.
Advance U.S. retail and food services sales for September 2019 (which is adjusted for seasonal variation and holiday and trading-day differences, but not for price changes) were $525.6 billion, a decrease of 0.3% from the previous month and 4.1% above September 2018.
New orders for manufactured durable goods in September decreased $2.8 billion or 1.1% to $248.2 billion.
Oil Pricing And Geopolitical Concerns
Fuel prices continue below the $3 per gallon threshold at $2.72. Gasoline prices for October are 1.6% higher than last month, but 7.4% lower than September of last year.
Oil prices, as measured by West Texas Intermediate crude, have increased 3.82% from last month as of today and are 13.45% lower than the same day last year.
The flashpoint the Straits of Hormuz that we have been expecting for some time, since the Joint Comprehensive Plan of Action (JCPOA) was abandoned, did not escalate in October and remains stable for the time being. But the situation is clearly unpredictable day-to-day.
We think Iran may be awaiting the outcome of the 2020 US presidential elections and now impeachment before taking any new moves. As we have related, Iran runs the risk of a catastrophic war with the USA if it continues its belligerence in the region. The lessening of tensions is reflected in the fleet deployment at October 28th. The USS Abraham Lincoln (CVN 72) CSG is patrolling south of the Saudi Peninsula, the first time in months that the US has not had naval forces deployed closely to the Straits of Hormuz.
Hong Kong remains unstable and even Taiwan is protesting against Chinese authoritarianism. Hong Kong is now in recession and we anticipate that protests will continue. China is, in our view, unlikely to attempt the type of brutal repression we saw in Tiananmen Square a generation ago for fear of US sanctions.
Doing so would exacerbate strained US/China relations even more. Even now, we are seeing bipartisan revulsion at China's brutality and its many violations of fair trade, particularly its thefts of intellectual property. Moreover, Secretary Pompeo's comments earlier this week point to what we believe is the most adversarial tone toward China in at least 30 years. The effect of the change in tone remains to be seen, but we believe the Trump Administration would welcome internally-driven "regime change" from the communist regime in China were it to happen holistically.
Nevertheless, we're not terribly afraid of the China trade wars, as we have said several times before. The total value of the US economy is about $20.5 TRILLION. The total value of US goods imports from China is about $539.5 BILLION. That works out to about 2.6% of the US economy.
Our EXPORTS to China are about $120.3 BILLION. That works out to 0.58% (58/100ths of a percentage point) of the US economy.
As with Iran, we think Xi Jinping and his counselors are awaiting the outcome of the 2020 elections before committing to a permanent trade deal. We do not see one coming before spring or summer of next year.
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 largely allayed by the Fed's rate cuts. Still, the US dollar will be European and Japanese investors' currency of choice as rates in those countries continue to be lower than the US. While the Fed has signaled it will be more dovish, we note, nevertheless, that the DXY:CUR, while having dropped recently, still shows a relatively strong dollar compared to most of the year, largely because there are so few good, growing, stable foreign economies.
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 1:70.9). Tensions over Kashmir between India and Pakistan have ramped up, at least rhetorically, as India moved to remove its special status under the Indian constitution. Pakistan's president has threatened nuclear war. The situation there is now at the top of our list of prospective geopolitical "black swans", replacing the Straits of Hormuz.
Other Macro Data
For July, the latest available data, the TSI printed at +0.7, unchanged from June and up from -0.7 last year. Debt service as a percentage of household debt is moving downward again. We 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. Data for 2019Q2 showed debt service as a percentage of disposable income at its lowest level, 9.969%, since records started being kept 40 years ago. It ran over 13% prior to the Great Recession. (We're still awaiting an update for 2019Q3).
M-2 velocity dipped further in 2019Q3. We would have liked to see the improvement in M-2 velocity that seemed to be on track in 2018. We are disheartened that it continues to fall. We would like to see the Fed stop paying interest on excess deposits to free up cash in the economy, which would boost M-2 velocity, a position we have advocated for some time.
We note these other developments since our September jobs report:
- The wholesale trade report for August, reported October 9th, showed sales unchanged month-on-month, but down 0.7% year-on-year. Inventories were up just 0.2% month-on-month and up 6.2% from last year. The August inventory to sales ratio was 1.36, unchanged from last month and up from 1.28 last year.
- Building permits for September, released October 17th, were down 2.7% from August but up 7.7% from last year. Housing starts dropped 9.9% month-to-month, but increased 1.6% year-on-year.
- The ISM Manufacturing report for October, released just this morning, showed minimal improvement at 48.3%, up from September's 47.8%. The ISM non-manufacturing report for September, released October 3rd, printed at 52.6, down from 56.4 for August, although still expanding. The October report will print next week on November 5th.
- Personal Income & Outlays for September and August, released October 31st, showed disposable personal income up 0.3% in both current and chained 2012 dollars. Personal income in current dollars was also up 0.3%.
- Personal consumption expenditures (PCE) for August were up 0.2% in current dollars. In chained 2012, PCE was also up 0.2%.
- The IBD/TIPP Economic Optimism Index for October was up 3.5% at 52.6, reversing a negative trend from July. (Anything above 50 indicates growth).
Federal Reserve Actions
Trimmed mean inflation for personal consumption expenditures, less food and energy, or " Real PCE," for the Dallas Fed is at 1.7% year on year. The real PCE price deflator, reportedly the Fed's preferred measure of inflation, printed at 1.7% for September, 30 bps below the Fed's target.
We're heartened by a widening yield curve, but it is still too narrow. We started 2018 with a spread of the 3 month/10 year yield curve of nearly 102 bps, just half the 200 or so bps that started 2017. We started 2019 just 24 bps apart. As of yesterday, October 31, the 3 Month/10 year yield curve was separated by just 15 bps. Still, that's an improvement over last month when they had inverted.
While we agree with the Fed's John Williams 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 veritable legend as 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". With Asia and Europe both showing evidence of a slowdown, we think it is vitally important for the finance ministers and central bankers of major economies to agree a strategy to address what we foresee as a very challenging time for the world's economies.
We expect 2019Q4 GDP to print at 1.7 to 2.0 percent, up 20 bps on the lower end from last month's jobs report. The narrow/inverting yield curve, concerns about China and Europe, the continuing uncertainty on Brexit, the situation in Pakistan and India, North Korea's ongoing IRBM testing (it tested another missile toward the Sea of Japan just yesterday), and domestic politics concern us and we advise stop-loss or other hedging in all equities.
For investments, we're inclined to mostly stand pat with these sectors:
- Outperform: Trucking and delivery services on speculation of consolidation and acquisition, consumer discretionaries and retail in the higher- and luxury-end segment, higher-end QSRs and casual dining, and REITs that own real estate in sectors identified as "opportunity zones" under the Tax Cut and Jobs Creation Act of 2017. We think CHF is a safe haven from domestic and geopolitical uncertainty.
- Perform: Consumer discretionaries and retail across in middle-market and low-end sectors; consumer staples, energy, utilities, telecom, and materials and industrials; certain leisure and hospitality; healthcare; currencies of developing nations such as INR; and the GBP and EUR.
- Underperform: Financials; the asset-light hospitality sector on speculation of declining GDP and costs; technology; lower-end, low-quality QSRs (e.g., McDonald's (NYSE:MCD), Domino's Pizza (NYSE:DPZ), YUM! Brands (NYSE:YUM), etc.) on greater US delivery competition and a slowing economy; lower-end hospitality on a slowing economy; and a decline in consumer confidence.
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Additional disclosure: The views expressed, including the outcome of future events, are the opinions of the firm and its management only as of today, November 1, 2019, and will not be revised for events after this document was submitted to Seeking Alpha editors for publication. Statements herein 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.