Average three months and six months jobs signal continued strength into 2020.
Even accounting for around 50,000 UAW workers returning to GM after a strike, the preliminary figure well exceeded the 186,000 that were anticipated.
Geopolitical and domestic political risks present the larger challenge to the economy. We don't see a China Trade "deal" until the 2020 election outcome takes shape.
The US economy leads the G-7 so that rates are likely to remain low as foreign investment continues to US shores.
We raise our 2019Q4 GDP estimate by 20 bps, to between 1.9% and 2.2%. We seen no recession in the first half of 2020, barring a "black swan" event.
NEW YORK (December 6) - The November jobs report printed at a stunning 266,000 new jobs, well above the consensus estimate of 186,000, even considering the roughly 50,000 jobs that resulted from the settling of the UAW strike against GM. Revisions for September (+13,000) and October (+28,000) netting 41,000 new jobs.
Average jobs printed up in both the three month and six month average categories, as shown in our chart here, recovering from a relatively weak October:
Source: The Stuyvesant Square Consultancy from BLS data
The seasonally adjusted unemployment rate was 3.5%, down 1/10th of a percentage point from October, 2019, and matching the lowest unemployment rate in 50 years. The seasonally adjusted U-6 Unemployment, at 6.9%, also down 1/10th of a percentage point from October, and down 70 bps since last year.
Nominal average weekly wages increased by 3.14%, year on year, at a rate higher than inflation. Real wages increased by 1.54%, assuming the 12 month Trimmed Mean PCE annual inflation rate of 1.6%. However, month-on-month nominal average weekly wages increased $2.41, or 0.025%, although average weekly hours remained steady, month-on-month and year-on-year from 2018.Notably, weekly wages in mining and retail decreased as those sectors weakened, as our exclusive chart of jobs by average weekly wages, below, shows
Analysis: Details and 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 the revised GDP report issued November 27, average GDP for the past four preceding quarters is 2.2%; not great, but clearly better than the rest of the G7).
Monday's ISM Report printed at 48.1, a modest decrease from 48.3 last month. Both numbers, below 50, indicate an economic contraction. The 2019Q3GDP report also indicated that inventories have been largely burned off and will likely have to be re-stocked in 2019Q4.As we discussed in our August jobs report, we foresaw a slowdown, but not a recession in 2019. As discussed further, we're confident of that forecast through 2020Q2, barring a "black swan". Our central concerns now are liquidity and contagion from defaults in the global economy, particularly China. The Fed's more dovish stance on interest rates, including, a headline 3.1% 2019Q1(revised) GDP report, that vastly exceeded expectations, a reasonably good 2.0% 2019Q2 GDP, a 2019Q3 GDP that printed at 2.1% (revised), 50 bps above estimates 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% of 2019Q2, and China is suffering the highest level of defaults in its history. Japan's 2019Q3 data printed down at just 0.1% on November 14th, down from 2019Q2 of 0.4%.Domestic and foreign political considerations are also now weighing much more heavily on our outlook this month than last. The House will almost certainly vote impeachment and a Senate trial will likely ensue. There will be no major legislation likely to move in the interim, so the USMCA will be delayed until, likely, 2020Q2.
In Europe, polling indicates Britain's elections next week will likely break for the Tories, increasing the odds of a "no-deal" Brexit. Germany's SPD has named new party leaders who have pledged to seek a better deal with Chancellor Merkel for their constituency, thus putting its governing coalition with Merkel's majority CDU/CSU at risk and raising the prospect there could be snap elections in the early part of 2020 if no governing coalition is maintained. (The rightmost AfD has also elected a more radically right leadership.) And in France, a general strike over Emmanuel Macron's plans to reform generous government pension plans is in its second day today and will likely last well into next week.
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. (See our article yesterday about China's record level of defaults.) We are happy, for the time being, that the yield curve inversions and narrowings that have troubled us for some time have receded since the Fed's rate cut; spreads are improved.
We continue to have overall concerns about US demographics, particularly the aging of the US population, an increase in the average age of marriage and family formation, student debt levels, and retirements from skilled trades that are not being filled by new entrants to those professions.
We're also wary of 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, that will depend on data. 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 on September 26th, at the 2.0 percent we had predicted in our July jobs report. The 2019Q3 GDP estimate printed at 2.1%, slightly exceeding our upper end of our range estimate of 1.5% to 2.0% and 50 bps above the consensus 1.6% estimate. We hope that the consistent GDP growth rate of 2.2% in the last four quarters and the uncertainty of a China trade deal will cause renewed US Gross Domestic Investment, the weakest sector of GDP. 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 SeekingAlpha.
October Jobs Creation by Average Weekly Wage Source: The Stuyvesant Square Consultancy, compiled from BLS Establishment Data for October, 2019.
The number of people employed in November was 158,593,000 up 83,000 from October's 158,510,000 and up 1,790,000 from the same period last year. Some 164,404,000 individuals were in the workforce, up 40,000 from last month. The labor participation rate dropped 10 bps to 63.2% from last month and up from 62.9% last year.
The JOLTS survey for September, the latest available data, released November 5th, showed continued and increasing slowing in job openings, slowing 277,000 fewer job openings from August, and 368,000 fewer jobs than had been created in September, 2019. The year-on-year slowdown in jobs creation has been significantly and consistently from the year-on-year change from the January 2019 JOLTS report, when 1.666 million more new jobs had been created.
Advance U.S. retail and food services sales for October, 2019, (which is adjusted for seasonal variation and holiday and trading-day differences, but not for price changes) were $526.5 billion, an increase of 0.3%from the previous month, and 3.1% above October, 2018.New orders for manufactured durable goods in October increased $1.5 billion or 0.6% to $248.7 billion.
Oil Pricing And Geopolitical Concerns
Fuel prices continue below the $3 per gallon threshold, at $2.69. Gasoline prices for November are 0.45% lower than last month and 8.49% lower than of last year.
Oil prices, as measured by West Texas Intermediate crude, have increased 2.15% from last month as of today, and are 9.32% higher 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, has not escalated 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 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. Iran is also in the midst of domestic turmoil as residents protest higher fuel prices and the deep recession the country has suffered since sanctions were imposed. At December 2nd, the USS Abraham Lincoln (CVN 72) CSG is patrolling off the cost of Qatar and within striking distance of the Straits of Hormuz.
Hong Kong remains unstable and is now in recession. As related further below, we anticipate that protests will continue until the outcome of the US election becomes clear. China is, in our view, unlikely to attempt the type of brutal repression we saw in Tiananmen Square a generation ago unless it becomes clear the Hong Kong protests are leading to contagion against the CCP in Mainland China.
Nevertheless, we are seeing bipartisan revulsion at China's brutality and its many violations of fair trade, particularly its thefts of intellectual property. Secretary Pompeo, Vice President Pence, and President Trump have spoken or acted in what we believe is the most adversarial manner towards China in at least 30 years. The effect of this change in US policy remains to be seen, but we believe the Trump Administration would welcome internally-driven "regime change" in China.
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. 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. That works out to about 2.6% of the US economy. Chinese belligerence toward us and our allies, and their espionage activities, are far more threatening from geopolitical and military perspective than an economic one.
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 think the current optimism towards a trade deal is significantly overstated, particularly given the belligerent tone from China since President Trump signed the Hong Kong Human Rights and Democracy Act.
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 USA. 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 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, 2018 at 1:74. As of today, it was 1:71.25).North Korea has hinted at further belligerence with recent missile tests, but the situation remains unclear. Tensions over Kashmir between India and Pakistan continue to be a concern. The situation there is now third on our list of prospective geopolitical "black swans", along with North Korea, the Straits of Hormuz and above Europe.
Other Macro Data
For September, the latest available data, the TSI printed at -1.8 down 2.5 from August and down 2.0 from last year. Debt service as a percentage of household debt is moving downward again. We were 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, 9.68762%, 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. But while we are disheartened that it continues to fall, we note it is likely attributable to Fed easing. 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 October jobs report:
- The wholesale trade report for September, reported November 8th, showed sales unchanged, month-on-month, but down 0.6%, year-on-year. Inventories were down 0.4%, month-on-month but up 4.8% from last year. The September inventory to sales ratio was 1.36, unchanged from last month, and up from 1.29 last year.
- Building permits for October, released November 19th, were up 5.0% from September and 14.1% from last year. Housing starts increased 3.8%, month-to-month, and up 8.5% year-on-year.
- The ISM Manufacturing report for November, released Monday, showed further slowing, at 48.1%, down from October's 48.3%. The ISM Non-manufacturing report for November, released Wednesday, printed at 53.9, down from 54.7 from October, although still expanding.
- Personal Income & Outlays for October, released November 27th, showed disposable personal income down -0.1% in current dollars, and down -0.3 chained 2012 dollars. Personal income in current dollars was unchanged.
- Personal consumption expenditures (PCE) for October was up 0.3% in current dollars. In chained 2012, PCE was also up 0.1%.
- The IBD/TIPP Economic Optimism Index, for November was up to 52.9 from October's 52.6, reversing a negative trend from July. (Anything above 50 indicates growth.)
- Labor productivity in 2019Q3, fell 0.3%, while average unit costs increased 3.6%.
For now, we continue to be heartened by the Fed moving away from tightening rates too much, too quickly. The FRB has essentially "repealed" its earlier normalization vis-à-vis the 2018 rate. Today's jobs numbers, together with a 2019Q3 robust GDP print at 2.1%, will likely restrain the Fed from making further cuts this year and likely well into 2020Q2. Trimmed mean inflation for personal consumption expenditures, less food and energy, or "Real PCE" for the Dallas Fed is at 1.6%, year on year. The real PCE price deflator, reportedly the Fed's preferred measure of inflation, also printed at 1.6% for October.
We would like to see increased growth in Gross Domestic Investment, aside from inventory growth (i.e., in fixed investment) with growth in that component of GDP negative in both 2019Q2 and 2019Q3. 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 two of nearly 102 bps, just half the 200 or so bps that started 2017. We started 2019 just 24 bps apart. As of yesterday, December 5th, the 3 Month/10 year yield curve was separated by just 26 bps. Still, that's an improvement over last month.
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 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" 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 president's sometimes seemingly mercurial "on-again, off-again" tariff threats so that businesses could operate with greater certainty. But given Europe's failure to step up on China's brutal repression of China's Hong Kong protesters, and its weak economies, we do not expect leadership across the Atlantic to show much fortitude. As stated above, as the impeachment narrative continues to play out, we anticipate that Beijing will await a more traditional, less disruptive, president in hopes of getting a better deal. We think China will stall on any trade deal until 2020 polling shows a clear winner in the US elections. We put the likelihood of a China deal, currently, at just 30%, given the impeachment proceedings. Were Hong Kong authorities (acting for Beijing) to crack down heavily on Hong Kong protesters, we do not see any likelihood of a trade deal; indeed, it is more likely the US would impose sanctions. (Accordingly, we believe Hong Kong will continue to be in recession, situation status quo, until the US elections outcome has some higher certainty.)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 in this region to agree a strategy to address what we foresee as a very challenging time for their economies.
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. 2019Q3 continued that trend. 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 2019Q4 GDP to print at 1.9 to 2.2 percent, up 20 bps on the lower end from last month's jobs report. We would not be surprised if 2019 yielded growth for the full year at 2% or, or slightly less, all things being equal.
In equities, we're inclined to mostly stand pat with these sectors include stop loss orders or hedging:
- 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; and 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, 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, December 6, 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.
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