Headline Jobs Number For March Is Misleading. Growth Mostly In Low-Wage And Government Sectors
Summary
- Leisure & Hospitality (280,000), Government (136,000), and Education & Health Services (101,000), which tend to be government supported, were 517,000 of the 916,000 jobs.
- The rise of COVID19 cases and the confirmation of the Brazilian variant in Michigan last week gives us pause as to whether we are truly seeing daylight on the disease.
- We expect tensions with CCP China to escalate after the summit in Alaska last month and the crackdown on Honk Kong democracy.
NEW YORK (April 2) - The March jobs report printed this morning with 916,000 jobs, well above the consensus estimate of 647,000 jobs that the markets expected. (Today is Good Friday, so markets are closed.)
Monthly, 3-month and 6-month average jobs printed as follows, reversing prior months' generally downward-sloping average jobs data:
SOURCE: The Stuyvesant Square Consultancy from today's jobs report and historic data.
The seasonally adjusted unemployment rate in March fell to 6.0 % from 6.2% in February, but is still 1.6 percentage points worse than the comparable month in 2020. But the lower unemployment rate needs to be considered in light of the decline in the labor participation rate. The participation rate in March, 2020, was 110 bps higher at 62.6% than the current rate of 61.5%. The workforce increased by 347,000 from February to March and is 2,163 fewer than in March 2020.
The seasonally adjusted U-6 Unemployment, at 10.7%, is down 4 bps lower than last month's 11.1%, but still 190 bps higher than March, 2020.
Nominal year-on-year average weekly wages increased by 5.08%, at a rate more than three times the rate of inflation, assuming the Trimmed Mean January PCE inflation rate of 1.61%.
Month-on-month, nominal average weekly wages increased by about $7.06 Average weekly hours, were up slightly, by 3/10th of an hour, month-on-month. Hours were up 8/10ths of an hour, year-on-year, from March, 2020.
Our quarterly report on jobs and wages is below.
SOURCE: The Stuyvesant Square Consultancy from BLS and Dallas Fed data.
Analysis: Details and Outlook
NOTE: This analysis is current as of April 2, 2021. Inasmuch as economic, political, and geopolitical trends affecting portfolios can continue for some time, and beyond the monthly timeframe of our jobs reports, certain portions of this report may repeat commentary in whole or in part from our prior reports, depending on whether the circumstances it describes have changed significantly.
The pandemic shut-down what had been a mostly optimistic economy. We are hopeful that the vaccination program - with about 29.4% of the population having had one dose and 16.4% fully vaccinated. (Those statistics do not include who had the disease and are naturally immune.) Nevertheless, a recent resurgence the variants from South Africa and the UK show that the disease is mutating, as we had warned last April in our first article on the pandemic. The Brazilian variant, which strikes younger people, was confirmed to exist this week in Michigan. The risk is that as the disease continues to spread, the higher the likelihood of additional mutations and the higher the likelihood a deadly mutation is vaccine-resistant. It's also not yet clear whether Covid-19 and its variants will be endemic; that is, a recurring illness that occurs at a regular interval, like annual influenza and that subsequent mutations (like flu) will require another vaccine annually. So while we are hopeful, we are decidedly reserved in our optimism.
From Deflation Fears to Inflation?
We have had four overriding economic concerns from COVID19, including deflation. During the pandemic, we were worried about negative interest rates and deflation. Of late, however, the 10 year Treasury has been improving as the economy moves out of COVID 19, with the rate above 1.5% at 1.69. But the speed with which the rate is increasing, 76 bps since the beginning of the year, is concerning.
Those increases, plus the $1.9 trillion fiscal policy recently passed and the pending $2 trillion infrastructure bill have raised fears of inflation that Chair Powell has done little to dispel. As a consequence, the USDX has dropped more than 800 bps since the beginning of the year.
Russia, China, and Iran have been working to de-dollarize the world economy in pursuit of their geopolitical interests, to remove the US "exorbitant privilege" that has allowed the US a lot of profligate spending. While longer-term rates remain low, a rebellion in the bond market amid Fed actions and fiscal nearly four trillion dollars in fiscal stimulus has led some to suggest the Fed to announce it will use Yield Curve Control, a rarely used "cousin" of Quantitative Easing, but one that targets medium and long term rates. (Bank Rate does a good job of explaining it here.) Still, the trimmed mean full year core inflation printed at an annual rate of 1.6% so investors are effectively paying for the safety of Treasury Notes and Bills. While longer term rates have increased, the fears we had of disinflation remain, for the moment.
Millions of small businesses and people are operating under eviction moratoriums that we anticipate will become particularly ugly when they end. Rents will need to be lowered or settled for pennies on the dollar. Mortgages will need to be written down by banks and there will be a significant shift in the supply/demand curve, post-pandemic. New York City has been particularly hard-hit by price drops. It is yet to be seen whether the drops in home prices will offset the increases in long-term interest rates so that homeowners' mortgage payments will increase, decrease or remain about the same.
For shorter term rates, we sense from Chairman Powell's statements that he and his colleagues fear a liquidity trap, although they have yet to come out and say so insofar as we know. But it's clear they have to weigh the risk of a liquidity trap, with rates dipping below zero, and disinflation, which would be countered, from the central bank's perspective, by the Fed "printing" money. That said, the ISM Report on Manufacturing shows prices increasing, but with customer inventories too low, so it is likely demand-pull inflation.
Supply side - There's some concern suppliers will likely be unable to meet their demand in the aftermath of COVID19. The February ISM Manufacturing report shows customer inventories continue to be "too low", and supplier deliveries are increasingly slower. For this reason, the ISM report shows prices increasing faster. Inflation will be volatile until market inventories settle. The contracting customer inventories might, possibly, have a favorable effect in boosting manufacturing in this and later quarters. The inventory to sales ratio for January, at 1.26, was the lowest since October 2014. This will be an important statistic to follow for the balance of this quarter, as it indicates whether inventories are increasing or sales are declining.
Our concerns about a considerable decline in a disposable income among lower-income workers who cannot work remotely, who were laid off, etc., remain unabated.
Service-related businesses that have "battened down the hatches" against COVID19 resulted in the lower productivity we predicted at the start of the pandemic, with 2020Q4 productivity printing at the lowest level since 1981.
Stimulus and More
We're of the view that pensions in many states are horribly underfunded, as we discussed here and also over-extended in their debt. We have therefore recommended investors to step back from muni bond ETFs and (AGO). The Democrat majority can probably muster enough votes to bail out under-funded state and municipal pension plans. But if they do without insisting that states adopt the same discount rates as private pensions, as we described here, it will be feckless and irresponsible and an invitation to city managers to continue the sophistry of moral hazard. Investors require a transparent assessment of municipal finances, some of which are particularly precarious. Demand side: As mentioned above, it's not clear we are past the disinflation - and even deflation -- we saw at the height of the pandemic. That could be troubling for heavily leveraged companies where cash flow may require debt restructuring.
President Biden and his team have made clear that hydrocarbons are being reduced, so there will be an acceleration of layoffs in the high-wage extractive industry as operators will likely abandon shooting new wells where geological and geophysical surveys indicate there are reserves that can be recovered only by fracking.
Defaults - Our concerns on foreign defaults on USD bonds are largely ameliorated by a weaker dollar. The Fed seems ready to expand its balance sheet to an unprecedented and unlimited level, seemingly adopting MMT by default for lack of better options.
US Politics - Events continue to exacerbate a wider political divide, compounding the socio-economic divide that will almost certainly require higher wages in low-skill jobs; higher taxes; and regulatory enhancements, now being ordered by the Biden/Harris Administration.
Democrats and Republicans have both adopted a more populist agenda, but with widely divergent means to arrive at populist goals. However, we anticipate the Republican leadership will disavow the populist, sovereign, non-interventionist, and economic nationalist themes that made up much of the Trump agenda. If so, the Trump populist/nationalist enterprise will be shut out from 2022 and 2024 politics. We're seen this already as Leader McCarthy and Minority Leader McConnell have been relatively mute in changes President Biden has made to the Trump immigration and amnesty policies relative to others in the Trump Wing of the party and Leader McCarthy's support for Rep. Cheney in a House leadership position.
The US Economy
As we explained in our 2020Q3 GDP report, the "V"-shaped recovery was merely a return to pre-pandemic levels, but the "L"-shaped...um... "recovery" we predicted may be shorter than we originally estimated, depending on the course of the COVID19 virus and the mutations and endemic that we discussed above. Things could become a "U"-shaped recovery for reasons we explained here. But remember: a lot of Americans are unemployed and running up debt, both on credit cards and back rent and mortgage payments forestalled by eviction moratoria. Even after COVID19 is thoroughly overcome, those people will be spending their disposable income after basic living expenses on paying down credit cards and their back rent. In our view, little will be spent on outings, vacations, restaurant meals, entertainment or new purchases. The 4% 2020Q4 GDP growth exceeded our expectations, but the overall 3.5% decline in annual GDP from 2019 was the worst annual GDP in 75 years. We expect 2021Q1 GDP to print at 0.5% to 1.5%, barring some remarkable turnabout in COVID19 by April 1st.
Let's look at our exclusive schedule of jobs creation by average weekly wages for the July jobs report:
December Jobs Creation by Average Weekly Wages
Source: The Stuyvesant Square Consultancy, compiled from BLS Establishment Data for March, 2021.
As can be seen, jobs creation tended to be in lower wage sectors, and healthcare, education and social service which tend to be government supported. (Actual government employment, not shown in this private sector chart, was 136,000 new jobs.)
As we review other economic data, remember that later data is always better, particularly for prognostications about the future of the economy. Moreover, there are new challenges ("grey swans") that may arise from the virus mutations and the failure to more rapidly vaccinate the population. Investors should also keep in mind that apparently "stellar" movements in their own right are, in most instances, merely a partial restoration of the status quo before COVID19 hit. Such movements aren't "growth", per se, if one buys into the Broken Windows Fallacy. We saw this in 2020Q3 GDP data which was, at the end of the day, merely a return to pre-pandemic levels.
Geopolitical Concerns
Asia & South Asia
Taiwan and CCP China
We are deeply troubled by CCP China's continued belligerence toward Taiwan and its sanctions.
If the CCP China PLA and PLAN continue their incursions against Taiwan Air Defense Identification Zone ("ADIZ"), it's only a matter of time before there is an incident that has a huge risk of triggering a war. While the US policy toward Taiwan has always been "deliberately ambiguous", (meaning that we didn't commit to defend Taiwan, but we did not say we would not, leaving CCP China at risk of war with the USA if it attacked the island), a risk of war would increase exponentially.
We believe the Biden Administration's more accommodative treatment of CCP China is a grave error in the conduct of foreign policy that the US will regret. This was evidenced by the "slap down" of Secretary Blinken and National Security Adviser Sullivan from the Chinese delegation at the U.S.-China Summit in Alaska last month. The CCP's ban of democratic candidates in Hong Kong earlier this week shows that only an assertive -- and even a belligerent -- diplomacy will contain CCP China's expansionist and imperial ambitions.
South Asia
The coup in Myanmar against a democratically elected government continues as geopolitical risk to the US and its Pacific allies than is being reported.
Were what now purports to be the "interim" government in Myanmar to allow CCP China to build a naval base in Myanmar, the People's Liberation Army Navy (PLAN) would have direct access to the Indian Ocean, ready access to its adversary India, and an enhanced ability to blockade the Strait of Malacca, the gateway of the Indian Ocean to the South China Sea and the Pacific. Euro-zone GDP for 2020Q4, printed down 0.7%, from 12.4% in 2020Q3. EU27 GDP fell 0.5% following on an increase of 11.5% in 2020Q3.
Foreign Economics
The Chinese Bureau of National Statistics data set is reported as "insecure" by our firewalls and we do not access it. News reports put the growth at a purported 2.3% growth for all of 2020. The regime announced overnight that they predict a 6% GDP growth rate in 2021. (But CCP China data reporting has always been opaque and is often exaggerated as part of state propaganda.)
Japan's 2020Q4 GDP printed at 2.8% in 2020Q4 in the second estimate, exceeding expectations. Nearly all the geopolitical and economic considerations we ordinarily address in our monthly jobs report have been starkly overshadowed by the global COVID19 pandemic. Nevertheless, we have listed above some of the geopolitical risks that have developed in recent weeks.
US Politics
We also fear the fiercely partisan nature of domestic politics. The "healing" and "unity" promised by President Biden has proven elusive. A wave of executive orders reversing Trump policies, and a generally more ardent tone from both sides of the aisle shows a deeply divided government. We are cautious of the government's inability to respond to threats, disasters, and other exigent business given the depth of the divide.
Developments
Geopolitical events that merit especially significant notice and which will affect investors' portfolios will be addressed as separate articles on Seeking Alpha when they appear to be imminent or within a day or two after they occur.
Macro Data
Oil and Fuel Pricing
Fuel prices continue to increase, at $2.89, up 12.02% from February. Gasolines prices are 24.43% higher than the same period in 2020.
West Texas Intermediate crude oil prices have increased nearly 61.4% since election day. With fracking on federal lands restricted, the Keystone XL pipeline cancelled, and government policy discouraging the use of Hydrocarbons, we expect higher prices to continue for the foreseeable future. Month-on-month, the price per bbl fell 6.15%, but are 131.54% higher than the same time in 2020.
Other Macro Data
The JOLTS survey for January, the latest available data, released March 11th, showed 237,000 fewer job openings than January, 2020, and 165,000 more jobs than had been created in December, 2020. Total separations decreased 257,000 YOY, and 65,000 MOM.
Advance estimates of U.S. retail and food services sales for February 2021, released March 16th, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $561.7 billion, a decrease of 3.0% from the previous month, and 6.3%above February 2020.
New orders for manufactured durable goods in February, released March 24th, decreased $2.9 billion or 1.1 percent, to $254.0
The TSI for January, printed at 1.1%.
Debt service as a percentage of household debt was moving up again before the COVID19 crisis hit. It actually fell in 2020Q1, presumably as credit card debt dropped as shopping did. Data for 2020Q4 showed debt service as a percentage of disposable income increasing, at 9.406, but is still considerably lower than historical percentages. See the chart below
As we had anticipated in June, M-2 velocity cratered to the lowest level in history with 2020Q2 GDP, given the Fed having opened the monetary spigot fully and the cratering of the economy from COVID19. It has picked up somewhat with 2020Q4 as the economy starts to recover. It is on the decline again as loose money continues. See the chart below.
The Fed is yet to explain the inherent conflict of its policy - since 2008 - of paying interest to banks on excess deposits while keeping the money spigots open. It's like a fish hatchery filling a lake through a fishing net. It makes no sense. We suspect that it is how the short-term rates illustrated in interest rate chart above have continued while their longer-term counterparts have been accelerating.
We note these other macro developments since our February jobs report:
- The wholesale trade report for January, reported March 8th, showed sales of $531.7 billion, up 4.9% from the revised January level, and up 5.9% from the revised 2020 January, 2020, level.
- Building permits for February, released March 17th, were of 1,682,000. This is 10.8 percent below the revised January rate of 1,886,000, but is 17.0 percent above the February 2020 rate of 1,438,000. 1,881,000.
- Housing starts in n February were at a seasonally adjusted annual rate of 1,421,000. This is 10.3% below the revised January estimate of 1,584,000 and is 9.3 percent below the February 2020 rate of 1,567,000.
- Personal Income & Outlays for February, released March 26th, showed disposable personal income down 8%, month-on-month, in current dollars, and also down 8.2% in chained 2012 dollars.
- Personal consumption expenditures (PCE) for January fell 1.0% in current dollars and also down 1.2% in chained 2012 dollars.
- The IBD/TIPP poll of Economic Optimism for February, released March 2nd, increased 6.7% from 51.9% to 55.4% (This is above the threshold of 50 that indicates expected growth.) As our friends and associates at Technometrica wrote: "Americans are feeling much better about the U.S. economy and everything else. IBD/TIPP's direction of the country gauge skipped 7.1 points to 52.7, the highest since January 2004 and the first positive read since August 2018."
Fed Measures
The Fed has made clear that it will be at the ready to maintain liquidity in the markets, despite concerns by some - discussed above - to implement a program to implement Yield Curve Control to rein-in the rapid increases in long-term rates in case of a bond market revolt, as discussed above.
GDP predictions remain extraordinarily difficult in the current environment as the quantum of economic change has been so volatile, measured in multiple percentage points instead of tens of basis points. That said, we're hoping to narrow the scope of our GDP estimate now to +/- 100 bps. We believe 2021Q1 will print up 0.5% to 1.5%.
Investment Summary
Overall, we see the markets as overvalued now and gaining most of their momentum from Fed policy. We think the $1.9 trillion fiscal response is inflationary, particularly in a recovering economy; that it will increase interest rates in the moderate term; and that it will move some investors from stocks to T-bills, notes, and bonds.
- Outperform: The VIX, as volatility affects the market. Large commercial banks. Trucking and delivery services on speculation of consolidation and acquisition, as well as pandemic market growth that will likely continue thereafter. Paperboard and other container and packaging companies for the same reason. Consumer discretionaries and retail in the higher- and luxury-end segment. Longer term investors might leg into well-capitalized higher-end QSRs and casual dining; "From home" stocks for both work and entertainment, including food delivery services, are likely to continue growth, even as the pandemic hopefully fails. We foresee a fundamental "re-think" of the way companies and individuals will go about their lives in the post-pandemic world.
- Perform: Consumer discretionaries and retail across middle-market and low-end sectors; consumer staples, energy, utilities, telecom, and materials and industrials; healthcare; currencies of developing nations, such as INR; and the GBP, and EUR. Higher-end hospitality as the economy opens up more.
- Underperform: Financials; heavily leveraged REITs, the hospitality sector on speculation of a slowly recovering GDP and better managed COVID-19. (We expect lower end hospitality to suffer as US consumer confidence improves, but also that domestic travelers will "trade up" from lower end of luxury brands (for example, to lower-end Marriott (MAR) brands, like Fairfield, from lower-end brands like Choice Hotels (CHH) brands; airlines, again on COVID-19; technology, as inflation fears move from low/no dividend tech to Treasuries as rates increase; lower-end, lower-quality QSRs (e.g., MCD, DPZ, YUM, etc.) on greater US delivery competition by their higher-end counterparts. However, YUM may do better as its KFC chicken sandwich is far superior to all its competitors.
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Note: Our commentaries most often tend to be event-driven. They are mostly written from a public policy, economic, or political/geopolitical perspective. Some are written from a management consulting perspective for companies that we believe to be under-performing and include strategies that we would recommend were the companies our clients. Others discuss new management strategies we believe will fail. This approach lends special value to contrarian investors to uncover potential opportunities in companies that are otherwise in a downturn. (Opinions with respect to such companies here, however, assume the company will not change).
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
The views expressed, including the outcome of future events, are the opinions of the firm and its management only as of April 2,, 2021, 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. We associate with principals of Technometrica on survey work in some elements of our business.
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My edit: Added word "be".