![Jill on Money [ Archive]](http://images.squarespace-cdn.com/content/v1/59efbd48d7bdce7ee2a7d0c4/1510342916024-TI455WZNZ88VUH2XYCA6/JOM+Blue+and+White.png?format=1500w)
Although it may seem like a lame excuse, stormy weather in March, which followed mild conditions in February, caused job creation to slump in March. The economy added a lower than expected 98,000 jobs and the number of Americans who were not at work due to bad weather was 195,000 in this report, 55,000 more than the historic number of 140,000. Adding back those employees, the reading was 153,000, somewhat weaker than the 175,000 expected, but well within the general range.
Here’s the good news: there is only one more important week of economic data left before Labor Day weekend -- the last blast for summer occurs this week. The bad news is that given the geopolitical events transpiring recently, the economy may eventually be the least of our problems. That said, investors have continued to take the various global conflicts in stride -- maybe a full week on the economic calendar will get them going. They'll need to shore up their energy before shutting down for August. The fun starts with the government’s first estimate of second quarter growth. After a horrible first quarter, where the economy contracted by 2.9 percent, Gross Domestic Product is expected to show an acceleration to an annualized pace of 3 to 3.5 percent. The rallying cry for the economy is quickly shifting from “2014: The year that growth returned to the US” to “2014: Here’s hoping that second half growth will save us!”
The sluggish first half growth will be front and center for the Federal Reserve, which will conduct a two-day policy meeting this week. It is widely expected that the central bank will announce another $10 billion cut to its bond-buying program, reducing monthly purchases to $25 billion. Officials are also expected to keep short-term interest rates near zero, where they have been since the height of the financial crisis in late 2008. Because there will be no press conference or Fed projections at this meeting, investors will pay close attention to the accompanying statement, which will highlight the Fed’s view on recent economic improvement and accordingly, when the central bank might raise short term interest rates (estimates are for some time in the first half of next year).
Fed Chair Janet Yellen has made clear that her perceptions of a healthy economy hinge largely on a healthy labor market. This week will also feature the July jobs report, which is expected to show continued progress. In the first half of the year, the economy has created an average of 231,000 jobs per month, putting it on track to add more jobs this year than any year since 1999. Economists predict that 225,000 jobs were created in July and that the unemployment rate will remain at 6.1 percent, the lowest level since September 2008.
Of course the labor market is more than just the unemployment rate or the number of jobs created. Whenever I write about the labor market, I receive a bunch of comments that say something like: “Sure the economy is adding jobs, but they are crappy, low-paying jobs!” Indeed, job creation during the sluggish recovery has been skewed more towards lower wage industries, like hospitality and retail.
But the tide may be turning, according to the folks at Capital Economics, who note “the overall quality of the jobs being created is rising. Based on the mix of jobs added in each sector and the average weekly earnings within those sectors, our calculations suggest that the 1.3 million private sector jobs created in the first six months of this year paid an average of $867 a week. That’s slightly higher than the average of $843 per week that the existing 117 million private sector workers earn. The upshot is that the jobs created this year, have been of a slightly higher quality [than last year].”
Given that wage growth has been stuck at about two percent a year, just about matching the pace of inflation, it is no wonder that consumer spending has been spotty during the recovery. It is imperative to see an increase in take home pay for the average American worker, if we have any hope for a new, faster pace of economic growth to take hold in the second half of the year, and beyond.
MARKETS: Despite Friday’s sell-off on disappointing results from Amazon and Visa, earnings season has generally been better than expected. With nearly half of the S&P 500 having reported, 76 percent have beaten earnings expectations and 67 percent have reported above sales estimates, according to FactSet. Earnings growth for Q2 is growing by 6.7 percent, which is ahead of expectations for 4.9 percent growth as of June 30th. The telecom services sector is reporting the highest earnings growth for the quarter, while the Financials sector is reporting the lowest earnings growth.
THE WEEK AHEAD: In addition to the highlights mentioned above, the week ahead will feature reports on housing prices, monthly automobile sales, personal income and spending, manufacturing and consumer confidence.
Mon 7/28:
Coach, Herbalife
10:00 Pending Home Sales
10:30 Dallas Fed Activity report
Tues 7/29:
American Express, Pfizer, UPS, Twitter
9:00 Case Shiller home price index
10:00 Consumer Confidence
Federal Open Market Committee begins
Weds 7/30:
Kraft, MetLife, Whole Foods
8:15 ADP Private Jobs Report
8:30 Q2 GDP (1st estimate)
Federal Open Market Committee concludes
Thurs 7/31:
Avon, MasterCard, ExxonMobil, Conoco
8:30 Weekly Jobless Claims
10:00 Chicago PMI
Senate panel discusses results of a report on "too big to fail" banks (remember that?)
Fri 8/1:
Chevron, Clorox
Automobile Sales
8:30 July Employment Report
8:30 Personal Income and Spending
9:45 PMI Manufacturing
9:55 Consumer Sentiment
10:00 ISM Manufacturing
10:00 Construction Spending
What do Wal-Mart, Family Dollar Stores, Lumber Liquidators and the Container Store have in common? CEO’s from all of these retailers lamented the tepid pace of consumer spending. One even labeled the condition a “retail funk” that has infected the US economy. Let’s start with the biggie: Wal-Mart President and CEO Bill Simon told both Reuters and CNBC that shoppers have not returned to world’s largest retailer at the pace one might expect five years after the recession ended, because “middle-class and lower-class are still economically challenged, only spending during holidays and for family occasions." Despite gains in employment, Simon predicted it would take six months to a year for retailers to start seeing a sales boost from job growth. “We’ve reached a point where it’s not getting any better but it’s not getting any worse – at least for the middle (class) and down." The numbers bear out those sentiments: sales at Wal-Mart's U.S. stores have fallen for five straight quarters, and traffic has dwindled for a year and a half.
Family Dollar Stores reported disappointing quarterly earnings last week and CEO Howard Levine said, "Our results continue to reflect the economic challenges facing our core customer and an intense competitive environment." Similarly, Lumber Liquidators’ CEO Robert Lynch said that earnings were weaker in the first quarter due to bad weather, but the much-hoped for spring-awakening did not occur and “Customer traffic to our stores was significantly weaker than we expected.”
But it was The Container Store’s CEO Kip Tindell (check out this 2011 CBS Sunday Morning segment about The Container Store and CEO Tindell), who actually diagnosed the problem: “Consistent with so many of our fellow retailers, we are experiencing a retail 'funk'…we continue to experience slight traffic declines in this surprisingly tepid retail environment. While consumers are buying homes and automobiles and even high ticket furniture, most segments of retail are, like us, seeing more challenging sales than we had hoped early in 2014 – so we’re not alone in this."
Investors will be eager to see whether other retailers have felt the pinch. The June Retail Sales report will be released on Tuesday and many economists are keeping a keen eye on the results. Sales have been inching up, but there has yet to be a broad-based, consistent gain among a variety of retailers. Despite the woes at the companies noted above, carmakers have enjoyed big gains and high-end retailers, like Tiffany’s and Burberry Group have been racking up the sales.
One thing is clear: until more Americans feel confident enough in the economy to spend more money, we are likely to see mixed results and sub-par growth. We’ll hear a little more about the nation’s progress this week, when Fed Chair Janet Yellen testifies before the Senate Banking and House Financial Service Committees. After minutes from the central bank’s recent policy meeting revealed that the Fed is planning to wrap up its bond buying program in October, lawmakers are likely to ask when the Fed will begin to raise short term interest rates. Based on the economic projections submitted at the most recent policy meeting, officials expect the first rate hike will occur around the middle of next year.
MARKETS:
THE WEEK AHEAD: The financial services sector will headline earnings reports in the week ahead. Analysts predict it will be a tough quarter, with revenue declining by 5.6 percent from a year ago and profits down by 10.3 percent. Investors will pay special attention to Citigroup’s report, after it was reported that the bank and the Justice Department were nearing a $7 billion dollar deal to settle a civil investigation into the sale of mortgage investments.
Mon 7/14:
Citigroup, Barclay’s
Tues 7/15:
Goldman Sachs, JP Morgan, Johnson & Johnson, Yahoo, Intel
8:30 Retail Sales
8:30 Empire State Manufacturing Index
8:30 Import/Export Prices
10:00 Business Inventories
10:00 Janet Yellen testifies before Senate Banking Committee
Weds 7/16:
Bank of America, eBay, Yum! Brands
8:30 Producer Price Index
9:15 Industrial Production
10:00 Housing Market Index
10:00 Janet Yellen testifies before House Financial Services Committee
2:00 Fed Beige Book
Thurs 7/17:
Morgan Stanley, Google, Schlumberger
8:30 Weekly Jobless Claims
8:30 Housing Starts
10:00 Philadelphia Fed Survey
GE CEO Mary Barra and general counsel Mike Millikin testify before a Senate subcommittee on why it took so long to recall cars with faulty ignition switches.
Fri 7/18:
General Electric
9:55 Consumer Sentiment
It should be a quiet holiday-shortened week ahead. US markets are closed on Monday in honor of Martin Luther King Day. The only major economic report will be December existing home sales, which is expected to show a slower pace of activity, due to higher mortgage rates and an increase in inventory. One quirk of 2013 housing market was that as prices firmed, some sellers were more patient; and others could not find homes to buy. The combination pushed down inventory and forced prices higher. However, as the market continues to improve, inventory should rise and as a result, house price increases will downshift from last year’s pace of 12 to 13 percent, to the mid-single digits this year.
A slowdown doesn’t mean a downturn. In fact, economists believe that housing should continue to contribute to economic growth. The reason is that “residential investment” is a broad category, which includes investment in new construction of single family and multifamily structures, improvements to existing housing units, brokers' commissions on the sale of residential property, and some types of equipment that are built into residential structures, such as heating and air-conditioning equipment.
According to the ever-prescient Bill McBride at Calculated Risk, residential investment is usually a strong contributor to GDP growth and employment in the early stages of a recovery, “but not this time - and that weakness was a key reason why the recovery was sluggish...Residential investment finally turned positive during 2011 and made a solid positive contribution to GDP in both 2012 and 2013…and it seems likely that residential investment as a percent of GDP will increase further in 2014.”
MARKETS: Without much fanfare, the S&P 500 reached a new all-time high in the middle of the week, only to be pulled back after late-week earnings disappointed investors.
THE WEEK AHEAD:
Mon 1/20: US MARKETS CLOSED FOR MLK DAY
Tues 1/21:
Coach, JNJ, IBM, Texas Instruments, Verizon
Weds 1/22:
eBay, Netflix
World Economic Forum 2014/Davos (thru Sat)
Thurs 1/23:
McDonald’s, Microsoft, Southwest Airlines, Starbux
8:30 Weekly Jobless Claims
10:00 Existing Home Sales
10:00 FHFA Home Price Index
10:00 Leading Indicators
Fri 1/24:
Kimberly-Clark, Proctor & Gamble, Xerox
The US economy created far fewer jobs than expected in December – just 74,000, the smallest number since January 2011. The unemployment rate dropped to 6.7 percent, the lowest since October 2008, but the rate went down for the wrong reason - it was largely due to 347,000 would-be workers leaving the labor force. That pushed down the participation rate (the number of people actively looking for a job or employed) to a 35-year low of 62.8 percent. (As a point of reference, the participation was about 66-67 percent over the last 20 years. A large portion of the drop (as much as one-half to two-thirds) is attributable to demographics, i.e. Baby Boomers retiring). Considering that analysts were predicting 200,000 jobs created and that the participation would increase, you are not alone in asking, “What happened?”
Some economists noted that the big miss was due to unseasonably severe winter weather last month. The Bureau of Labor Statistics attempts to adjust its findings for seasonal factors. But since more snow fell than in a normal December, the adjustment may have lagged reality. The government’s household survey showed that 273,000 people reported not being able to work because of the weather in December, that’s well above the long-term average of 166,000 for the final month of each year. The folks at Capital Economics said, “It’s even possible that some people who couldn’t get to work were incorrectly recorded as unemployed rather than employed.”
Doubters contend that bad weather should not matter, because the government still counts workers as employed as long as they were paid for one day in the sample period, regardless of whether they turned up. Hard to say, but eyeballing the 16,000 decline in construction and the drop in average weekly hours worked, chances are that bad weather played some role. If that’s the case, then the next few months should show a pickup, as the chill from the Polar Vortex (and all other unnamed weather patterns) pass.
For now, the labor market still has work to do…
Now that the jobs report is behind us, it’s time for earnings season! Fourth quarter earnings for all S&P 500 companies are expected to rise by 6.1 percent, according to FactSet, compared to a 5.1 percent increase in the third quarter. Earnings estimates are down since September 30th, with the energy sector seeing the largest cut. It’s the financial sector that is expected to lead the way, with earnings expected to rise by over 20 percent.
On the economic calendar, December retail sales will provide a closer look at the holiday shopping season. Last week, ShopperTrak said that sales were up 2.7 percent from a year ago in brick-and-mortar stores, despite a steep drop in traffic, which fell 14.6 percent. Separately, low-end retailers Dollar Stores and Sears reported that their customers continue to struggle economically and as a result; the holiday season was a bust.
MARKETS:
THE WEEK AHEAD:
Mon 1/13:
Tues 1/14:
JPMorgan Chase, Wells Fargo
8:30 Retail Sales
8:30 Import/Export Prices
10:00 Business Inventories
Weds 1/15:
Bank of America
8:30 PPI
8:30 Empire State Manufacturing
2:00 Fed Beige Book
Thurs 1/16:
American Express, Citigroup, Goldman Sachs, Intel
8:30 Weekly Jobless Claims
8:30 CPI
10:00 Philadelphia Fed
Fri 1/17:
GE, Morgan Stanley
8:30 Housing Starts
9:15 Industrial Production
9:55 Consumer Sentiment
10:00 Job Openings and Labor Turnover Survey (JOLTS)
Image by www.lendingmemo.com
Let's start at the very beginningA very good place to start When you read you begin with A-B-C When you sing you begin with do-re-mi
- The Sound of Music (1959, music by Richard Rodgers, lyrics by Oscar Hammerstein II)
Investors used to think that starting at the very beginning meant examining corporate earnings. After all, buying stock in a company (or through a stock mutual fund) is a bet that the company will increase its ability to earn money over time. Yet there is ample proof that companies are having a harder time making money by selling more goods and services and have instead been relying more on cost containment and financial engineering to meet their earnings objectives.
S&P 500 corporate profits are expected to rise 2.9 percent in Q1 vs. a year earlier, according to analysts polled by Thomson Reuters, which would be a slowdown from 5.4 percent in Q1 and 6.2 percent in Q4. But those diminished earnings are coming on projected revenue growth of only 1.6 percent. “If companies are having a harder time making money, then why is the stock market rising?” asked a caller to my radio show recently. The answer to that question requires that we start at another beginning…or with Ben Bernanke.
In January, I jotted down 7 reasons why the stock market rally could extend well into 2013:
(1) (2) (3) The Federal Reserve is maintaining its low interest-rate policies (including the monthly purchase of $85 billion worth of bonds) until employment improves substantially
(4) Japanese officials have started to address the country’s multi-decade economic stagnation
(5) Europe is no longer on the precipice of disaster
(6) The much-feared hard landing in China never came to fruition
(7) U.S. housing is finally contributing to economic growth
You get the joke…Ben Bernanke’s Federal Reserve is responsible for the lion’s share of the stock market move. Without easy monetary policy in place, all of the other factors would not have boosted stocks to the levels that we are seeing now. Last September, the Fed launched its current round of bond buying (QE3) and also said that it would maintain low short-term interest rates until mid-2015. The announcement and the subsequent December pledge to keep the program open-ended sparked a rally in global equities.
Everything was honky dory until May 22nd, when during Congressional testimony, Bernanke raised the prospect that the central bank could downshift from its accommodative policies, if economic data were to improve. The subsequent 7½ weeks were volatile for every asset class, with most (bonds, gold, emerging stocks) heading lower. The exception has been the U.S. stock market -- the S&P 500 and Dow Jones Industrial Average tumbled about 7 percent from their intraday record highs in June, before recouping all of those losses and recording a new nominal closing high by the close of trading on Friday.
If the boomerang stock market started its journey with Bernanke’s comments, it makes sense that markets would return home after another Bernanke speech. In it, the Chairman underscored that the central bank would continue to pursue highly accommodative policies for the “foreseeable future,” due to a weak labor market and low inflation. This time, investors took Bernanke at his word.
This week’s key event puts Ben Bernanke back on the hot seat for his semi-annual testimony to the House on Wednesday and to the Senate on Thursday. It is expected that the Chairman will draw a distinction between tapering bond buying, which is likely to begin at either the September or December Fed meeting, if all goes well in the economy; and raising interest rates, which is not likely to occur until 2015. Bernanke and company will have a lot more data to chew on between now and the September 17-18 FOMC meeting, including two more employment reports.
Markets: The risk-on trade was ON…at least for another week. For the 25th time this year, the Dow closed at an all-time closing record. The S&P 500 hit its 19th record close of the year, and the NASDAQ hit its highest closing price since September 2000.
THE WEEK AHEAD: Bernanke’s testimony and earnings season will dominate. Readings on Retail Sales are likely to show an increase, due to a spike in energy prices and consumer inflation at the core level should remain tame.
Mon 7/15:
Citigroup
China GDP
The trial of former Goldman Sachs employee Fabrice “Fab” Tourre begins. He is charged with misleading investors in a mortgage deal begins
8:30 Retail Sales
8:30 Empire State Manufacturing Survey
10:00 Business Inventories
Tues 7/16:
Goldman Sachs, Coca-Cola, Yahoo
8:30 CPI
9:15 Industrial Production
10:00 Housing Market Index
Weds 7/17:
American Express, Bank of America, BNY/Mellon, eBay, IBM, Intel
8:30 Housing Starts
10:00 Ben Bernanke testifies before House
2:00 Fed Beige Book
Thurs 7/18
Capital One, Google, Morgan Stanley, Verizon, Microsoft
8:30 Weekly Jobless Claims
10:00 Ben Bernanke testifies before Senate
10:00 Philadelphia Fed Survey
10:00 Leading Indicators
Fri 7/19:
GE, Honeywell, Schlumberger
