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The U.S. economy is experiencing “a particularly bright moment,” according to Federal Reserve Chairman Jerome Powell, which is why Fed officials increased interest rates by a quarter of a percentage point to a new range of 2 to 2.25 percent and are likely to hike one more time by the end of the year. The strength is likely to persist into next year. According to the central bank’s “dot plot,” which is intended to forecast future actions, there will be four rate hikes by the end of 2019.
If during a two week summer vacation, you heard that there was an escalation of tensions between the US and Korea; two international terrorist attacks; a US domestic terrorist attack; a looming debt ceiling crisis; and political upheaval in the White House, you might think that US stock markets would be in free-fall. You would be mistaken. Although markets were down over the most recent fortnight, the damage was fairly limited—about two percent overall. Even with the recent declines, the S&P 500 remains 8.3 percent higher on the year and just 2.2 percent below its record high, while the NASDAQ is up 15.5 percent in 2017. Given these numbers, its not surprising that the most frequently asked question that I have fielded over the past month has been, “I can’t believe that market is doping so well, considering (fill in the blank)…SHOULD I SELL MY STOCKS?”
The April jobs report continued the saga of a two-tiered labor market. The economy added 160,000 jobs and the unemployment rate remained at 5 percent. Revisions to the previous two moths amounted to 19,000 fewer jobs than originally reported. But the broad numbers may not paint a true picture of the employment landscape. The biggest complaint is that overall wage growth has been unimpressive. In April, average hourly wages increased by 0.3 percent, nudging up the annual increase to 2.5 percent. Given the impressive number of jobs added, most analysts have been promising that wage growth would soon follow, but annual wage growth has remained between 2 and 2.5 percent for the past few years, below the near-3 percent seen in previous expansions. While 2.5 percent is not a bad number, we have been here before and now need to see consistent readings that are trending higher.
It’s not supposed to work this way. If employers are having a hard time filling positions, and workers are more willing to jump ship, wages should be rising faster. However, according to economist Joel Naroff, “No matter how tight the market may be, companies are still willing to go without new hires and limit pay increases.”
It may be that the labor market is not quite as healthy as the top line measures indicate. In addition to the 2.1 million Americans who have been out of work for more than six months, the number of workers who work part-time but would rather be full-time remains at a still-elevated 6 million. According to research from the Federal Reserve Bank of Chicago, the high numbers of “part-time for economic reasons” is a contributing factor to limiting wage growth.
What appears to be happening is that workers in the high growth fields can demand higher wages, but the vast majority of workers either don’t feel like they have bargaining power or have made a different kind of adjustment: if the boss can’t pay me more, maybe I will work a little less. This could be part of the reason why worker productivity has dropped off. According to the Labor Department, in the recent 2007-2015 period, annual labor productivity has slowed significantly to 1.2 percent, the worst period since the late-1970s to mid-1980s. Naroff says the downshift is understandable because “until workers have reasons to work harder (i.e., greater compensation), they will find ways not to work harder.”
Of course, with corporate earnings set to drop for a third consecutive quarter, companies are unwilling to take the first step to incentivize their workforces. This strange game of chicken is unlikely to continue for too much longer. Unfortunately, there is probably an equal probability that we see a downshift in the economy, which would spur workers to step it up; and an uptick, which would force companies to pay more.
MARKETS:
THE WEEK AHEAD:
Mon 5/9:
China CPI/PPI
Tues 5/10:
Walt Disney
6:00 NFIB Small Business Optimism Index
10:00 JOLTS
Weds 5/11:
Macy’s
2:00 Treasury Budget
Thursday 5/12:
Kohl’s, Ralph Lauren, Nordstrom
8:30 Import/Export Prices
Friday 5/13:
JC Penney
8:30 Retail Sales
8:30 PPI
10:00 Consumer Sentiment
It’s never as good or as bad as you think. For the past few months, there has been a chorus of downbeat chants that the U.S. economy is headed for a downturn and that the job market was the leading indicator of the coming storm. The Cassandra’s cited the weak job creation numbers in August (+153,000) and September (+137,000), a sizable pullback in manufacturing and the much-feared hard landing in China. These doubters said that the Fed would have to wait at least until March 2016 to raise rates, in order to determine whether the slowdown was temporary or longer lasting. All of that changed when the government released the October employment report. The labor market bounced back in October, adding 271,000 jobs. It was the best pace of hiring this year and well ahead of the consensus estimate for 180,000. With this report, the three-month average increased by 20,000 a month to 187,000 and the 12-month average stands at 230,000.
The unemployment rate edged down to 5 percent, the lowest level since April 2008 and the broader measure of unemployment, which includes those who have stopped looking as well as those working part-time for economic reasons, edged down to 9.8 percent. While that’s still a hefty number, it is the first time that it's been below 10 percent since May 2008. And average hourly earnings increased by 2.5 percent from a year ago, the fastest year-over-year pace since 2009. If maintained, the extra money could potentially help consumers feel more economically secure and spend more freely.
Before you start the celebration, there is no doubt that the jobs market is not a-ok for everyone. Manufacturing has slowed down, due to plunging energy prices, weakness in China and the emerging markets and a strengthening U.S. dollar. One manufacturing executive based in MN, told me that the sector was in “a second recession.” Indeed, various indicators show that output, although still barely positive, is at the weakest pace since 2009. But there are signs of improvement on the horizon: there has been evidence of a near-term bottoming of Chinese (the Shanghai Composite has gained more than 20 percent since its low in late August) and other emerging economies and commodity prices have stabilized.
In fact, the firming global situation, along with the stronger than expected jobs report, now puts a December Fed rate hike back on the table. Just two weeks ago, the futures markets saw only a 30 percent chance of a December lift-off. A day before the jobs report, that number was over 50 percent and moments after the BLS release, it jumped to over 70 percent.
But as a reminder, the month-to-month numbers can change on a dime and it is really never as bad or good as you think…although the economy appears to be firming, sentiment could quickly sour again. For now, enjoy the good news.
MARKETS:
THE WEEK AHEAD:
Mon 11/9:
Tues 11/10:
6:00 NFIB Small Business Optimism
Weds 11/11:
Thurs 11/12:
10:00 Job Openings and Labor Turnover Survey (JOLTS)
Fri 11/13:
8:30 PPI
8:30 Retail Sales
10:00 Consumer Sentiment
The death of the job market was greatly exaggerated. Cassandra’s were out in force after the weak first quarter, but to the relief of economists, the May employment report showed a much hoped for spring back in the labor market. The Bureau of Labor Statistics said 280,000 new jobs were added last month, exceeding the consensus estimate of 220,000. The previous two months were revised higher by a total of 32,000. Over the past six months, the economy has added an average of 236,000 jobs per month, a solid gain though lower than last year's monthly average of about 260,000. The unemployment rate ticked up to 5.5 percent for the right reason-like in April, more people joined the labor force and while a number of them landed jobs, some were not able to do so in May. [As a point of reference, in the three years prior to the recession, the unemployment rate averaged 4.8 percent, which is below the post World War II average of 5.8 percent.]
The labor force participation rate (the number of Americans in the labor force or actively seeking employment) ticked up to 62.9 percent, the high end of the narrow range of 62.7 to 62.9 percent seen for the past year. There was also a 268,000-drop in discouraged workers in May to 1.9 million, the lowest number since 2008.
As more candidates snag those coveted jobs, economists say that wage gains are not likely to be far behind. In this report, average earnings increased at a better than expected pace month over month and are now up 2.3 percent from a year ago, the biggest increase since the summer of 2013. Before you pop the champagne, it’s worth considering that 2.3 percent is just a touch ahead of the pokey pace of the past few years, is still below the 3 percent growth seen in the last expansion and not to rub salt into the wound, but increases of more than 4 percent were common in past expansions.
Those wage gains are elusive because there is still significant slack in the labor market. Slack can come in many forms: those 1.9 million discouraged workers; the 6.7 million people working part time, who want a full-time job; and the 2.5 million long-term unemployed. As a report from the Atlanta Fed recently noted: “There is intense competition among job seekers for available job opportunities. And within many jobs, the demand for more hours has been greater than the supply of hours offered by employers.”
Productivity, or lack thereof, is also creating a headwind for wage growth. First quarter productivity decreased at a 3.1 percent seasonally adjusted annual rate and has now fallen for two consecutive quarters, the first time that has happened since 2006. “The most important factor determining living standards is productivity growth, defined as increases in how much can be produced in an hour of work,” Fed Chairwoman Janet Yellen said in a speech last month. “Over time, sustained increases in productivity are necessary to support rising incomes.”
Finally, economists note that because inflation is running low and the hangover form the recession remains indelible, workers have not demanded higher wages. But the tide could be turning, as the May jobs report showed a little spring in the labor market's step!
MARKETS: Despite fears than an M&A boom is fueling high valuations in the tech sector and pushing stock indexes to unsustainable levels, the action this week was in the bond market. Benchmark government bond yields in Europe, Japan and the US increased to their highest levels of the year. After the jobs report confirmed strengthening in the US economy, the price of the US 10-year dropped and the yield rose to 2.4 percent, the highest closing level since October 6th. The latest action prompts the question: Is the thirty-year bull market in bonds finally coming to a close? Stay tuned…
THE WEEK AHEAD:
Mon 6/8:
Apple developer conference: Company expected to launch a streaming music service
Tues 6/9:
9:00 NFIB Small Business Optimism Index
10:00 Job Openings and Labor Turnover Survey (JOLTS)
Weds 6/10:
Thurs 6/11:
8:30 Retail Sales
8:30 Import/Export Prices
Fri 6/12:
8:30 Producer Price Index
9:55 U Michigan Consumer Sentiment
What’s going on with the American consumer? Most economists thought that the plunge in energy prices would eventually show up in a little extra spending elsewhere in the economy. So far, that has not been the case. Retail sales in April were flat and excluding gasoline, they were up just 0.1 percent from March. People are not spending, because they are not buying that the economic recovery is for real. The University of Michigan’s consumer sentiment index dropped sharply, with respondents’ saying that they are still concerned about losing their jobs. In fact, they reported the highest probability of losing their jobs since 2009. The sour mood coincides with data showing that new jobless claims remain at 15-year lows.
And it’s not just in the U.S., says Capital Economics “consumers in advanced economies [US, euro zone, UK and Japan] have so far opted to save, rather than spend, their oil windfall.” All is not lost, because there is hope that as labor markets strengthen, confidence and spending should follow. Additionally Joel Naroff of Naroff Economic Advisors reminds us that the retail sales report does “not include services, which is two-thirds of spending, so we really cannot count the consumer out just yet.”
In addition to consumer spending, which is expected to spring back in the coming months, hopes are high for continued housing market gains. For much of the recovery, potential first time homebuyers were opting for rentals due to a combination of outstanding student loan debt, difficulty in obtaining mortgages and a generalized fear of owning a home. The later two issues appear to be dissipating (home purchase mortgage applications increased to a two-year high in April), especially as rents rise in many of the cities where young, first time buyers live.
Unfortunately, outstanding student loans could continue to partially impede progress in the housing market. Just in time for college graduation season, the New York Federal Reserve reported that total outstanding student loan debt increased to 1.2 trillion in the first quarter, up $78 billion from a year ago. Additionally, the college class of 2015 holds a dubious distinction: its graduates are the most indebted ever. The average graduate, with a student-loan, owes just over $35,000, according to Edvisors. Adjusted for inflation, that’s more than double the amount borrowers had two decades ago.
MARKETS: Consumer confidence may be down, but that hasn't stopped investors from pushing up stocks at or near record levels.
THE WEEK AHEAD: Traders are eagerly awaiting a long weekend-most will focus on minutes from the last Fed policy meeting and earnings reports from some of the nation’s largest retailers.
Mon 5/18:
Urban Outfitters
10:00 Housing Market Index
Tues 5/19:
Home Depot, TJX, Wal-Mart
8:30 Housing Starts
Weds 5/20:
Lowes, Sears, Staples, Target
2:00 FOMC Minutes
Thurs 5/21:
Aeropostale, Best Buy, Dollar Tree, Gap
10:00 Philly Fed
10:00 Existing Home Sales
Fri 5/22:
Ann Taylor, Foot Locker
8:30 Consumer Price Index
We have now entered the third stage of the psychological condition known as “Investor Angst”. As a reminder, stage one began nearly two years ago, with the "Taper Tantrum". On May 22, 2013, the Federal Reserve announced that it would begin tapering its bond and mortgage backed securities program. The news freaked out investors and they sold just about everything that was considered risky. The second stage was "Patience Panic", which began this year, as investors perseverated over whether or not the Fed would remove the word “patient” from its monetary policy statement. When the news finally emerged that the central bankers were no longer "patient" as to when they would consider hiking rates, reality sank in and investors entered stage three of the affliction, "Rate Rage".
The more rational among us might think, “Wait, isn’t it a good thing that the Fed is finally going to normalize its policy? Doesn’t that mean that the economy is officially out of the woods and we can put the financial crisis, the Great Recession and the stinky recovery behind us? And after all, who cares whether the Fed starts increasing interest rates at the June or the September meeting—does ninety days really matter to my long term game plan?”
All of those are great questions, but they matter little to institutional investors, who have been enjoying this period of ZIRP (Zero Interest Rate Policy) and are riding high on the big gains in their portfolios. The “pros” are among the most likely to suffer from Rate Rage, because once interest rates start to rise, the period of easy money is over and they must return to the mundane world where old school financial analysis is necessary to score big investment returns.
That’s why as you were gearing up for a big weekend of NCAA basketball, the “Rate Ragers” were focused on a speech that Fed Chair Janet Yellen delivered on Friday. Here’s what you need to know about the 18-page (more than 4,000 words) treatise that she delivered: the central bank will raise short term interest rates later this year; and once it does actually happen, the pace of increases will be gradual and will depend on economic conditions. In other words, Yellen told us what we already knew.
For those suffering from Rate Rage, perhaps the only solace is to remember that the rationale behind rising rates is that things are getting better. And because the process is likely to be a slow one, the U.S. economy should still be able to expand to its historic, post World War II pace of 3 to 3.5 percent. That doesn’t mean that stock prices will shoot up, but frankly, after a six-year bull market, what did you expect?
As companies’ increase wages (a good thing!), their profits will be curtailed. I’m guessing that most workers would gladly trade a bump in pay for an extra couple of percentage points of gains in their retirement accounts this year. To put into perspective how much ground needs to be covered in wages, the analysts at Capital Economics note that labor’s share of corporate profits after tax has fallen to 57.7 percent, down dramatically from the peak of 66.3 percent in Q1 2001. While the drop partly reflects “the structural forces of globalization and technological progress…it has also been a cyclical response to the deepest recession in recent memory.”
To determine when those much-needed and anticipated pay raises are coming, the focus will be on the government’s monthly employment report, which is due on Friday. It’s expected that the economy added 250,000 new jobs and the unemployment rate remained at 5.5 percent.
MARKETS:
THE WEEK AHEAD:
Mon 3/30
8:30 Personal Income and Spending
10:00 Pending Home Sales
10:30 Dallas Fed Survey
Tues 3/31:
9:00 Case- Schiller Home Price Indexes
9:45 Chicago PMI
10:00 Consumer Confidence
Weds 4/1:
Motor Vehicle Sales
8:15 ADP Private Jobs Report
9:45 PMI Manufacturing
10:00 ISM Manufacturing
10:00 Construction Spending
Thurs 4/2:
8:30 International Trade
10:00 Factory Orders
Fri 4/3: Good Friday: Markets Closed, Banks Open
8:30 March Employment Report
After a slight delay, the Labor Department reported that the economy added 295,000 jobs in February, ahead of estimates for 230,000 and better than the average monthly gain of 266,000 over the past year. January’s result was revised down by 18,000 but December’s strong 329,000 was unchanged. Even with the downward revision, payrolls are still rising at a three-month average of 288,000 a month. There is no doubt that job creation has kicked into a higher gear over the past year. A total of 3.3 million jobs were added, the highest year-over-year gain since the end of the 1990s. Meanwhile, the unemployment rate slid to 5.5 percent from 5.7 percent, due to a 178,000 decline in the labor force. The BLS noted that the labor force participation rate, at 62.8 percent, “has remained within a narrow range of 62.7 to 62.9 percent since April 2014.” Economists have attributed at least half of the more than three percent decline in the participation from pre-recession levels to the demographic trend of the retiring baby-boom generation. The rest of the drop reflects a deep jobs recession, which prompts disgruntled workers to give up their search. In her recent Congressional testimony Fed Chair Janet Yellen said that the low participation rate continues to suggest, “some cyclical weakness persists.”
The problem for Yellen is that the unemployment rate is now at the top end of the Fed’s 5.2 to 5.5 percent estimate of the natural rate. As a matter of policy, when the rate falls into the “natural” range, the central bank would start to increase short-term interest rates. But Yellen has also noted that wage growth would be a factor in the Fed’s decision on lift-off of rates.
Despite healthy job creation, average hourly earnings advanced by just 2 percent in February from a year earlier, stubbornly slow progress. Wages grew at a better than 3 percent rate annually during the prior recovery that ended in 2007. Economist Joel Naroff believes that wage growth is a lagging indicator “and with major employers announcing pay increases, it is only a matter of time before wages, however we measure them, increase faster.”
The long-awaited jump in wages could be coming sooner rather than later, according to the Financial Times. The fact that younger employees are seeing better growth; and lower wage earners are seeing a moderate improvement in incomes, “could be a harbinger of stronger earnings across the economy.” Analysts at Capital Economics say if the Fed waits until wage growth rises at a more normal pace, it risks being “well behind the curve.”
Meanwhile, investors threw a little tantrum on Friday, after the stronger than expected jobs report got some thinking that the Fed would be forced to raise rates at the June meeting. Stock indexes were down 1 - 1.5 percent and bond prices slumped. At some point, these knee-jerk reactions will stop and everyone will realize that more normal interest rate policy would indicate a healthier economy.
We'll hear more about the potential timing of rate increases at the next Federal Reserve policy meeting on March 17 and 18. One clue that the central bankers might increase rates as soon as June would be the removal a key phrase in the accompanying statement. If the Fed is no longer "patient" as to when it will consider hiking rates, we could see a June lift-off. BUCKLE UP!
MARKETS: Last week there was little fanfare over the NASDAQ reclaiming 5000 after 15 long years. Perhaps investors might feel a bit better when they reflect on the 6-year anniversary of the bear market lows, which occurred on March 9, 2009 (see stats below).
THE WEEK AHEAD:
Mon 3/9: 6th Anniversary of Bear Market Lows
Here’s where we stood 6 years ago--since then, the broad S&P 500 has gained 150 percent, on an inflation-adjusted basis (dividends not included).
Tues 3/10:
9:00 NFIB Small Business Optimism
10:00 Job Openings and Labor Turnover Survey (JOLTS)
Weds 3/11:
Thurs 3/12:
8:30 Retail Sales
8:30 Import/Export Prices
10:00 Business Inventories
Fri 3/13:
8:30 PPI
10:00 Consumer Sentiment
It’s official: 2014 was the best year for job growth since 1999, with a total of 2.952 million non-farm jobs created. The Labor Department reported that the U.S. economy added 252,000 jobs in December and the unemployment rate dropped to 5.6 percent, the lowest level since June 2008. That said, the labor market still remains in the healing phase for at least these four reasons:
Just days ahead of the December jobs report, the Federal Reserve Bank of San Francisco released a paper asking “Why Is Wage Growth So Slow?” (I asked a similar question six months ago, “When Will Americans Get a Raise?”) Authors Mary C. Daly and Bart Hobijn note, “A prominent feature of the Great Recession and subsequent recovery has been the unusual behavior of wages.” At this point you may want to exclaim, “NO KIDDING” or some other expletive, but what was really unusual about the most recent recession, according to the research, is that more workers did not take STEEPER wage cuts.
In past recessions, companies cut wages and then subsequently raised them amid upturns. But in the past three recessions, Corporate America minimized wage cuts and instead laid-off more workers. The goal was to keep the remaining workers happy. Who knew that those who kept their jobs had it better than they thought?
Because many firms did not reduce wages during the recession, “they must now work off a stockpile of pent-up wage cuts.” And because “it takes some time to fully exhaust the pool of wage cuts, wage growth remains low even as the economy expands and the unemployment rate declines.”
That’s why despite putting up the best year for job creation since 1999, wage growth continues to be disappointing. “Industries that were least able to cut wages during the downturn and therefore accrued the most pent-up cuts have experienced relatively slower wage growth during the recovery.” Fed economists say wage growth should slowly pick up, as the labor market tightens and companies are forced to pay up for talent. American workers are waiting...
MARKETS: If the first week of the year is a harbinger for the rest of 2015, we better fasten our seat belts, because it's going to be a bumpy ride.
THE WEEK AHEAD: What’s the upside of stagnant wages? It’s good for corporate profitability. This week kicks off quarterly earnings season and the estimated year-over-year earnings growth rate for S&P 500 companies in Q4 is 1.1 percent, according to Factset. Analysts will also be keeping a close tab on those companies that are either hurt by or benefit from lower oil prices.
Mon 1/12:
Alcoa
Tues 1/13:
7:30 NFIB Small Bus Optimism
10:00 Job Openings and Labor Turnover Survey (JOLTS)
Weds 1/14:
JP Morgan Chase, Wells Fargo
8:30 Dec Retail Sales
2:00 Fed Beige Book of Economic Conditions
Thurs 1/15:
Citigroup, Bank of America, Schwab, Schlumberger, Intel
8:30 Weekly Jobless Claims
8:30 Producer Price Index
8:30 Empire State Manufacturing Index
10:00 Philadelphia Fed Survey
Fri 1/16:
Goldman Sachs
8:30 Consumer Price Index
9:15 Industrial Production
9:55 Consumer Sentiment
You can forgive the vast majority of Americans for not celebrating last week’s 28th record high of the year for the S&P 500 index. Oh sure, people like to see retirement accounts rise in value, but there is a pervasive sense among workers that they are not getting ahead. In fact, just as the stock market completed its strongest week in four months, a new report from Sentier Research on income revealed that many continue to struggle. As of June, median income for all households, adjusted for inflation, was $53,891. Here's the good news: in the past three years, incomes are up 3.8 percent. The bad news is that in the five years since the recession ended, median income has fallen by 3.1 percent. That’s just one of the reasons that when Federal Reserve Chair Janet Yellen delivered her much-anticipated speech from Jackson Hole, WY, she said that “the unemployment rate has fallen considerably, and at a surprisingly rapid pace,” but “the labor market has yet to fully recover.”
How has it not recovered? Well, as of July, there were 3.2 million workers who have been unemployed for more than 26 weeks and still want a job. Although this is well below the peak of 6.7 million and the lowest level February 2009, it is still very high. Additionally, while the unemployment rate has dropped nearly 4 percentage points from its late 2009 peak to 6.2 percent in July, the broad unemployment rate (defined as the official rate, plus marginally attached workers; those who are neither working nor looking for work, but want a job and have looked for work recently; and people who are employed part time for economic reasons), stands at a lofty 12.2 percent.
And then of course there’s the problem of Americans’ eroding earning potential, highlighted by the Sentier report. But as Yellen noted, part of the problem is structural, meaning that some global economic changes that have put pressure on incomes are here to stay. Sentier found that median income, adjusted for inflation, is 5.9 percent below where it stood in the year 2000. The stunning fact that the average American is WORSE OFF than he or she was fourteen years ago seems to get short shrift in reporting on the recovery.
There are a few factors that have contributed to the longer term slide in incomes: (1) Globalization allowed companies to move operations overseas, where wages were cheaper than in the US; (2) Technological advancements eliminated the need for as many workers overall; and (3) Most public companies have been more concerned with boosting share prices than in paying workers.
In an effort not to end on such a downbeat note, it’s worth noting that economists believe that as the economy continues to improve, incomes will slowly rise. Unfortunately, that may be cold comfort to millions who are having a hard time meeting their daily obligations. As one radio listener recently said, “I like when my 401K goes up, but it doesn’t help me pay the utility bill!”
MARKETS: Just in time for the busy Labor Day weekend, oil and gas prices have dropped to near 6-month lows.
THE WEEK AHEAD:
Mon 8/25:
10:00 New Home Sales
10:30 Dallas Fed Survey
Tues 8/26:
8:30 Durable Goods Orders
9:00 Case-Schiller Home Price Index
10:00 Consumer Confidence
Weds 8/27
Thurs 8/28:
8:30 Weekly Jobless Claims
8:30 Q2 GDP – 2nd estimate (Preliminary: 4%)
8:30 Corporate Profits
10:00 Pending Home Sales
Fri 8/29:
8:30 Personal Income and Spending
9:45 Chicago PMI
9:55 Consumer Sentiment
