FROM DOUBLE DIP TO MUDDLING THROUGH

Muddling through is my scenario since early July. David Rosenberg has upgraded his double dip scenario, for now…

The (employment) data are hardly strong but admittedly are not consistent with the economy contracting this quarter. But the data do not alter our outlook for a double-dip scenario unfolding before year-end as the policy stimulus continues to fade and the inventory cycle subsides.(…)

Now that the financial market sentiment is moving away from the “double dip” outcome, equity investors still have to confront what a “muddle through” scenario is going to mean for corporate profits because we had such a “muddle through” in the second quarter with 1.6% volume GDP growth, which translated, at a time of cycle-high margins, into virtually flat sequential corporate earnings growth. So, it would stand to reason that if there is vulnerability, it is highly unlikely that we will see profits rise 20% in the coming year as is currently the consensus view in the marketplace.

The jobs report was uninspiring in the aggregate but the bright spots cannot be readily dismissed. First, the private payroll number came in at +67,000, which was above the consensus estimate of +40,000, not to mention the ADP print of -10,000. This, along with the upward headline revisions of 123,000 and the 0.3% MoM gain in the wage number has the bulls rather excited.

But there were many other parts of the nonfarm report that left much to be desired. Here’s an unlucky seven examples of softness beneath the surface:
1. Aggregate hours worked were flat.
2. All the employment gains were part-time — full-time employment, as per the Household Survey, plunged 254,000.
3. Those working part-time for “economic reasons” surged 331,000 — the biggest increase in six months.
4. While private payrolls were better than expected, 10,000 of that +67,000 tally reflected returning construction workers who had been on strike.
5. Manufacturing employment was down 27,000 and total goods producing jobs were flat — hardly signs of a robust economic backdrop.
6. The diffusion index for private payrolls actually fell to 53.0 from 56.7 in July — a seven-month low. It was 68.0 at the April high, which is consistent with an economy slowing down to stall-speed.
7 . The labour market gap widened with the all-inclusive U6 unemployment rate rising to a four-month high of 16.7% from 16.5% in July. This is why the odds are stacked against a sustained acceleration in wages.

Moreover, there is nothing in the data to suggest anything but a further slowing in Q3, and the only reason why there is no contraction this quarter is because it looks as though we are getting another lift from inventories — though now the buildup looks involuntary, which will cast a cloud on fourth-quarter GDP barring a sudden reversal in the declining trend in real final sales.

ISI’s Ed Hyman has a list of surprisingly strong data recently, namely

Today’s employment report, The Case-Shiller housing index, the US manufcaturing PMI, pending house sales picking up, better than expected chain store sales, M1 accelerating, blowout German Q2 GDP, China servicing PMI rose more than expected while the manufacturing PMI unexpectedly increased, Australia nominal Q2 GDP +15.4% a.r., Brazil nominal Q2 GDP + 12.9% a.r..

So no double dip there as well, only a “soft patch”.

NBF Financial names it a “slow recovery”.

The U.S. labour market is not collapsing. (…) The jobs report was all the more encouraging given that the two previous months were revised up by a cumulative 123,000. While negative job creation at this point in the economic cycle is a disappointment, the good news is that the losses continue to be more than offset by the combination of rising hourly earnings and a longer workweek. We calculate that the economy-wide wage bill rose 0.2% in August, following a gain of 0.5% in July. This was the sixth increase in eight months. Even if payroll jobs remain more than 5% below their pre-recession peak, the economy-wide wage bill has fared much better.  As today’s Hot Chart shows, the spending power of U.S. employees was only 1.2% below its pre-recession peak in August (a development that reflects the productivity surge in the U.S.). An improving wage bill does not herald a retrenchment in consumer spending. The U.S. remains in a slow recovery, but a recovery nonetheless.

image

 

Leave a Reply

Your email address will not be published. Required fields are marked *