NEW$ & VIEW$ (5 AUGUST 2013)

Low Pay Clouds Job Growth

The U.S. labor market’s long, slow recovery slowed further in July—and many of the jobs that were created were in low-wage industries.

Employers added a seasonally adjusted 162,000 jobs in July, the fewest since March, the Labor Department said Friday, and hiring was also weaker in May and June than initially reported. Moreover, more than half the job gains were in the restaurant and retail sectors, both of which pay well under $20 an hour on average. (…)

Over the past year, lower-paying sectors such as retail, restaurants, hotels and temporary-help agencies accounted for more than 40% of job growth. Many of those jobs are part time; the share of Americans imageworking part time, which spiked during the recession, has shown little improvement and has been trending upward for much of this year. (…)

Of the 227,000 new jobs in the July household survey, 45% were part-time in June. In the past three months 684,000 (97%) of the 706,000 new jobs were part-time (Chart from NBF Financial).

But the proliferation of low-wage jobs is leading to anemic growth in incomes. Average hourly wages were up by less than 2% in July from a year earlier, continuing a pattern of weak wage growth in the recovery. A broader measure of income released by the Commerce Department on Friday showed that inflation-adjusted incomes actually fell slightly in June. (…)

The U.S. has added an average of 192,000 nonfarm jobs per month so far this year, hardly a robust pace but more than enough to keep up with population growth. (…)

But only 175,000 on average in the last three months. The lack of momentum is also apparent in the private sector where an average 181,000 jobs were created in the last 3 months compared with 206,000 in the previous 4 months.

The number of Americans working or looking for work fell by 37,000 in July; as a share of the population, the labor force remains near a three-decade low.

Questions of Quality

Pointing up Aggregate hours worked fell 0.1% as the workweek declined 0.2% (-0.1% in the private sector), and wages fell 0.1% in July leading the annual pace to slow to 1.9% from 2.1%. As a result, workers’ earned income fell by 0.3% in July.

Oh! by the way, ISI Company Surveys have been weaker lately with their diffusion index threatening to go negative. Most of their consumer-related surveys are weaker. We are entering the all-important back-to-school season. Eighteen states are offering sales tax holidays for a couple of days in August, 12 were last weekend.

Construction Jobs Are a Wreck The housing industry may be resurgent but construction jobs aren’t helping build payrolls.

Friday’s employment report showed that construction industry jobs fell by 6,000 in July and are down three of the past four months. At a seasonally adjusted 5.79 million, the number of jobs in the sector is up less than 3% from a year earlier.

But the real culprit appears to be a big drop in public construction.

Residential and specialty trade contractors — home builders — added 6,300 jobs in July.

Meanwhile, the nonresidential side cut 9,500 jobs. Heavy and civil engineering subtracted another 2,000 positions.

Looking only at residential construction, there was a loss of 400 jobs in the last 3 months. Actually, on a non-seasonally adjusted basis, the number of construction workers in the U.S. has increased only by 8,100 workers or 1.3% in one year. What housing recovery?


Meanwhile, Congress is back to budget brinksmanship, with the threat of a possible government shutdown in the fall and another market-rattling fight over the federal government’s borrowing limit looming ever-larger. So no one really knows — not even the Fed — what the central bank will do in September, and the July jobs numbers didn’t change that one bit. (WSJ)

Barron’s Gene Epstein adds this to blur everyone’s vision:

But if there were no signs of improvement over the job gains of last year, there was one apparent bright spot in the July report. The unemployment rate fell two-tenths of a percentage to 7.4%.

The bright spot was tarnished, however, by another trend in job-deprivation. Based on the BLS measure of labor underutilization that includes involuntary part-timers, the official unemployment rate “should” have read 7.9% rather than 7.4%. The math involved in generating that 7.9% is fairly straightforward.

The BLS keeps six measures of labor underutilization, “U-1” through “U-6,” of which U-3 is the official measure. U-3 covers only those jobless folks 16 and older who have looked for work over the past four weeks. U-6 includes those folks and adds two other categories, often referred to as the “hidden unemployed.” The first is the “marginally attached”—people who haven’t looked for a job over the past four weeks, but have done so over the past 12 months. The second consists of the involuntary part-timers (“part-time for economic reasons,” in BLS parlance)—people who work part-time, but are searching for full-time positions. (…)

For 15 months from October 1999 through December 2000, U-3 fluctuated between 3.8% and 4.1%—by all accounts, a time when jobs were quite plentiful and the labor markets unusually tight. Yet through this same 15 months, U-6 ran between 6.8% and 7.2%, averaging 177% higher. And it turns out that, over the 235 months since January 1994 when the BLS began tracking U-6, the ratio between U-6 and U-3 has also been 177%. Over that period, the ratio has fluctuated between a low of 163%, in ’02 and ’03, and a high of 189%. When the ratio gets that high, U-6 may be trying to tell us something.

That high of 189% was reached just last month. In July 2013, U-6 was at 14%, and if you assume a “normal” ratio last month of 177%, then U-3 would be 7.9%, not 7.4%. Also, if you parse U-6 you find that, the reason it’s unusually high is not because of the marginally attached, but because of the unusually high share of involuntary part-timers.

U.S. Consumer Spending Rises 0.5%

Personal spending, which measures how much Americans spend on items from gasoline to refrigerators, rose 0.5% in June from a month earlier, the Commerce Department said Friday. The spending boost was more than double the increase in May and the biggest since February.

Personal incomes, meanwhile, rose 0.3%, down slightly from May’s revised increase of 0.4%. (…)

However, in one potentially troubling sign, Americans’ disposable income, adjusted for inflation, fell for the first time in months. That could raise doubts as to how much spending will increase in coming months. (…)

Doug Short’s charts reveal the consumer squeeze:

Click to View

Savings are of little help. The 2005-08 low savings rates came from the housing bubble, unlikely to get repeated for a while.

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The price index for personal consumption expenditures, the Fed’s preferred gauge for inflation, rose just 1.3% in June from a year ago. That was higher than 1.1% year-over year increase in May but still far below the Fed’s target of 2% inflation.

So-called core prices, which exclude volatile food and energy costs, rose 1.2% in June from a year ago. That was the same year-over-year increase as in May.

Just kidding  Simple math: per capita real disposable income growth is 0%, employment growth is 1.7% and mostly part-time and savings are just about as low as they can get. Tough to expect spending growth in excess of 1.5-2.0%. That’s for 70% of the economy. Another 20% is government spending, going nowhere for a while longer. Never mind the rest.

Hence: real consumption has grown 1.5% in Q1 and 1.2% in Q2. Real GDP was +1.7% in Q2 (on a big inventory rise) and +1.1% in Q1. Clearly, the U.S. economy is not accelerating as many pundits, including many Fed officials, expected.

Comstock Partners observes:

Since consumer spending accounts for about 70% of GDP, we see little chance that other sectors can make up for the shortfall created by the lack of demand. In fact, the economy is likely to face additional headwinds as a result of the coming showdown in Washington over the fiscal 2014 Federal budget and another fight over the debt ceiling. The result could be either a White House concession on spending leading to additional fiscal restraint or the debilitating threat of a government shutdown. Although this has not yet gotten a lot of attention in the media, it will probably hit the headlines and dominate cable news after the congressional summer recess.

Ghost  And just when practically nobody uses the R word, they add:

In assessing the prospect for growth, it is also important to mention the much-discussed concept of “stall speed”, the point at which the economy can no longer maintain momentum and, therefore, falls into recession. In post-World War II recoveries whenever the 4-quarter growth rate of GDP has declined to below 2% the economy has gone into recession within a short time. In this regard, it is noteworthy that 2nd quarter GDP growth was only up 1.4% from a year earlier. This does not bode well for the widely expected pickup in the 2nd half, particularly in view of the headwinds from the coming political fight over the budget and debt limit, the possible tapering of QE, and the numerous problems facing the global economy.

But the best recession indicator has yet to turn down even though it has been flattening out lately…(charts from Doug Short)

Click to View


Click to View


Stay tune!

U.S. Factory Orders Rise 1.5%

Demand for U.S. factory goods rose in June, boosted by higher demand for aircraft, as businesses stepped up investments but at a slower pace than earlier in the spring.

Excluding transportation, factory orders were down 0.4%.

Orders for nondefense capital goods excluding aircraft rose 0.9%, after rising 2.1% in May and 1.2% in April. That figure is considered a proxy for business spending on equipment and software.

The report also showed that orders for goods expected to last more than three years, such as cars or refrigerators—known as durable goods—rose 3.9%. That was revised downward from last week’s 4.2%.

In one potentially troubling sign, orders for consumer goods fell 0.7%, largely on nondurable items.


PMI readings signal the end of Eurozone recession in the third quarter

PMI surveys confirm the ongoing improvement seen recently in business surveys (EC surveys, Ifo) and hard data (Industrial production, retail sales). Beyond the uncertainties regarding Q2 outcomes, this suggests that the euro area economy as a whole may exit recession in Q3, although the recovery remains fragile due to several headwinds, in particular the ongoing deleveraging process, Chinese slowdown and political instability. (Pictet)

Euro-Zone Retail Sales Fall

Eurostat said the volume of sales in June was down 0.5% from May, and 0.9% from June 2012. The month-to-month decline was the largest since December 2012.



In fact, sales volume was up 1.1% in May. But the important stat is core sales, excluding food and fuel, which were down 0.2% in June after surging 1.1% in April and 0.7% in May. In total, core sales were +1.6% in real terms in Q2 (+6.5% a.r.), following +0.2% in Q1 0.8% a.r.).

Is Spain’s Experiment About to Succeed?

(…) Spain has become a giant laboratory for an experiment never before attempted in a modern democracy. Can a program of austerity and structural overhauls extricate an economy from a debt crisis? Is it really possible for a country to achieve a so-called internal devaluation—restoring its competitiveness by cutting wages and boosting productivity rather than lowering its external exchange rate? Are European democracies capable of confronting vested interests and coping with the resulting social upheaval? (…)

The Bank of Spain recently estimated that the Spanish economy contracted by just 0.1% in the second quarter, down from 0.5% in the previous quarter, raising hopes that a return to growth is imminent—perhaps as soon as the current quarter. At the same time, unemployment has started to fall—down by 77,000 in the past four months. House prices and car sales have also stabilized. Exports have surged, up 8% in 2012, matching Germany. The current-account deficit, once 10% of gross domestic product as the country sucked in cheap money to fund the  construction boom, has turned to surplus. (…)

Now the conditions are in place for a business-investment-led recovery: foreign direct investment is picking up while domestic firms are throwing off sufficient cash to be increasingly self-funding. After all, Spain’s impressive export performance was achieved despite the deep domestic credit crunch. (…)

What is certain is that the stakes couldn’t be higher—for Spain and the euro zone: A self-sustaining recovery would remove one of the biggest threats to the survival of the single currency.

No less importantly, it would vindicate Berlin’s approach to handling the crisis and send a powerful message to other governments tempted to look to debt mutualization as an easy alternative to the hard business of reform.

High five IMF casts shadow over Spanish jobs
Fund expects jobless rate above 25% for at least next five years

(…) echoing recent warnings from independent economists, the IMF makes clear that Spain’s growth rates in the years ahead will be too anaemic to allow job creation. The Fund expects Spain’s gross domestic product rise to be less than 1 per cent annually for the next four years, and only 1.2 per cent in 2018.

“Spain has historically never generated net employment when the economy grew less than 1.5-2 per cent,” the IMF notes. “Yet growth is not projected to reach these rates even in the medium-term. Thus reducing unemployment to its structural level (still likely very high around 18 per cent) by the end of the decade would require a significant improvement in labour market dynamics.” (…)

Hmmm…The IMF is not the ultimate in economic forecasts. FYI, Spain retail sales were down 0.8% in June but +0.6% in Q2 following +1.1% in Q1. These compare with EA17 sales up 0.6% in Q2 up 0.8% in Q1. (Eurostat)

Sales tax rise to hit Japanese growth
Government says economy would grow 1% next year

The cabinet office forecast that the economy would grow at only 1 per cent in the fiscal year starting in April if the government proceeds with the first phase of a two-stage plan to raise the consumption tax from 5 per cent to 10 per cent by 2015. (…)

The cabinet office also raised its forecast for the economy this year to 2.8 per cent from 2.5 per cent. While the estimates highlighted concerns about the controversial tax, they implied that Japan would avoid a severe sales tax-related recession, suggesting their value as ammunition for opponents of the rise may be limited.

A final decision on the plan’s first phase – a rise from 5 to 8 per cent next spring – must be made by October, and could come earlier. The long-debated measure is intended to shrink the budget deficit and tackle a gross public debt that is almost 250 per cent the size of the economy, the highest ratio in the developed world. (…)

Many Japanese policy makers remain haunted by the country’s last sales-tax rise, in 1997. Enacted in the face of a worsening Asian financial crisis, it is widely believed to have tipped the economy into a severe recession. (…)

Part of the predicted tax-related slowdown would be a result of a shift in the timing of consumption, rather than an overall suppression of demand, the government said. Some people would move up purchases of big-ticket items, such as cars and houses, to before the tax took effect. That would both lift consumption immediately before the implementation date and exacerbate the expected post-tax fall.

One solution for Mr Abe could be to cushion the blow of any tax increase with short-term government spending. Economists have suggested that a stimulus budget of Y4-5tn, about half the size of a spending package Mr Abe introduced in January, could offset the tax’s likely negative impact on consumption.

Indonesia’s consumer boom falters Second-quarter growth of 5.8% is slowest for nearly three years

(…) Indonesia’s annual GDP growth fell to 5.8 per cent in the second quarter, according to government data released on Friday, the slowest pace for nearly three years.

Agus Martowardojo, governor of the central bank, told reporters that the government needed to “promote exports to new markets . . . as growth slows in China and India”.

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Rate Cuts Fail to Lift Australian Consumers  Disappointing Australian retail sales data added to market expectations the Reserve Bank of Australia is likely to cut rates at a policy meeting Tuesday. But few observers expect such easing to help turn around weak consumer spending in the short term.

Wall St falls out of love with commodities
JPMorgan’s exit signals that the boom is over

(…) The fact that JPMorgan is considering a sale is the clearest sign yet that Wall Street’s commodities trading boom has fizzled out. Coalition, a consultancy, reports that the combined revenues of the top 10 banks in the commodities sector was $6bn last year, down 22 per cent on 2011. Revenues peaked at $14.1bn in 2008, the same year the oil price peaked. (…)


Miners return to hedging gold
Small and medium-sized companies lead industry shift

(…) The shift in philosophy towards hedging reflects mining executives’ fear that the past month’s rebound in gold prices may be shortlived, as well as the recognition that more falls in prices could push them into losses. Bankers said the hedging had accelerated as prices rallied from their June low to $1,313 last week.

The mining industry has a chequered history of hedging. The practice was most prevalent in the late 1990s, just before gold began a decade-long bull market, while by the time gold prices peaked in 2011, miners had cut their hedging to almost nothing. (…)

Nerd smile  Being a broker, or even a miner, does make you any smarter!


We are nearing the end of Q2 earnings season as 393 S&P 500 companies have reported. According to S&P, the beat rate remains at 66% while the miss rate edged up above 25%. The bulk of the companies yet to report are in the Consumer and Telecom sectors where the miss rates have been above average. See last Friday’s Earnings Watch comments for a valuation update.

For Q3 2013, 61 companies have issued negative EPS guidance and 16 companies
have issued positive EPS guidance. These numbers are in line with those at the same time during the Q1 season for Q2 results but well above the 5-year average of 62% according to Factset which adds:

Due in part to negative EPS guidance, analysts have lowered earnings expectations for the third quarter. The estimated earnings growth rate for Q3 2013 is 4.8%, down from an estimate of 6.9% at the start of the quarter (June 30). Seven of the ten sectors have recorded a decline in expected earnings during this time, led by the Materials and Information Technology sectors. (…)

Although analysts have reduced earnings growth expectations for Q3 2013 (to 4.8% from 6.9%) and Q4 2013 (to 11.1% from 12.1%) since June 30, they still expect a significant improvement in earnings growth in the second half of 2013 relative to the 1st half of 2013.

That is even though estimated revenue growth rates are only +2.8% for Q3 2013 and +0.7% for Q4 2013. Why are they seeing such margins expansion at this stage? Wishful thinking when we look at these two charts from Factset.


Q4’13 margins are estimated (!) at 10.0%, up from 9.0% in Q4’12 and 8.7% in Q4’11. This would be the first year when Q4 margins would be higher than margins of the previous 3 quarters. Why? Beats me. And then, of course, it’s up on a straight line.

Here’s a ScotiaCapital chart that speaks volumes about margins:


See 10% margins there?

Interestingly, Facset recently looked at  analysts quarterly projections for the past 10 years to discover a clear propensity to really overestimate Q4 results.


Hmmm…careful if you’re using forward earnings.


Dow Gains Sixth Week in a Row

Stocks edged higher, capping the Dow’s sixth-straight weekly advance, as investors shrugged off weaker-than-expected July jobs growth.

Morning MoneyBeat: Meh Earnings? Who Cares! Investors don’t seem to be losing much sleep over the unfolding of yet another lackluster earnings season.

(…) Corporate profits have taken a backseat to Fed policy as a primary catalyst for the market’s short-term moves. (…)

Earnings may not be great, but they’ve been good enough to keep the rally moving along.

Warning lights flash in US credit markets
There is much for financial stability hawks to worry about

(…) Fed governor Jeremy Stein’s February 7 speech on “Overheating in Credit Markets” signalled that officials were thinking seriously about the potential financial ill-effects of QE, in a theme that was taken up by chairman Ben Bernanke three months later. It looked an important speech then. It looks seminal now.

In it, Prof Stein highlighted the dangers to financial stability as investors reach to earn a little more yield in the ultra-low interest rate environment engineered by the Fed. He ran through a list of indicators where one may spot high-risk practices building up. It is worth repeating the exercise. (…)

All four of his non-traditional indicators are flashing warning lights, data from Lipper and S&P Capital IQ show. This year’s issuance of payment-in-kind notes, which allow borrowers to put off cash interest payments, is close to passing the total for the whole of 2012, having had the biggest month this year in July.

Issuance of covenant-lite loans hit an all-time record in February but even through recent turbulence it has remained elevated at monthly levels that were typical in the first half of 2007.

The use of borrowing simply to pay private equity shareholder dividends – “divi recaps” – doubled in the second quarter from the first. July was slow, but there are $8bn of deals slated for August, which will be at least the second-highest month this year.

Dividend recap volume

And finally, the leverage in large buyout deals in July was 5.9 times, the highest since 2007. There is still a wall of money chasing the higher yields from junk bonds and leveraged loans. Leveraged loan funds just recorded their 59th successive week of inflows. (…)

The evidence from credit markets, and from high-yield and leveraged loan sectors in particular, is that risk-taking may be more widespread even than it was when Prof Stein raised his early warning in February.

As Stock Market Surges, Private Equity Says It’s Time to Sell

Fortress, the first publicly traded buyout firm in the U.S., is preparing holdings for public offerings while struggling to find attractive new deals, Wesley Edens, who runs Fortress’s $14.3 billion private-equity business, said on a conference call with investors yesterday. That environment extends to credit and distressed investments, said Pete Briger, who oversees the New York-based firm’s $12.5 billion credit business.

“This is a better time for selling our existing investments than making new investments,” Briger said on the call. “There’s been more uncertainty that’s been fed into the markets.”

Their comments echoed remarks from Apollo Global Management LLC Chief Executive Officer Leon Black to Blackstone President Tony James, who said last month the environment is ripe for selling because credit markets are still hot and equities strong.

“It’s almost biblical: there is a time to reap and there’s a time to sow,” Apollo (APO)’s Black said at a conference in April. “We think it’s a fabulous environment to be selling. We’re selling everything that’s not nailed down in our portfolio.”


4 thoughts on “NEW$ & VIEW$ (5 AUGUST 2013)

  1. Denis,
    Thanks for all the great info. Considering that lots of economic data is revised sometimes months after the fact, how timely is the Conference Board Leading Economic Index. The chart looks great at being able to signal a recession but if the chart is the product of subsequent revisions, maybe it is not as great a timely warning tool as it first appears?

    • Tks Randy.
      Very valid point. Alas, nothing is perfect. The CB LEI is composed of 10 economic indicators which are all subject to revisions. It is best to wait for 2-3 months of downturn in the Index b4 making a definitive call. Also, I like to analyse each component as well a the diffusion index.

      Tks for reading me.

      • Thanks for the reply. I was actually thinking the opposite: Is it possible we are already in a recession and once the econ data is revised, it will create a “revised or back-dated” LEI which will look like it forecast the recession when it really did not?

        • Doubtful given all the data around and the stock market (a pretty good predictor on its own) but not entirely impossible. The coincident indicator is also not leaning this way.

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