The Economic Data calendar for the week of the 11th of March through the 15th of March is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Hedgeye's Director of Research Daryl Jones appeared on CNBC's Closing Bell Exchange this afternoon to discuss the S&P 500 and record highs being made in the US equity markets. Jones discussed how the strong outlook for the US dollar will be good for the American consumer and how derivative plays on housing are worth allocating capital to. He also reiterated his call made on CNBC last week that being bullish and overweight on US equities is the key to success.
You can watch Daryl's full appearance on CNBC in the video posted above.
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Comparing the job growth trends, implied by the BLS data released today, in limited service and casual dining suggests that the relative softness in casual dining trends is continuing.
Knapp Track same-restaurant sales data track BLS employment growth data for the full-service restaurant industry.
Employment growth by Age
Employment growth by age data continues to imply that quick service restaurants are benefiting from improving job growth in the younger age cohorts while casual dining struggles are being exacerbated by decelerating employment growth among some of that sector’s most important demographics.
The chart below illustrates continuing growth in the employment of 20-24 year old's while employment growth in the 35-44 YOA and 45-54 YOA cohorts declined in February, albeit at a lesser rate than in January.
If we assume that hiring within the restaurant industry serves as a proxy for operator confidence, it seems that QSR operators have a much different outlook than casual dining operators.
The Leisure & Hospitality employment growth decelerated in February, suggesting that overall trends for the restaurant industry may be turning negative. Quick service chains seems to be benefiting from casual dining’s malaise.
Takeaway: Today’s Employment data supports our domestic #growthstabilizing view and offers positive confirmation of accelerating Labor Market Trends
Today’s Employment data supports our constructive view on domestic #growthstabilizing, and offers positive confirmation of the accelerating labor market trends observed in both the initial claims and ADP series.
Below we revisit the idea of seeing a 6-handle in unemployment in 2013, and provide a two-pronged breakdown of today’s Labor Market Numbers: Analysis of the Current Population Survey (Household Survey) which drives the Unemployment Rate & the Establishment Survey (CES) which drives the NFP Number:
6-Handle? In a previous scenario analysis, we examined the extent to which the variables driving the unemployment rate would have to move to push unemployment below 7% over 2013 (Will We See 6.5% Unemployment in 2013? ). While a sub-7% unemployment rate probably wouldn’t represent our baseline case, we wouldn’t view it as a tail probability either. In fact, the declining labor force participation rate and 200K+ employment gain we saw this month represents the variable dynamic required for a move below 7% over the NTM.
A continuation of February's trend and a run at a 6-handle in unemployment into 2013 year-end would effectively extend our existing investment view – long consumption oriented equities, short bonds and commodities as the growth/employment data would remain equity bullish, $USD Bullish (via shifting policy and interest rate expectations) and bond & commodity (to the extent negative correlations to the $USD hold) bearish.
Total Employed & Employment By Age: Total Employment as measured by the household survey was up 170K in February with y/y growth decelerating 2bps sequentially to 1.0%.
The hallmark of the employment downturn thru the Great Recession was the contrast between the extreme job loss among younger cohorts and the relative employment stability among older workers (employment for 55-64 yr. olds never went negative through the great recession). What we’ve seen over the last three years has been a distinct barbell recovery as employment growth for 20-35 and 55+ year olds has been strong while job growth for 35-54 year olds has failed to gain sustainable traction. This trend extended itself further in February.
As it relates to our bullish view on housing, the 20-35 year old cohort remains the biggest demographic driver of household formation. Continued positive employment growth in that age group should provide an ongoing support to housing demand.
Civilian Noninstitutional Population: Each January the Census Bureau's estimates of the civilian noninstitutional population ages 16 and over are revised back to the base period for intercensal estimation, currently April 2010. The annual benchmark adjustment is applied without any smoothing or rearward revision and shows up as single bolus in the January release.
The January 2013 adjustment (+138K) was largely benign from a historical perspective. Following the January Adjustment, growth estimates for the CNP are generally stable for the balance of the year. Note that is the difference between growth in the CNP and growth in the Total Labor Force (Employed + Unemployed as measured by the BLS Household Survey) that drives the movement in the Labor Force Participation Rate.
Unemployment Rate: The Unemployment rate decreased from to 7.9% to 7.7% m/m. As an Unemployment 101 reminder, the Unemployment & Labor Force Participation rates are primarily a function of 3 variables: The growth in the Civilian Noninstitutional Population (CNP), growth in the Employed, and growth in the Unemployed.
The sum of Employed + Unemployed = The Total Labor Force, The Unemployed as a % of the Total Labor Force (i.e. Employed + Unemployed) = Unemployment Rate, and the Total Labor Force/CNP = Labor Force Participation Rate.
In terms of the variable dynamics, there are a couple of simple relationships to keep in mind. First, as it relates to the Labor Force Participation Rate, if growth in the Total Labor Force (Employed + Unemployed) is faster than growth in the Civilian Noninstitutional Population, then the labor force participation rate will increase & vice versa. Second, as it relates to the Unemployment Rate, if growth in the Employed is stronger than growth in the Unemployed or, conversely, if the decline in the unemployed in greater than the decline in the employed, the Unemployment rate stands to benefit. .
Thus, a rising participation rate alongside a declining unemployment rate represents the most bullish factor combination and a declining participation rate alongside a rising unemployment rate the most bearish combination from an economic/end consumption perspective. A declining participation rate alongside a declining unemployment rate, which is the dynamic we have observed for the better part of the last few years, reflects a mixed labor market picture as the decline in the unemployed has been more a function of individuals dropping out the Labor Force (discouraged, retiring, disabled) than it was those individuals gaining employment.
The principal driver of the decrease in Unemployment this month was the delta between the change in the employed and the change in the unemployed. Total Employed increased 170K sequentially while the Total Unemployed declined 300K sequentially, a 407K delta. In this instance, the -300K change in the numerator (Unemployed/(Employed + Unemployed) dominates the impact and serves to drive the Unemployment Rate lower.
Part-time & Temp Employment: Part-time employment (household survey) increased 102K m/m but growth remains negative on a y/y basis. Temp employment growth (establishment survey) followed a similar trajectory, increasing 16K m/m while decelerating 140bps sequentially on a y/y basis.
To the extent growth in full-time employment can displace growth in part/temp employment and business can gain some further fiscal policy clarity into mid-year (post sequester, debt ceiling, budget resolution) sustainable real consumption growth stands to benefit as workers gain health/retirement benefits, weekly wages rise, and confidence/clarity around future income supports marginal spending decisions.
Total NFP Gains & Growth: Total Nonfarm Payrolls increased 236K in January vs. consensus at 165K while Private Payrolls rose 246K on estimates of 166K. January’s Private payroll estimate was revised lower by 26K. We’d expect the market to look through the negative revision given the strength in the February number. Adjusted for the negative revision, the change in private payrolls for February still beat by 50K. Employment comps get marginally easier as we move through the year.
State & Local Government employment: After a four year run of negative growth, state & local employment growth continues to stagnate just below the zero line. Collectively, states expect continued tax revenue growth in 2013 with total General fund revenues expected to surpass the 2008 peak in nominal terms. The continued recovery in revenues should be a tailwind for employment and investment, however, sequestration and uncertainty around impending fiscal policy decisions at the federal may be weighing on hiring decisions at the state/local gov’t level currently.
Christian B. Drake
Takeaway: Bearing bearish because we are at a certain price level isn’t a catalyst.
This note was originally published March 08, 2013 at 11:34 in Macro
POSITIONS: 12 LONGS, 6 SHORTS @Hedgeye
I’ve been on the road all week seeing clients in California. I’ve been told, multiple times, “you are the most bullish firm we pay right now.” That’s kind of weird to hear. But I kind of like it.
Bearing bearish because we are at a certain price level isn’t a catalyst. Neither is trying to call tops or managing career risk associated with not wanting to make the mistakes that were made the last time we were at these levels (i.e. the 2007 top). That’s called baggage.
The career risk (draw-downs) we think will be in missing growth stabilizing and accelerating (draw-downs in being long Gold, Treasuries, Yen, etc.). Strong Dollar (6 weeks in a row to a YTD high) is perpetuating Commodity Deflation (6 down weeks in a row). That’s an explicit pro-growth signal; especially for Consumption Growth.
Across our core risk management durations, here are the lines that matter to me most:
In other words, there is no resistance to the all-time closing high for the SP500. This market continues to make higher-lows and higher-highs, as the US economic growth picture continues to improve.
Enjoy your weekend,
Keith R. McCullough
Chief Executive Officer
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