This note was originally published at 8am on June 10, 2015 for Hedgeye subscribers.
“If the 130,000 year period since modern humans made their first appearance were compressed into a single day, the era of modern growth would have begun only in the past 3 minutes.”
-Charles I. Jones
The 1st Chart of the Day below from Stanford Professor Chad Jones generated a fair amount of feedback after I presented it on our Morning Macro Show on Monday. Using data from Maddison, it shows per capita GDP across a cross-section of economies all the way back to the year 1 AD.
I like the chart because it’s a simple but striking reminder that modern growth – in the form of sustained/endogenous growth and contemporary productivity functions – is still a fledgling phenomenon and central banking and monetary policy making are still very much an experiment in progress.
Back to the Global Macro Grind…
A fundamental constraint of a daily strategy missive with a self-imposed ~900 word threshold and a finite production timeline of a couple hours is that you can’t boil the Macro ocean every morning.
The format, however, does lend itself well to boiling the daily puddles of data and attempting to appropriately contextualizing those high-frequency macro morsels.
Yesterday we received the NFIB Small Business Confidence data for May along with the Job Opening and Labor Turnover Survey (JOLTS) data for April. Tomorrow we’ll get the Retail Sales data for May.
Why do people care about small business confidence?
Small Businesses represent over 99% of total U.S. Employer firms and >60% of net private sector hiring on a monthly basis – and sentiment around the current and forward prospects for business activity are discretely related to hiring activity and labor compensation trends.
Further, a number of the sub-indices such as Hiring and Compensation Plans have served as solid lead indicators for the corresponding official figures reported by BLS. For instance, as the 2nd Chart of the Day below illustrates, Small Business Compensation Plans have presaged actual compensation increases pretty well – typically leading growth in reported hourly earnings by ~3 quarters.
Indeed, the strong advance in NFIB compensation plans over the last 24 months along with emergent strength in the Employment Cost Index (ECI) have backstopped consensus expectations for accelerating wage inflation for the better part of a year and a half now. The current divergence between Compensation Plans and (lack of) actual earnings growth remains stark and whether the existent spread represents a structural dislocation or if the cycle high +2.3% growth in hourly earnings reported in May represents the beginning of a lagged convergence remains to be seen.
Wage inflation is a canonical late cycle indicator so it certainly wouldn’t be surprising to (finally) see some degree of acceleration as the payroll expansion reaches its 63rd month off the February 2010 employment trough. At the same time, with the profit cycle past peak, the prospect of incremental margin pressure via acceleration in labor line costs does not argue for a step function increase in corporate capex spending – particularly with aggregate global demand flagging and the worlds core consumption demographic of 35-54 year olds remaining in secular retreat.
Why do people care about the JOLTS Data?
While the NFP data offers the official read on net hiring, the JOLTS data provides the internals on the gross flow of both hirings and separations. A hallmark of an efficient and well functioning labor market is a fluid flow of workers – job openings and the creation of new positions is a direct measure of the economy’s health (or perceived health), and the more that companies are hiring and creating new positions, the easier it is for job-seekers to find work and for skill and need to find their most productive match.
On a gross basis, 5.007 million people were hired in May (kind of surprising relative to the NFP figures of 100-200K we’re used to hearing, right?) while 1.8 million were laid off or fired and 2.7 million people quit their job. Job Openings, meanwhile, made a new all-time high of 5.38MM while the Quits Rate continued to approach prior cycle highs.
Granted, the historical data only go back to 2000 so it’s hard to take an overly convicted view as far as a conclusion. But as it stands, the domestic labor market remains solid with many metrics at or approaching prior cycle highs – which is probably the larger point. As we summarized in an institutional note last week:
Tops are processes & “late-cycle” is not some discrete peak on a Macro sine curve. Move while the music plays but don't be willfully blind to the #LateCycle reality of it all.
Why do people care about Retail Sales?
A better first question may be: What is Retail Sales?
It’s a trivial, but not an insignificant question.
In casual conversations with investors, particularly those who aren’t Macro centric, I’d say a majority don’t technically know what Retail Sales encompasses. Superficially, the term “Retail Sales” kind of connotes that it’s a broad measure of the 70% of the economy that is consumer spending – and most people take it that way.
In fact, Retail Sales is an estimate of spending at department stores, food service providers, auto dealers, and gas stations. In other words, it is largely an estimate of spending on goods.
In other, other words, while it’s a timely, insightful barometer of the prevailing state of domestic consumerism, it doesn’t include spending on services, which comprises the lion’s share of consumption at ~2/3 of household spending and ~45% of GDP
The numbers are also volatile on a month-to-month basis, subject to significant revision and reported on a nominal basis – making it difficult at times to distinguish whether sales trend changes are due to prices or volumes. What it offers in terms of timeliness, it lacks in terms of precision and magnitude.
Anyhow, the May figures should be markedly better sequentially. The acceleration in auto sales to 17.7MM (annualized) in May vs. 16.5MM in April will buttress the monthly figures. Further, consumer revolving credit growth (i.e. credit cards) and spending on durables goods tend to move in directional tandem and with revolving credit rising +11.6% month-over-month annualized in April, it wouldn’t be surprising to see some measure of that show up in the May Retail Sales figures or in a positive revision to the April data.
Also, it’s worth highlighting that realized improvement in May would only serve to take the year-over-year growth rate up to something like +1-2% - a sequential improvement but a far cry from the cycle peak of +5% growth observed mid-year last year.
…Having exceeding my character count threshold, I’ll abruptly/awkwardly end the macro miscellany there. With Keith on the road, you’ll have sufficient opportunity to suffer my pedestrian attempts at dazzling distillations of domestic eco data over the balance of the next two weeks.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.06-2.52%
Oil (WTI) 58.64-61.75
To historical context and the profitable boiling of puddles,
Christian B. Drake
U.S. Macro Analyst