Those waiting for an inflection to Trend acceleration in domestic growth have been waiting for 9-months and will be watching the economic paint dry for a long while still. Those looking for an imminent, acute collapse in activity and a Saturday recession will be similarly disappointed.
Since 1K labor review notes have already hit your inbox and because my proclivity for brevity has become an increasing function of my age, # of kids, and proximity to the weekend, let’s go with the bullet-point set of tangible takeaway:
- Sequential ↑, Trend ↓ | The March Employment data was good but not good enough. Given the easiest comp in years (Last March = +84K) we knew we’d get a sequential, rate-of-change acceleration in employment growth. The Trend, however, remains one of deceleration off the RoC peak of +2.28% YoY recorded in February 2015.
- Bro, Don’t be So Bro-Cyclical About It! Peak rate-of-change in employment growth doesn’t herald an imminent recession. Over the last three cycles, on average, the expansion lasted 24-months after reaching peak employment growth. Notably, however, the cycle consistently plays itself out after cresting. In other words, we don’t roll off peak growth then re-breach it to the upside.
- Comps: With 2Q16 comps being the hardest of the cycle, the trend toward deceleration won’t abate over the nearer-term. Reported 1Q earnings will remain dismal and the slope of the line across most growth metrics will remain negative in 2Q.
- Labor ↑, Profits ↓: To the extent demand & output continue to decelerate, healthy employment gains effectively equates to (further) lower productivity and margin pressure for businesses. The combination of rising labor costs and declining demand/profitability can only persist so long until it feeds back negatively on hiring and capex decisions.
- Income: With growth in aggregate hours rising and wage growth accelerating modestly, aggregate income growth should reflect modest acceleration when the official March data are reported later this month. If the savings rate retreats off the highs of recent months, consumption growth should see similar improvement. Like the employment dynamics highlighted above, this would represent a sequential improvement inside a larger trend towards deceleration.
- The Cycle | We’ll review this in fuller detail on our 2Q16 Macro Themes call on Thursday but the following fundamental macro metric flow sufficiently captures the broader reality:
- 4Q14: Income Growth, Corporate Profits and SPX Margins Peak --> 1Q15: Employment Growth peaks --> 1H15: Consumption Growth & Confidence Peak--> 3Q15: Equities Peak ……So, not some mystical transcendental function, it’s simply the cycle playing out largely as a commonsense expectation of it would suggest.
- Good = Bad: Perceived good news = ↑rate hike risk = $USD ↑ = equities/commodities/everything-reflation ↓. Correlations, of course, build and decay but nearer-term inverse correlations to the dollar remain strong at present.
- Quad #3/4: As it stands currently, we’re walking the edge of stagflation’s blade. Rising inflation + Slowing Employment Growth classically characterizes the late-cycle. If, however, wage inflation fails to materialize alongside the rise in broader inflation (driven by excess price growth in key consumer cost centers of housing/healthcare) and consumption/income continue to slow then stagflation risk starts to percolate more tangibly. Neither scenario - late cycle and/or stagflation - is particularly supportive of pro-growth positioning.
A visual tour of the data is below. Enjoy the weekend.
Christian B. Drake