"The world only needs five computers"
-Thomas J. Watson Sr, President of IBM
You know you can get premium cable for free, right?
I’m not saying it’s the moral high ground, I’m just saying it’s readily available.
And since the amazon firestick remains on permanent back order (i.e they can’t make enough of them) it seems that, nationally, that high ground may be lightly treaded. (If you don’t know what I’m talking about a casual search should suffice.)
“Free” is a sirenic seductress, indeed, and disruptive digital innovation is challenging the “no free lunch” doctrine, for now anyway.
Back to the Global Macro Grind…
One of our favorite quasi-quantitative indicators in the peri-crisis period was the vaunted “Joseph A. Bank Indicator”.
Prior to the recession, most of the promo offers were of the buy 1, get 1 free variety.
But as the economic and consumption contraction crescendoed, so too did the promotional offerings. I think it peaked at something like buy 1 suit, get 7 free (seriously!).
Promotion magnitude then mapped the trajectory of the subsequent recovery pretty well.
Okay cord cutter, BOGO boy, get to the point!
Stay with me now, I’ll introduce some Jobs Day relevance here momentarily.
After slowing consistently for 24 months off the February 2015 rate of change peak, employment growth accelerated (at the fastest pace in two years) in January.
Anything north of 240K this morning will keep the 2nd derivative flat to positive. And after February, the March-May NFP comps are: 225K, 153K, 43K …. with the year-over-year growth comps easing similarly.
Despite its obviousness, there is a sneaking tendency to forget that payroll growth is path dependent.
In other words, net payroll gains in February determine how many jobs need to be added in March to achieve a given growth rate. The affect snowballs as each month impacts the “requirements” of subsequent months to hit a given rate-of-change target.
The point is this: If we can “buy” anything close to 240K in February, it’s likely we get 3 months free of employment acceleration as compares ease through May.
Inclusive of the acceleration in January, that would be a 5-month stretch of payroll acceleration and the first such streak in 2 years.
The 2nd derivative trend in payroll growth matters, of course, because it’s a key component in income growth … and income growth defines the capacity for consumption growth.
Under an assumption of static change in average weekly hours (which has been the trend), aggregate income growth simplifies to the sum of employment growth + hourly earnings growth.
If employment growth accelerates (or, at least, stops slowing) and labor market tightness makes wage inflation more likely than not, then the probable trajectory for aggregate income growth is higher.
A few other points:
- Income Growth: The sum of aggregate hours growth and hourly earnings growth in the NFP release offer an early read on direction of the official income data released later in the month. However, the official, aggregate private sector wage income figures for January diverged notably from that implied by the NFP data last month. This suggests a positive revision to the disappointing hourly earnings numbers in January or a sizeable acceleration in the February data. The acceleration in aggregate income growth is also why we weren’t overly disappointed in the deceleration in household spending in January. To be sure, the deceleration in consumption is a net negative from a GDP accounting perspective but the acceleration in income growth means the capacity for consumption growth is improving, not deteriorating.
- Slack: You’ll hear economists talk about the U6-U3 spread as a measure of labor slack. The U3 Unemployment rate is the benchmark measure and the one you hear quoted every month. The U6 Unemployment rate adds on discouraged and marginally attached workers as well as those who are part-time but would rather be full-time. Late in an expansion when the economy is reaching full employment and the unemployment rate (U3) has troughed at some low level (like it has over the last year+), it becomes increasingly likely that unemployment has hit its “natural rate” floor. If the U3 rate is at its lower bound, the spread between the U3 and the U6 rate becomes a reasonable proxy for remaining cyclical slack in the labor market. That spread has moved below its long-term average in the last couple months and, as the Chart of the Day below shows, sits at a point, historically, where wage inflation begins to hook up.
- Weather: I’ve fielded a lot of questions around unseasonably warm weather in February serving to juice the reported job gains. In an absolute sense, someone doesn’t get hired because the weather is nice. In most instances it represents a time shift in seasonal demand. So, a pull-forward that benefits Feb would manifest a similar sized drag to the March/April totals as the benefit reverses. Those kinds of distortions can be real but, in the present instance, it is probably inconsequential. Given the base effect dynamics for March-May described above, any prospective weather distortion is largely irrelevant vis-à-vis the impact of any benefit reversal.
- ADP: The ADP report (+298K vs +187K est.) was obviously a monster beat and the internals were as positive as the headline. Small and mid-size companies saw outsized gains, construction employment rose the most in 11 years and manufacturing employment saw its largest increase since 2014. The strength in manufacturing payrolls accords with the recent strength in the ISM data and the New Orders components in those series suggest production and employment should remain solid. And if the more cyclical components of the economy are accelerating, it’s likely the larger employment mojo remains positive over the nearer term.
I hate myopically bullish blustering as much as the next thoughtful, objective reader so let me give you some bear scraps before closing:
- The Peak Is In: Given the larger employment base and tighter labor market, we will not retrace back to the February 2015 rate of change peak in employment growth. The way we’ve framed it is that we could see a mini-version of flatlining-to-modest acceleration in payroll growth similar to the 18-month period that capped the end of the 90’s expansion.
- Yellow Snow: January was not a great month from a growth accounting perspective. PCE was modestly disappointing and the Trade Balance was the worst in 2 years. If we get similar number in Feb/March, net exports will remain a drag on GDP in 1Q. A worsening trade balance is not particularly surprising given present dynamics: If domestic growth is better than global DM growth our relative demand for imports will rise and a strong dollar could be expected to amplify that effect.
- Yes, Yes, Yes & Yes: Yes, valuations are rich, spreads are tight, political and policy risk may be underpriced and reflation’s peak is likely in.
Our re-joinder remains what we’ve outlined here repeatedly. At present, the preponderance of domestic and global fundamental data is 2nd derivative positive and the risk management signals for the exposures we have in the RTA portfolio remain bullish.
Our current view, like free-cable and cheap suits, won’t last forever.
But trending macro data tends to be autocorrelated … a kind of statistical BOGO. As it stands, we think there’s still some GO left.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.46-2.65%
SPX 2
VIX 10.62-12.99
USD 101.25-102.62
Oil (WTI) 48.90-51.72
Gold 11183-1231
Copper 2.55-2.76
Have a great weekend,
Christian B. Drake
U.S. Macro Analyst
