“We don’t know what we’ll be doing a year from now. It’s a mistake to try and get too precise ….you can’t expect the Fed to spell out what it’s going to do...because it doesn’t know."
- Stanley Fischer
The writing has been on the wall, you’ve just been too scared to read it.
They have, indeed, come for your job and the time for dithering and willful blindness has past. The automation apocalypse is nigh.
Consider the following petition just out from a long-standing manufacturing group:
"We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival . . . is none other than the sun."
Back to the Global Macro Grind ….
That “Petition from the Manufacturers of Candles” was not, of course, penned recently in response to the emergent threat of robotic automation, but 150 years ago by French economist Frederic Bastiat as a satirical response to the fledgling threat of foreign competition and globalization.
In 1900 more than 40% of U.S. workers were employed in agriculture. Today, it is less than 2%.
History is replete with examples of misplaced angst around technological innovation and structural transformations in the labor market. The apprehension is understandable - the concentrated and conspicuous demise of specific and long-standing industries is typically enveloped and replaced with uncertainty, not with a mature industry with a defined path.
“What’s next” is always whatever we think of next and that “next” - and its 2nd order effects in terms of application and utility - isn’t generally clear in the moment.
But from Queen Elizabeth to Keynes (WSJ) to the agricultural and industrial revolutions, the broad lesson of history is both congruous and comforting: Innovation first births angst but invariably spawns improved growth and rising standards of living.
That message isn’t new or novel, but it does provide a small quantum of solace and is worth re-remembering every now and again as the “technological disruption” headlines crescendo.
It’s also relevant on a day when Productivity measures headline the domestic macro calendar. Let’s quickly tour the recent data and developments of consequence in a little macro medley this morning.
Productivity: The upward revision to 2Q GDP will manifest in a positive revision to productivity growth in the quarter and will mark the 4th month of acceleration and the fastest pace of growth in 2 years.
With population growth and labor supply in secular retreat, productivity growth will need to increasingly shoulder the burden of real growth.
That shouldering will remain an uphill battle as demographics continue to conspire against policy makers and global and domestic macro momentum through multiple channels.
Lower labor supply growth acts directly as a drag on aggregate output growth (if growth in the number of people making stuff is slowing, it’s a direct drag on growth in the amount of stuff that is getting made in aggregate) but also serves as a depressant on both productivity growth (productivity seems to follow an inverted U-pattern, peaking at 40-50 years old and subsequently declining, so an aging labor force is productivity negative) and reported wage growth (higher paid boomers being displaced by comparatively lower wage younger workers). I’ll detail those dynamics more fully in a future Early Look.
Real Growth: If your productivity is flat (i.e. you produce the same amount of stuff per hour) but you work more hours, will your total output be higher or lower?
The question is rhetorical but the simple point is that overcomplicating growth accounting isn’t always necessary. Productivity growth is accelerating (thru 2Q) and aggregate hours growth is accelerating modestly to start 3Q.
If you are working more hours and producing more stuff in each of those hours, the slope of the output growth line (i.e. real GDP growth) will be positive. That conceptualization doesn’t get you a high conviction point estimate for growth but, remember, Macro is about better/worse not good/bad, and the slope of the line is most of what matters.
ISM: The ISM Services Index followed the Manufacturing Index higher in August with Current Activity, New Orders, Employment, Backlogs and Export Orders all ticking higher. With New Orders at 57.1 on the Services side and holding >60 on the Manufacturing side, the near-term outlook for production activity remains positive. The gains in the Employment sub-indices along with the historical revision pattern for August payrolls are also suggestive of a likely upward revision to Aug NFP.
Also notably, both inventory and inventory sentiment retreated in the latest month. Recall, the Customer Inventories series in this month’s ISM Manufacturing report fell to its lowest reading since April 2011 (see Chart of the Day). And remember, down is good for this series as a gain in the index equates to a buildup of inventory which generally signals lower future orders/factory output.
So, superficially, the declines in the inventory readings in August augur positively for future production and inventory investment.
BoC: While we were busy kicking the can on the debt ceiling (don’t worry, the can will kick back (again) in December) the Bank of Canada was busy anti-can kicking the policy rate cycle.
The loonie and yields bounced as the policy move was not fully backed given the recent backslid in inflation. However, price action is unlikely to be reflexive (unlike July) as investors were largely onside with respect to positioning. Indeed, speculative net futures and options positioning in the Canadian Dollar was +2.28 Standard deviations on a 3Y basis. We wouldn’t be buyers of the CAD here as we expect growth to inflect lower and inflation to continue to underwhelm in the coming quarters.
Higher-Highs: As Keith highlighted yesterday on the quantitative front in RTA, both the SP500 and Nasdaq signaled higher-highs within the @Hedgeye Risk Range #Process into the close. That’s new as the signal has implied lower-highs for the last few weeks. We added back some of our Best Ideas longs that were immediate-term oversold on that signal.
And lastly,
Farewell Fischer: We’ve carried our qualms with policy makers but, on balance, we’ve been a fan of Fischer. We’ve previously described our hack theory on his refreshing penchant for non-prevarication, but a redux seems appropriate:
If there’s been a voice of non-prevarication in recent years on the policy side, it’s probably been Stanley Fischer ….
….You know how when people get old they get to the point a lot faster. What is lost in tact is made up for in unfettered insight – a kind of unadulterated, politically quasi-correct truth serum. Little kids don’t know better, old people do but don’t care anymore.
While I think Greenspan has probably lost it, I think Fischer’s entered still-coherent, old-dude, truth serum prime time.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.06-2.19% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 6 (bullish)
VIX 10.04-12.78 (bearish)
Oil (WTI) 45.44-49.38 (bearish)
To old dudes, truth-serums and their elegantly productive synergy,
Christian B. Drake
U.S. Macro Analyst
