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“I never thought I’d be a ‘My Little Pony’ fan”
-BronyCon, Solution to the Problem of lack of My Little Pony Fan Conventions for Adults 

Finally, a solution to a problem that didn’t exist!

So, in one of the great stealth underdog stories of the past year, Keno has somehow succeeded in claiming dominion over the central CT dining-tainment scape.

Despite having no interest myself in playing, knowing exactly zero people who do, in fact, play it and only a few people who actually know how to play, it has succeeded in entrenching itself in almost every restaurant or hang out spot I’ve gone to over the past couple months. 

How does a game that no one plays, carries no discernible ground level support and fills a market void that didn’t exist garner enough critical mass and infrastructure support to entrench itself into retail ubiquity?

Meanwhile, in  ‘fool me twice’ non-solutions to actual problems …. Trade war “optimism”.  

Back to the Global Macro Grind ….

We tend to touch on and re-contextualize the same topics recurrently alongside the scheduled ebb and flow of high-frequency macro data releases each month.  While that may or may not be tedious for the reader, presumably, if we’re focused on the right things it’s a necessary and worthwhile mapping exercise.

The labor music is playing again this morning, so let’s do the monthly data contextualization dance. Starting bigger picture and narrowing: 

Mexican Standoff:  The three-way standoff between the Manufacturing, Services and Labor economies continues to intensify as the cyclical economy is now in reported contraction, the Services economy is in Trend Deceleration while the labor market continues to buttress the consumption economy and forestall a more acute spiral in domestic growth. 

Of course, cyclical/Goods-producing sector employment always leads the trend in Services and broader NFP employment and the labor market – in Total Payroll terms – is always the last to know, a reality which is essentially tautological since the peak in payrolls, by definition, marks the peak of the cycle. 

Confused Canaries: 

  • Services:  Yesterday’s Services tea-leaves were sufficiently ambiguous as the Markit Services PMI made a lower cycle low while the ISM reading ostensibly did the opposite, rising +2.7 pts with Current Activity and New Orders both re-breaching 60 to the upside, rising to 6-month highs.
  • Employment:  The labor data for the month to-date were similarly mixed. The ISM Mfg Employment Series, ISM Services Employment Series, Fed Regional Surveys and the Labor Components in the Consumer Sentiment Surveys all softened in August.  Jobless claims, however, remain at multi-decade lows and the ADP report was resurgent.

Canary Clarity | Between RoC’s and Hard Decelerations: 

  • Taking a RoC-centric approach to mapping the data helps circumvent the challenge of parsing marginal changes in the absolute level of the data.  It also helps to sharpen the view around existing asymmetries. 
  • For example:  We need to print +286K on the NFP headline to avoid further deceleration in Y/Y payroll growth.  Not going to happen.  The intuition and growth implications around this reality are simple but significant, and worth reduxing every once and awhile ….

Sequencing the Simple | How the labor numbers have to move to support income/consumption is relatively straightforward:

Total Payrolls * Ave weekly Hours = Aggregate Hours Growth --> Aggregate Hours Growth + AHE (Average Hourly Earnings) = Aggregate Private Sector Income Growth --> Income Growth = Capacity for Consumption Growth --> Consumption growth defines the baseline view on Headline GDP growth, particularly for a DM Consumption based economy and when all the other expenditure buckets are on the back foot.   

Commonsense Calculus:  

  • If you are worried about slowing growth you don’t just start firing people.  You begin to curtail new hiring and toggle back the number of hours your current employees are working.  Indeed, Labor Hoarding defines early recession periods as labor’s share of national income spikes as employers respond to macro conditions on a lag. 
  • This is what occurring currently.  Payroll growth is slowing as are average weekly hours, resulting in a material slowdown in aggregate hours growth.  In the Chart of the Day below we plot the trend in aggregate hours growth vs real output growth. 

The Push-Pull:  So, as it relates to household income and the flow through to consumption capacity, late-cycle wage inflation is wrestling against a broader deceleration in the labor market.  In other words, the upside of improving compensation growth is being dragged down by a decrease in hours worked and a deceleration in total payroll growth.  As described above, aggregate income growth is the sum of aggregate hours growth and hourly earnings growth … and those are moving in opposite direction at present, resulting in relative stability in consumption but with asymmetric risk to the downside.  Improved hourly earnings are decidely less great if you’re working less hours, resulting in weekly income growth that is flat to down. 

If some is good, more is (not) better:  This has been particularly true in the rates markets of late as there are decidedly different implications to the market pricing in “insurance” cuts versus “recession” cuts.  August has seen a tilting into the latter.  More (labor costs) is also not better with respect to the profit cycle where margins are already under pressure, earnings growth is already negative across a sizeable swath of cyclical industries and the growth outlook is deteriorating further as companies are set to comp against cycle peak comps in 3Q.  


  • Census Distortion: The Census Bureau initiates temporary hiring as part of the decennial census. Earlier this month they announced they’re hiring ~40K workers as part of the 2020 effort.  Whether we see that full number manifest in a juicing of the August print specifically isn’t clear but it will impact the headline in the coming month(s).
  • Labor Force Growth:  The BLS published their labor force projections this past week and now expect growth of approximately 0.5% over the next decade.  Based on that projection we need to add 60-70K jobs a month to fully absorb new entrants into the labor market.  This has no immediate, investible implications but policy makers will lean on that to justify a positive spin on the labor market  should macro conditions shift and they require that kind of narrative framing to support the policy outlook.  

Recession Agnosticism:  “Recession” may be in breathless crescendo in google search terms, but remember, our model and macro view is slope dependent and largely recession agnostic.  In other words, Quad 4 allocations work during Quad 4 environments, whether it happens to be an actual recession or not.  Those returns may be amplified during outright contractions but its because the macro condition set that defines that environment is more acute, not because it carries some subjective label.   

Immediate-term @Hedgeye Risk Range with TREND signal in brackets:

UST 10yr Yield 1.42-1.61% (bearish)
SPX 2 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 61.20-64.14 (bullish)
REITS (VNQ) 90.09-94.21 (bullish)
Financials (XLF) 25.74-27.66 (bearish)
VIX 16.06-22.28 (bullish)
USD 97.40-99.25 (bullish)
Oil (WTI) 53.01-56.70 (bearish)
Nat Gas 2.12-2.47 (neutral)
Gold 1 (bullish)
Copper 2.51-2.63 (bearish)

Have a great weekend. 

Rest up  … and if you’ve been losing sleep over the “problem” over why pajama’s are so cheap, Under Armour still has a ($200) “solution

Christian B. Drake
Macro Analyst

Fool Me Twice - CoD Hours vs GDP