Platypus [ plat-i-puh s, -poo s ] : egg-laying, duck-billed, beaver-tailed, otter-footed, venomous, one of kind mammal
Yams vs sweet potatoes, bananas vs plantains, green beans vs haricots verts, sauce vs gravy, seltzer vs club soda vs tonic water vs sparkling water.
Can you tell the difference? Is there a difference?
CEO Confidence vs Consumer Optimism, China PMI vs U.S. ISM, U.S. ISM vs Markit PMI, SPX vs Yields/Spread/ROW Equities, Quad 2 equity performance vs Quad 3 bond action.
In which direction does the gap of record/near-record divergences close?
Back to the global macro grind …..
If you tenderly implored yesterday’s ISM services print for November, she’d gently whisper of Trend decelerations, ongoing spill-over effects and developing Quad 3 conditions (Headline ↓, Prices ↑).
Indeed, on the 1Y Anniversary of “Tariff Man”, the protracted trade war and its attendant network effects coupled with negative base effect gravity have succeeded in cultivating a plodding, negative spill-over from the cyclical-industrial economy to the services economy and, if the ADP data, the November ISM Manufacturing data and the November Fed Regional Survey are to be believed, the domestic labor market.
To be fair, the Headline decline was chiefly a function of the sizeable -5.4pts retreat in the Current Production series and belied modestly more sanguine developments across the balance of the internals as both the New Orders and Employment components improved sequentially.
But the simple reality is that activity remains in Trend retreat off the 3Q18 cycle peak and the slow leak lower comes with a dearth of catalysts capable of propagating a durable rate-of-change inflection, nearer-term.
Separately, if you independently implored the “people familiar with the situation” around the veracity of the latest iteration of competing Trade War headlines, you’d be regaled with the same superlatives around faux progress that have characterized this tragicomical surreality all along.
To be sure, there exists some positive signaling value in a lack of further escalation and a roll-back of existing tariffs is tangibly positive.
But the simple reality is that with the net effect still negative, the substantive issues still as intractable as they ever were, the probability of a realized phase two agreement or push towards re-globalization over the next year essentially zero, and the probability of a reversal and re-escalation more than zero, the conditions that have plagued global trade volumes and cratered capex mojo remain more in place than not.
Lastly, ahead of NFP - which now carries incremental import vis-à-vis the December FOMC meeting given the flavor of this week’s underwhelming rash of high-frequency domestic data ….. let’s seductively implore the labor market to distill some sultry analytical truths:
- The Employment and Hours worked series in the Fed Regional Survey’s for November continued to decline
- The Employment Series in the ISM Manufacturing Survey continued to decline
- Small Business hiring has fallen in each of the last two months
- Small Business Hiring Plans and Jobs Hard to Fill are both past peak and slipping in recent months
- Jobs Plentiful (the consumers read on labor conditions) in the Consumer Confidence Survey is Past Peak and declining in recent months
- Total Job Openings (JOLTS) peaked in 4Q18 and has progressively fallen YTD.
- Payroll Growth has slowed to a new RoC cycle low in October.
- Unit labor costs are accelerating and average hourly earnings continue to rise on a Trend basis, but hours worked are flat to down and average weekly earnings growth is decelerating.
- ISM Services suggest service sector hiring remains relatively healthy.
The simple reality here is that the domestic labor market remains in measured but terminal deceleration with the manufacturing/trade economy disproportionately influencing the aggregate trend.
Yesterday, we also received the QCEW (Quarterly Census of Employment and Wages – a more comprehensive quantification than the monthly NFP data) data from BLS for 2Q19.
In short, the data imply significantly less job growth over the reference period than the previously reported NFP data.
This tethers back to the preliminary benchmark revision to employment where estimates for employment gains over the April to March period (April 2018- March 2019) were revised down by -501K (or approx. -43K per month less than originally reported). The revisions won’t be incorporated into the official data until the final benchmark revision is issued in Feb 2020.
To frame up tomorrow’s data specifically:
- We need +199K on the Headline to avoid a further deceleration in payroll growth
- Yesterday’s soft ADP doesn’t include the GM autoworkers (~50K) who will be reincluded in the November NFP count.
- Looking back at the relationship between ADP and NFP over the duration of this cycle and inclusive of the GM distortion, achieving an acceleration in NFP growth basically requires one of the largest spreads to ADP of the cycle.
Bigger Picture, a few dynamics are worth a re-highlight:
- Output growth is the product of hours growth and productivity growth and a rise in the labor force is the predominant driver of increased hours.
- With the working age employment-to-population ratio approaching prior highs, labor supply is becoming increasingly scarce and an increasing constraint on the hours worked component in the output growth equation.
- The flow of workers from Out of the Labor Force directly to Employed (see Chart of the Day below) has been a significant source of labor (they aren’t included in the “unemployment calculation” which highlights the liability of using that measure as an accurate measure of “slack”, we prefer the employment to population ration and U6-U3 spread at the end of the cycle)
The Flow from Not in Labor Force → Employed carries a number of implications:
- In the near-term it represents a constraining factor within a larger barbell effect in earnings growth. That is, while skilled labor is commanding a premium wage (earnings growth for “job switchers” is running at a notable premium to the national average), new entrants into the labor force and those who have been out of work for a long-time are not necessarily in a position to command premium compensation. To the extent, this flow represents a meaningful share of new hires, it serves to otherwise dampen average hourly earnings growth.
- The onboarding of out-of-labor force workers has supported aggregate hours growth and has helped buttress output growth in the face of soft productivity growth, weak birth trends and slowing immigration dynamics.
- On a secular basis, increasing labor scarcity equals lower real growth and increased labor costs, a negative factor setup absent resurgent productivity growth.
It also presents a kind of decision paradox for business.
If you invest, you may be able to minimize labor cost increases via increased productivity. But investment can come with (significant) lead times …. and that ramp in capex spending would need to come into already declining margins and elevated risk of outright recession.
It’s difficult to characterize the draining of earnings power at the same time you’re staring down the compound risk of a lower multiple on a lower EPS number as great career risk management.
That is a necessarily non-comprehensive treatment of the larger, multidimensional issue but I think it sufficiently captures some of the relevant dynamics at play currently.
We’ll leave it there for this morning.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.70-1.83% (bearish)
SPX 3082-3150 (bullish)
RUT 1 (bearish)
Shanghai Comp 2 (bearish)
Oil (WTI) 54.92-59.92 (bullish)
USD 97.31-98.40 (neutral)
Gold 1 (bullish)
Copper 2.60-2.71 (bearish)
Best of luck out there today,
Christian B. Drake
Macro Analyst
