Conclusion: The combination of today’s employment report and the ISM Non-Manufacturing Index spell incremental trouble for the U.S. economy. We have conviction that growth will continue to slow based largely on a jobless and deleveraging consumer, downward pressure on housing prices, and a burgeoning federal debt burden.
Position: Short the S&P 500 (SPY).
This morning’s employment report was well received by the market (up around 1% today). This is largely due to the fact that private payrolls “beat” consensus estimates, climbing 67k vs. 40k (Bloomberg Consensus).
Akin to a bad company beating low earnings expectations, this morning’s employment report does not pass the test of analytical rigor. Diving deeper into the “model” we see that private payrolls growth (while up 67k MoM) slowed sequentially. In MACRO, everything that matters happens on the margin, and, on the margin, this is sequential deterioration.
Analyzing the industry-specific reports, we see that employment at service providers fell 54k MoM. While a sequential improvement, it is important to note that today’s ISM Non-Manufacturing Employment Index came in at 48.2 for the month of August, offering no near-term signs of reprieve in this sector. Employment in the retail industry fell by 4,900 bodies and employment in the construction sector grew 19k MoM. We hope (understanding full well that hope isn’t and investment process) that this addition of labor isn’t busy adding more supply to a housing market that is very much in disequilibrium from a supply/demand standpoint. Research from Josh Steiner, our Managing Director of Financials, suggests we are due for a ~20% correction in housing prices over the next 12 months based on current inventory levels – absent major government intervention.
The deltas in federal government employment continue to be distorted by the unwinding of Census hiring, so we’ll just leave the (-121k) MoM decline alone. We will, however, point out that State & local governments continue to shed jobs (down 10k MoM) and the austerity measures currently being undertaken across the country will weigh on GDP growth going forward. YTD, State & local governments have shed 135,000 jobs and without meaningful intervention by the federal government (or a pickup in tax revenues, which we feel is unlikely based on where we think GDP is headed), this trend will continue because of their budget balancing mandate.
Today’s unemployment report is similar to the trend we saw in the 2Q earnings season whereby companies beat on earnings but missing on the top line. The positive market reaction to the private payrolls “beat” is overshadowing the sequential uptick in the unemployment rate (9.6% vs. 9.5% in July), which is a miss in our eyes – regardless of consensus expectations. The end result is simply that less people that want jobs have them. Underemployment, which measures part-time workers who’d prefer full-time employment and people who want to work but have given up looking, also worsened sequentially (16.7% vs. 16.5% in July). Needless to say, the employment situation in America is not conducive for a pickup in growth, given that ~70% of our economy is consumer spending.
The last chart we want to highlight comes from another survey; the ISM Non-Manufacturing Index for August “missed” estimates, falling off the table sequentially (51.5 vs. 54.3 in July vs. consensus expectations of 53.2). The survey, which covers about 90% of the economy, is now 150bps away from signaling a contraction. The three components of the index we watch all declined sequentially: New Orders dropped to 52.4 from 56.7; Backlog of Orders dropped to 50.5 from 52; and Employment dropped into contraction at 48.2 vs. 50.9 in July.
All told, the combination of today’s employment report and the ISM Non-Manufacturing Index spell incremental trouble for the U.S. economy. We have conviction that growth will continue to slow based largely on a jobless and deleveraging consumer, downward pressure on housing prices, and a burgeoning federal debt burden. On July 1st as part of our American Austerity theme, we published our initial estimate for 3Q GDP, which was 1.7%. That will be revised lower in the coming weeks.
We remain short the S&P 500 via the etf SPY with an immediate term TRADE downside target of 1061.
Enjoy the long weekend with your family and friends.