Not Looking Good: U.S. Unemployment & ISM Non-Manufacturing by the Charts

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.

 

 Not Looking Good: U.S. Unemployment & ISM Non-Manufacturing by the Charts - 1

 

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.

 

 Not Looking Good: U.S. Unemployment & ISM Non-Manufacturing by the Charts - 2

 

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.

 

 Not Looking Good: U.S. Unemployment & ISM Non-Manufacturing by the Charts - 3

 

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.

 

 Not Looking Good: U.S. Unemployment & ISM Non-Manufacturing by the Charts - 4

 

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.

 

 Not Looking Good: U.S. Unemployment & ISM Non-Manufacturing by the Charts - 5

 

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.

 

Darius Dale

Analyst


Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more

Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more