NEW YORK (September 4th) – The August jobs report printed up 1,371,000 new jobs, slightly below the consensus estimate of 1,400,000 jobs.

Revisions for June (-10,000) and July (-29,000) netted 39,000 fewer jobs.

The seasonally adjusted unemployment rate ticked down 180 bps to 8.4% from 10.2% in July, but is still 4.6 percentage points worse than it was last year. Average monthly, three-month, and six-month jobs creation for June, July and August were as illustrated below.Average Jobs CreationMore workers returned to the workforce, as the participation rate went from 61.4% to 61.7% month on month, but still down from 63.2% from last year. The workforce grew by 968,000 jobs, but continues to be lower than last year, with 3,181,000 fewer workers in the workforce than last year.

The seasonally adjusted U-6 Unemployment at 14.2% was down 2.3 percentage points from last month’s 16.5%, but still up 7 percentage points from last year.

Nominal year-on-year average weekly wages increased by 5.26% at a rate more than two and one half percentage points higher than inflation. Real wages increased by 3.46%, assuming the Trimmed Mean Annual PCE inflation rate of 1.8%. Month on month, nominal average weekly wages increased slightly by about $6.74. Average weekly hours increased by 1/10ths of an hour month on month. Hours were up 2/10ths of an hour year on year from 2019.

Analysis: Details and Outlook

The last six months of the shutdown have disturbed what had been a mostly optimistic economy. While the pandemic situation has improved, there remains discernible fear among the elderly and those with comorbidities, as well as parents and teachers. For others, concerns remain about a “second wave”, such as is underway in Spain, the risks going into flu season next month, and the risks associated with transmissions from school re-openings. We remain in a blind spot for the time being, and we remain circumspect. We continue to have four overriding central economic concerns from COVID-19:

  • Negative interest rates and deflation: Cash has been flowing into the bond market so the 10-year is still printing well below 1.0%. Meanwhile, the trimmed mean core inflation printed at an annual rate of 1.8%, so bond investors are effectively paying for the safety of Treasury bonds. In the summer months, PCE inflation ranged as high as 6%, causing the Fed to revise its inflation expectations from “achieving” 2% to “averaging” 2%. Thus, the Fed is willing to tolerate “a little bit” of inflation to achieve its target. But we fear Fed policy is boosting an asset bubble that will not end well. The fact is, many of the assets that had value pre-pandemic have lost their real value, particularly in real estate. We’ve seen this game plan from the Fed before to limit defaults and avoid the realization that the demand curve of pre-pandemic assets has shifted down and to the left; they’re not worth what they were before March. We would prefer the asset market to settle where it belongs and for fiscal policy – and close monitoring of bank loan portfolios, including more rigorous stress tests – to take a larger role in the recovery. That viewpoint is supported by some signs of disinflation, with July 12-month PCE inflation, ex-F&F, ran at just 1.3%, 60 bps lower than the 1.9% it ran in January. The Fed has the spigot wide open, but we see disinflation as a material risk. Japan is already in deflation and expects to remain there for some years and there is some contagion in the rest of Asia. We fear the Japan model and do not see our way out of the deflationary woods just yet. That creates risk to lenders and bond holders.
  • Supply side – There’s some concern suppliers will likely be unable to meet their demand in the aftermath of COVID-19. We’re already seeing this in the ISM report, where customer inventories are described as “too low” and reducing faster. This might cause some minor inflationary pressures in the first months of the economy re-opening, particularly in food and fuel. But in the longer run, the risk is disinflation/deflation, particularly in commercial real estate, and the resulting liquidity trap. Other important elements of the ISM are as follows:

Category

August

July

Status

Rate

Duration (Mo.)

Employment

46.4

44.3

+2.1

Contracting

Slower

13

Supplier Deliveries

58.2

55.8

+2.4

Slowing

Faster

10

Inventories

44.4

47.0

-2.6

Contracting

Faster

2

Customers’ Inventories

38.1

41.6

-3.5

Too Low

Faster

47

Prices

59.5

53.2

+6.3

Increasing

Faster

3

  • Supply side (cont’d): The contracting inventories might, possibly, have a favorable effect in boosting manufacturing in later quarters, as prognosticated by presidential Economic Adviser Larry Kudlow keeps repeating. But for the time being, we’re assessing it as a reading that goods were not moving and that they are moving now, as illustrated in this schedule of Retail Sales. They’re up, but not markedly so from before the pandemic.SalesAccordingly, we assume no big burst in manufacturing. Instead, we anticipate inventory orders to remain relatively flat on and after the recovery. We expect federal COVID-19 maintenance payments to continue to those states that take the president’s order. There will also be some additional fiscal stimulus from the implementation of the president’s executive order to defer payroll taxes on lower- and middle-income taxpayers takes effect.
  • Demand side: It’s not clear we are past the disinflation – and even deflation – we saw at the height of the pandemic. That could be troubling for heavily leveraged companies where cash flow may require debt restructuring. Continued low oil prices, while somewhat better, have shuttered many fracking operations, causing layoffs of well-paying jobs that have been reflected in the pre-COVID-19 jobs report. Japan is expecting moderate deflation for the next few years.
  • Defaults – Our concerns on defaults now extend to defaults on both foreign and domestic loans, largely based on our concerns of deflation. A number of bankruptcies have already struck some US household names, mostly in the consumer discretionary and travel industry. China owes American, European, and British banks and other creditors, including Asian/Chinese investment funds. Our long-standing concerns about the rollover of dollar, euro, and pound denominated offshore corporate foreign currency bonds – concerns we’ve had since at least January of last year – were merely exacerbated by the COVID-19 virus, as roll-overs of both Chinese and other creditors’ debts will be much more difficult in the foreseeable future. We are concerned, too, about the devastating flooding in China’s Yangtze river basin. That said, weakness in the dollar over the last few months, and likely to continue into the future because of the Fed actions announced last week, has slightly ameliorated some of that concern. Events since the atrocious killing of George Floyd have accentuated and exacerbated a wider, underlying, socioeconomic divide that will almost certainly require higher–wage, low-skill jobs, higher taxes, and regulatory enhancements. The November election will be telling and decisive as to the future of the economy, with Democrats and Republicans both adopting a more populist agenda, but with widely divergent means to arrive at populist goals.
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The US Economy

The “black swan” widespread pandemic of COVID-19 hammered the US economy harder and faster than we ever could have imagined, and we are in a depression, defined as a decline of 10% or more in GDP in 2020Q2. This depression has altered much of how we did “pre-pandemic” business and surfaced a number of fault lines in society that had been hidden from view for some years. As we explained in our 2020Q2 GDP report, we continue to doubt a “V”-shaped recovery is likely, but the “L”-shaped…um… “recovery” we predicted may be shorter than we originally estimated, depending on the course of the COVID-19 virus; indeed, it could become a “U”-shaped recovery for reasons we explained here. Keep apprised of our outlook by checking our jobs reports here on Seeking Alpha.

Let’s look at our exclusive schedule of jobs creation by average weekly wages for the August jobs report:O820 JOBS BY AVERAGE WEEKLY WAGES

August Jobs Creation by Average Weekly Wages Source: The Stuyvesant Square Consultancy, compiled from BLS Establishment Data for August 2020. August jobs creation was more widely distributed than in July in low- to moderate-income occupations. July jobs were not so well distributed and slanted almost entirely in low-wage occupations in Retail and Leisure and Hospitality. But this is not uncommon in a recovery.

The number of people employed in August was 147,288,000, up 3,756,000 from July, but down 10,258,000 from the same period last year. Some 160,838,000 individuals were in the workforce, up 968,000 from last month, but down 3,181,000 from last year. The labor participation rate improved 30 bps to 61.7% from last month’s 61.4%, but was down 150 bps from the 63.2% of last year.

As we review economic data, please take note that the COVID-19 virus first became mainstream in the USA after December and only fully bloomed in March and that economic statistics reportage can be months behind. Data reporting for June or July, where it is available, is a far better indicator of the effect of the virus on the US economy – and whether we are emerging from its ill effects – than more lagging data from May. Later data is always better, particularly for prognostications about the future of the economy. Investors should also keep in mind that apparently “stellar” movements in their own right are, in most instances, merely a partial restoration of the status quo before COVID-19 hit. For example, a 20% increase in July month on month after a 25% decline in June isn’t “growth” per se if one buys into the Broken Windows Fallacy.

Geopolitical Concerns

Euro-zone GDP, printed down 12.1% in 2020Q2, following on a decline of 3.6% in 2020Q1. It is the sharpest decline observed since the time series started in 1995. EU27 growth declined 11.9%, following on a decline of 3.2% in 2020Q1.

The Chinese Bureau of National Statistics data set is reported as “insecure” by our firewalls and was not accessed for this month. News reports put the growth at just 3.2% after reporting a decrease of 6.8% in 2020Q1. China reporting has always been opaque under the CCP and is often exaggerated as part of state propaganda.

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Japan’s GDP declined at an annual rate of 7.8% in 2020Q2. It was 2.2% in 2020Q1 on the second revision. (Note that the calculation method was revised to accommodate data collection difficulties arising from COVID-19). We’re still awaiting 2020Q2 GDP from Japan.

Nearly all the geopolitical considerations we ordinarily address in our monthly jobs report have been starkly overshadowed by the global COVID-19 pandemic. Nevertheless, there are considerations we addressed in our discussion of 2020Q2 GDP. We see three geopolitical events that have developed or intensified since that report:

  1. The Belarus elections and protests, where Germany’s Angela Merkel had promised to push back against any intervention by Russia’s Vladimir Putin;
  2. flooding along the Yangtze river basin that threaten the Three Gorges Dam; and
  3. tensions between Greece and Turkey over undeveloped gas fields in the Aegean.

Events that merit especially significant notice and which will affect investors’ portfolios will be addressed as separate articles on Seeking Alpha when they appear to be imminent or within a day or two after they occur.

Oil And Fuel Pricing

Fuel prices remained above the $2.00 per gallon threshold in August at $2.272, unchanged from July. Gasoline prices were 16.07% lower than last year.

West Texas Intermediate crude oil prices continue to be battered by Russian and Saudi efforts to knock out US fracking, as well as COVID-19. They fell 2.11% from last month as of Thursday and are 26.68% lower than the same time last year.

Other Macro Data

The JOLTS survey for June, the latest available data, released August 10th, showed 518,000 new job openings from May, but 1,296,000 fewer jobs than had been created in May 2019. Total separations decreased from the April series high of 9.975 million to just 4,758 million, but up from last month’s 4.236 million.

Advance U.S. retail and food services sales for July (which are adjusted for seasonal variation and holiday and trading-day differences, but not for price changes) were $536.0 billion, an increase of 1.2% from the previous month, and 2.7% above July 2019.

This chart of advance retail sales, from the St. Louis FRED system, illustrates the warning we have tried to convey: we had a big “improvement” that put us back where we had been, with just modest growth, but it’s rather like running on a treadmill: you will have covered a lot of ground, but you went nowhere. That’s why we think GDP will print overall negative and likely in depression, down 10% or more, overall for all of 2020. The next report for retail sales for July is due September 16th. July new orders for manufactured durable goods, released August 26th, increased 11.2% to $230.7 billion.

The TSI for May, the latest available data, printed at 2.7%, coming off the June decline of -33.7, the biggest decrease since this statistic was adopted.

Debt service as a percentage of household debt was moving up again before the COVID-19 crisis hit. It actually fell in 2020Q1, presumably as credit card debt dropped as shopping did. We were heartened that people are taking home more cash from the 2017 tax cut, so that debt service accounted for a lesser percentage of disposable income. Data for 2019Q1 showed debt service as a percentage of disposable income at 9.66, the lowest level since records started being kept 40 years ago. It ran over 13% prior to the Great Recession. We expect the percentage to be higher in 2020Q2 as layoffs decimate the economy and household income, but that data has not yet printed.

As we had anticipated in June, M-2 velocity cratered to the lowest level in history with 2020Q2 GDP, given the Fed having opened the monetary spigot fully and the cratering of the economy from COVID-19.

We note these other macro developments since our February jobs report:

  • The wholesale trade report for June, reported in early August, showed sales up 8.8% month on month, but down 8.5% year on year. Inventories were down 1.4% month on month and down 5.7% from last year. The July 2020 Monthly Wholesale Trade Report is scheduled for release on September 10. The April inventory to sales ratio was 1.38 month on month, up from 1.34 last year. The August data will not be released until September 10th.
  • Building permits for July, released August 18th, were up 18.8% from and also up 9.4% from last year. Housing starts increased 22.6% month on month in July and was up 23.4% year on year.
  • The ISM Manufacturing report for August, released Monday, showed growth at 56.0%, up from 54.2%. The ISM Non-Manufacturing report, now called the “Services PMI”, for August printed at 56.9%, down 1.2% points from 58.1 in July.
  • Personal Income & Outlays for July, released August 28th, showed disposable personal income up 0.2% month on month in current dollars and down 0.1% in chained 2012 dollars. Personal income in current dollars was down 0.4%
  • Personal consumption expenditure (PCE) for July was up 1.9% in current dollars and 1.6% in chained 2012 dollars.
  • The IBD/TIPP Economic Optimism, released August 4th, climbed just slightly, by 2.5 points, to 46.8. (But still below the threshold of 50 that indicates growth).
  • Nonfarm Labor productivity in 2020Q2, as revised yesterday, increased 10.1% as output decreased 37.1% and hours worked dropped 42.9% while average unit costs increased 9.0%.
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Fed Measures

The Fed has made clear that it will be at the ready to maintain liquidity in the markets. And we are concerned about that policy, as described above.

Trimmed mean inflation for personal consumption expenditures, less food and energy, or “Real PCE” for the Dallas Fed is at 0.9% year on year. The real PCE price deflator, reportedly the Fed’s preferred measure of inflation, cratered further, printed at just 0.3% month on month, and just 1.3% year on year, down from 1.7% at the beginning of the year, hence our concerns about disinflation.

The yield curve has widened albeit at sharply reduced overall rates, given the Fed’s emergency actions. We started 2018 with a spread of the 3-month/10-year yield curve two of nearly 102 bps, just half the 200 or so bps that started 2017. As of yesterday, September 3rd, the 3-month/10-year yield curve was separated by 52 bps.

GDP predictions remain extraordinarily difficult in the current environment as the quantum of economic change has been so volatile, measured in multiple percentage points instead of tens of basis points. Not knowing the outcome of the pandemic, or the consequences of re-opening, our estimate requires a much wider range of values than our usual 30 to 50 bps, but we have revised our estimate for 2020Q3 to print down 3% to flat.

Investment Summary

  • Outperform: Trucking and delivery services on speculation of consolidation and acquisition as well as pandemic market growth that will likely continue thereafter, and consumer discretionary and retail in the higher- and luxury-end segment. Longer-term investors might leg into well-capitalized higher-end QSRs and casual dining. Residential real estate REITs in suburban markets surrounding large metropolitan areas.
  • Perform: Consumer discretionary and retail across middle-market and low-end sectors; consumer staples, energy, utilities, telecom, and materials and industrials; healthcare; and currencies of developing nations such as INR, GBP, and EUR.
  • Underperform: REITs that own real estate in sectors identified as “opportunity zones” under the Tax Cut and Jobs Creation Act of 2017 as banks tighten their loan portfolios for over-leverage and concern that urban centers may not “bounce back”; other heavily-leveraged REITs; financials; tech, which has been the “go-to” investment for funds on speculation (largely realized yesterday and today and with more to go, in our view); the asset-light hospitality sector on speculation of declining GDP and COVID-19; especially lower end hospitality as US consumer confidence and lower fuel costs allow domestic travelers to “trade up” to the lower end of luxury brands (for example, lower-end Marriott (NASDAQ:MAR) brands, like Fairfield, from a Choice Hotels (NYSE:CHH) brand); airlines, again on COVID-19; and technology; lower-end, lower-quality QSRs (e.g., MCD, DPZ, YUM, etc.) on greater US delivery competition by their higher-end counterparts. CHF on concerns it may be declared a currency manipulator.

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Note: Our commentaries most often tend to be event-driven. They are mostly written from a public policy, economic, or political/geopolitical perspective. Some are written from a management consulting perspective for companies that we believe to be under-performing and include strategies that we would recommend were the companies our clients. Others discuss new management strategies we believe will fail. This approach lends special value to contrarian investors to uncover potential opportunities in companies that are otherwise in a downturn. (Opinions with respect to such companies here, however, assume the company will not change). If you like our perspective, please consider following us by clicking the “Follow” link above.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The views expressed, including the outcome of future events, are the opinions of the firm and its management only as of today, September 4th, 2020, and will not be revised for events after this document was submitted to Seeking Alpha editors for publication. Statements herein do not represent, and should not be considered to be, investment advice. You should not use this article for that purpose. This article includes forward looking statements as to future events that may or may not develop as the writer opines. Before making any investment decision you should consult your own investment, business, legal, tax, and financial advisers. We associate with principals of Technometrica on survey work in some elements of our business.



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