Caton's Corner - February 2014

For the second month in succession, the employment report showed a disappointingly small gain in jobs in January. Employment rose by just 115,000, with the December increase almost unrevised. It is unlikely you can blame the small gain in jobs on the weather. While the winter continued to harsh, January was probably “less bad” than December.

Goods-producing employment was firm in the month, rising by 76,000, its strongest monthly gain for eight years. Construction employment rose by 48,000, more than reversing the 22,000 loss in December, while manufacturing employment increased by 21,000 after 8,000. This was the biggest monthly increase in construction jobs since February 2006. The survey week was the one mild-weather week in the month this may have been a factor in the rise in construction jobs in particular.

Private service-sector employment did not fare so well, increasing by just 66,000 after a gain of 102,000 in December (and 204,000 in November). This was the smallest monthly increase since June 2012. Retail employment fell by 13,000 after a massive gain of 63,000 in December, while education jobs declined by 8,000 and health care employment fell marginally. Health care employment has declined in just one other month in the past 24 years!� Government employment fell by 29,000, the largest decline since October 2012. The employment of postal workers fell by 9,000, after a smaller fall in December. So perhaps hail and snow do “stay” them from their appointed rounds.

The “wave” chart shows that a 3-month moving average of employment growth is struggling to gain momentum.

Benchmark revisions to establishment employment lifted the level of jobs in March 2013 by 347,000 (369,000 when seasonally adjusted). The revision came about solely because of a reclassification of some health workers providing care for the elderly and for people with disabilities from “private” (and hence outside of the scope of the survey) to an industry covered by the survey. Other revisions in fact lowered employment growth in the twelve months to March. The ongoing effects of the reclassification and other revisions were to lift the December 2013 level of employment by 509,000 (0.4%).

Hours worked per week were flat, at 34.4 hours, with the result that the aggregate hours index rose by 0.1%.

Average hourly earnings increased by 0.2% in January, with the earnings of non-supervisory production workers up by 0.3%. This brought the yearly growth rates to 1.9% and 2.2% respectively (see chart).

In the household survey, employment increased by 616,000 in January, after adjusting for the unusually small annual revision to the level of population. The unemployment rate fell once again, from 6.7% to 6.6%. It is getting very close to the Fed’s “threshold” of 6.5%. The further fall has been attributed to the fact that extended unemployment benefits ran out at the end of 2013, with the possible result that many simply dropped out of the labour force and hence are no longer recorded as unemployed. This explanation, of course, sits a little oddly with the increase in participation (from 62.8% to 63%) recorded in the month. In unrounded terms, the unemployment rate fell from 6.68% to 6.58%.

The broadest measure of unemployment, which includes those who have given up looking and those working fewer hours than they would like, fell from 13.1% to 12.7%.

Consumer credit for December increased by $18.8 billion, the largest gain since February 2013. Non-revolving credit continued to do most of the heavy lifting, rising by $13.8 billion, but revolving credit also showed reasonable growth, up by a 7-month high of $5 billion. In the past year, credit has increased by 6.2%, with non-revolving credit up by 8% and non-revolving by 1.9%. Consumers are apparently more ready to spend, hence the recent decline in the saving rate.

Earlier in the week

The week began with a surprisingly weak reading for the manufacturing ISM for the month of January. The index fell from 56.5 to 51.3, an eight-month low. The decline in the month was the sharpest since May 2011. The weakness was widespread, with all five sub-components declining in the month. The production index fell from 61.7 to 54.8, also an eight-month low, while the new orders index plummeted from 64.4 to 51.2, the largest monthly decline since 1980. The employment index fell from 55.8 to 52.3, a 7-month low. The prices paid index jumped from 53.5 to 60.5, an 11-month high. There is no question that the unusually severe winter was to blame for at least some of this weakness.

Two days later, the non-manufacturing ISM told a better tale. It rose from 53 in December to 54 in January, with the most forward-looking component, new orders, edging up from 50.4 to 50.9.� The employment index was also strong, rising from 55.6 to 56.4, the highest it has been since November 2010. The prices paid index rose from 55.1 to 57.1. Eleven industries reported growth in the month, up from 8 in December but down from the recovery-high of 16 (out of 18) last August. Bearing in mind that the non-manufacturing sector is so much bigger than manufacturing, this should have dispelled some of the gloom brought about by the manufacturing ISM.

The construction spending data for December were also soft. Spending rose by just 0.1%, with the previously-published 1% increase in November revised down to 0.8%. Growth in October was also revised down. The weakness was due to a 0.7% decline in private non-residential spending and a 2.3% fall in public spending. Private residential spending increased by 2.6% and is now back to its highest level since June 2008. For 2013 in total, construction spending increased by 4.8%, the fastest growth for four years. In the twelve months to December, spending rose by 5.3%, with all of the growth coming from private residential spending, which is up by 18.3%. Private non-residential is down by 1.7% and public spending down by 0.7%, with particular weakness in education and in sewage and waste disposal.

These data suggest a minor downward revision to Q4 GDP growth, but there will be other sources of likely revision in the days and weeks ahead.

Factory orders fell by 1.5% in December, a slightly better result than had been expected given that it was already known that durable orders had declined by more than 4%. In fact, there was only a small revision to durable orders, but non-durable orders were surprisingly strong, rising by 1.1%. Although durable orders were almost unrevised, both core shipments and core orders were revised upwards from -0.2% to 0.6% and from -1.3% to -0.6%. This is a positive sign for the short-term future of BFI, and possible also for Q4 2013 GDP growth.

Inventories rose by 0.5% in the month, while overall shipments fell by 0.2%. As a result, the inventory/shipments ratio rose slightly, but remains range-bound (see chart).

Mortgage applications rose by a scant 0.4% in the last week of January. Applications associated with a purchase fell by 3.8% while refinancing rose by 2.9%. In the past year, in trend terms, purchase applications have fallen by about 12.5% while refinancing is down by 64.5%. Applications have been drifting in recent weeks. The severity of the winter may have held them back to some extent. Interest rates fell again in the week. The 30-year fixed fell by 5 basis points to 4.47%. It has declined by 25 basis points in the past four weeks. The 5-year adjustable rate fell by 10 basis points to 3.15%. Relative to a year ago, however, these two rates are still higher, by 74 and 43 basis points respectively.

The oil and products inventory data recorded the third successive weekly rise in crude stocks, albeit of just 400,000 barrels. Gasoline stocks also rose marginally, by 500,000 barrels, while distillate stocks fell by 2.4 million barrels, the fourth successive weekly decline. In the past year, crude stocks have declined by 3.7% and distillate stocks by 12.2%. Gasoline stocks have shown a small increase, of 0.4%. Refinery utilisation fell from 88.2% to 86.1%.

Jobless claims fell by 20,000 in the last week of April after the previous week’s reading had been revised up from 345,000 to 351,000. The four-week moving average was unchanged, at 334,000. It may be settling down after several months of volatility. In unadjusted terms, claims fell from 358,000 to 355,000. Continuing claims for the previous week fell by 15,000 to 2.96 million. The claims data suggest that the US labour market is going sideways.

The trade deficit increased to $38.7 billion in December from $34.6 billion in November. Exports fell by $3.5 billion (1.8%) while imports rose by $600 million (0.3%). Non-petroleum goods exports dropped by $4.5 billion, the largest monthly drop since January 2009. The real trade deficit increased by $4.5 billion. This was more than assumed in the recent Q4 GDP release and is consistent with a downward revision to growth in that quarter of about 0.4 percentage point. Net exports will still contribute to GDP growth in the quarter, but by less than 1 p.p. compared with the initial estimate of 1.3 p.p. In the past year, international trade has grown only very slowly, with imports up by 1.3% and exports by 1.4%.

The first estimates of productivity and unit labour costs for Q4 2013 were released. As expected, productivity growth was firm in the quarter, at 3.2%, with Q3 revised up from 3% to 3.6%. The output measure used in the calculation rose at an annual rate of 4.9% while hours worked were up by 1.7%. In the past year, productivity has increased by just 1.7%, still below the long-run average (see chart).

Unit labour costs fell at an annual rate of 1.6% in the quarter, after a 2% decline in Q3. Hourly compensation rose by 1.5%. In the past year, ULC has now fallen by 1.3%, the fastest rate of decline for three years (see chart). The inflation outlook remains benign.

Rhetoric etc

On Friday, the US Government reached its debt ceiling. The Treasury Secretary announced that he was not confident that emergency measures (aka accounting trickery) could keep spending funded beyond 27 February. So, in a sense, we are back where we were in October. But the risk of debt default (and ensuing financial chaos) is much less this time. The Republicans lost a lot of face in October and they won’t want to go through that again, so some sort of compromise will be reached in the next three weeks. The US should follow our example and simply scrap the debt ceiling.

The Week Ahead

It’s a reasonably quiet week. On Tuesday, wholesale inventories for December are expected to show a rise of 0.6%. New Fed Chair Janet Yellen will give her first half-yearly Congressional testimony on the state of the US economy. On Wednesday, the Budget result for January is likely to show a small deficit.

On Thursday, retail sales for January should be close to flat, with sales excluding autos up only slightly. Business inventories for December should show a gain of about 0.4%. Initial claims should stay close to their current level. On Friday, industrial production for January is likely to increase by a moderate 0.3% with capacity utilisation rising slightly. Finally, the early-month estimate of consumer sentiment from the University of Michigan is expected to show a small decline, from 81.2 to about 80.

Market Reaction

After a nasty Monday, on which the S&P fell by 2.3%, the share market spent three of the succeeding four days in positive territory, and actually managed a gain for the week. In the week, the Dow rose by 0.6%, the S&P by 0.8% and the Nasdaq by 0.5%. We had thought Monday was overdone, and continue to believe in an upward trend, so we look for more gains in the week ahead.

Unsurprisingly, the long end rallied on Monday but then sold off for the rest of the week. The 10-year bond finished where it started, at 2.67%. We have no big call for the week ahead.