Category: Deficit Spending & Employment

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Steady growth in US hours worked

Growth of total hours worked, calculated as Total Nonfarm Payroll multiplied by Average Hours worked, improved to 1.575% for the 12 months to May 2017.

Total Hours Worked

And the April 2017 Leading Index, produced the Philadelphia Fed, is tracking at a healthy 1.64%. Decline below 1.0% is often an early warning of a slow-down; below 0.5% is more urgent.

Hourly Wage Rate Growth and Core CPI

Dow Jones Industrial Average continues to advance. Rising troughs on Twiggs Money Flow signal long-term buying pressure.

Dow Jones Industrial Average

Dow Jones Transportation Average is slower, headed for a test of resistance at 9500. But recent breakout of Fedex above $200 is an encouraging sign and the index is likely to follow.

Dow Jones Transportation Average

We are in stage III of a bull market, but this can last for several years.

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Is the US labor market tightening?

I wouldn’t read too much into weaker US job gains of 138 thousand for May 2017. Job gains seem to be tapering in 2017, with February highest at 232 thousand, but this could also be a sign of tightening labor conditions.

Monthly Nonfarm Payroll: Job Gains

Comments from respondents in yesterday’s ISM report showed hints of a tightening labor market:

  • “Business conditions are steady, and with competition increasing, it’s making negotiations even more intense to reduce costs.” (Machinery)
  • “Business is booming, and getting direct employees is increasingly difficult.” (Fabricated Metal Products)
  • “Difficult to find qualified labor for factory positions.” (Food, Beverage & Tobacco Products)

Unemployment continues to fall, reaching 4.3% for May 2017. The dip below the natural rate of unemployment also warns of tighter labor market conditions.

Unemployment and the Natural Rate

But there are no real signs of a tight labor market in hourly wages. In fact, hourly wage rate growth in the manufacturing sector is slowing.

Hourly Wage Rate Growth and Core CPI

Employee compensation as a percentage of value added (Q1 2017) is starting to rise and the percentage of profits (after tax) is declining. The lines tend to invert, with employee compensation peaking and profits dipping ahead of a recession. This still seems 12 months away.

Profits and Employee Compensation as % of Value Added

In summary, declining unemployment and rising employee compensation as a percentage of value added both indicate a tight labor market. But soft wage rate growth and falling core CPI suggest the Fed will be in no haste to apply the brakes. At least for the next three quarters.

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ISM May 2017 Report

After a setback in April, activity in the manufacturing sector is again expanding:

MANUFACTURING AT A GLANCE
May 2017
Index Series
Index
May		 Series
Index
Apr		 Percentage
Point
Change		 Direction Rate
of
Change		 Trend*
(Months)
PMI® 54.9 54.8 +0.1 Growing Faster 9
New Orders 59.5 57.5 +2.0 Growing Faster 9
Production 57.1 58.6 -1.5 Growing Slower 9
Employment 53.5 52.0 +1.5 Growing Faster 8
Supplier Deliveries 53.1 55.1 -2.0 Slowing Slower 13
Inventories 51.5 51.0 +0.5 Growing Faster 2
Customers’ Inventories 49.5 45.5 +4.0 Too Low Slower 8
Prices 60.5 68.5 -8.0 Increasing Slower 15
Backlog of Orders 55.0 57.0 -2.0 Growing Slower 4
New Export Orders 57.5 59.5 -2.0 Growing Slower 15
Imports 53.5 55.5 -2.0 Growing Slower 4
OVERALL ECONOMY Growing Faster 96
Manufacturing Sector Growing Faster 9

Manufacturing ISM® Report On Business® data is seasonally adjusted for the New Orders, Production, Employment and Supplier Deliveries Indexes.

*Number of months moving in current direction.

Notable comments from respondents:

  • “Business conditions are steady, and with competition increasing, it’s making negotiations even more intense to reduce costs.” (Machinery)
  • “Business is booming, and getting direct employees is increasingly difficult.” (Fabricated Metal Products)
  • “Difficult to find qualified labor for factory positions.” (Food, Beverage & Tobacco Products)

Read the full report at ISM May Report

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Australia: Lean years ahead

Growth in total monthly hours worked has slowed to 1.3% for the 12 months to April 2017. In fact, growth has been pretty lean over the last 5 years, except for the period January 2015 to February 2016.

ABS: Hours Worked & GDP growth

High commodity prices in 2004 to 2008 and 2010 to 2011 coincide with periods of strong employment and GDP growth, as indicated on the chart above.

DJ-UBS Commodity Index

The current down-trend in commodity prices, depicted on the DJ-UBS Commodity Index above, and low growth in hours worked both point to anemic employment (and GDP) growth ahead.

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Inflation surges

Inflation is rising, with CPI climbing steeply above the Fed’s 2% target. But core CPI excluding energy and food remains stable.

Consumer Price Index

Job gains were the lowest since May 2016.

Job Gains

But the unemployment rate fell to a low 4.5%.

Unemployment

Hourly wage rate growth has eased below 2.5%, suggesting that underlying inflationary pressures are contained.

Average Hourly Earnings Growth

The Fed is unlikely to accelerate its normalization of interest rates unless we see a surge in core inflation and/or hourly earnings growth.

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Robots Take Over | Susanna Koelblin | LinkedIn

From Susanna Koelblin:

First large scale shoe robot factory unveiled: Adidas will use machines in Germany instead of humans in Asia to make shoes

Adidas, the German maker of sportswear, has announced it will start marketing its first series of shoes manufactured by robots in Germany from 2017. More than 20 years after Adidas ceased production activities in Germany and moved them to Asia, Adidas unveiled the group’s new prototype “Speedfactory” in Germany. As of this year, the factory will begin large-scale production. What’s more, Adidas will also open a second Speedfactory in the U.S. in 2017, followed by more in Western Europe. According to the company, the German and American plants will in the “mid-term” each scale up to producing half a million pair of shoes per year.

Does this pose a threat to Adidas’s traditional manufacturing base in China, Indonesia and Vietnam? After all, labor in the region is becoming less cheap these days, and manufacturers are increasingly turning to robots. The current model in the apparel industry is very much based on sourcing products from countries where consumers are typically not based. In the longer term Adidas could even produce the shirts of Germany’s national football team in its home country. The shoes made in Germany would sell at a similar price to those produced in Asia, where Adidas employs around one million workers. Arch-rival Nike is also developing its robot-operated factory.

This development in the shoe area is just the beginning and will be leveraged to the apparel industry as well….

Robot factories will not restore former employment levels, with operations run by a skeleton staff. And low employment leads to low consumption. But new factories will require intensive capital investment. This may portend increased demand for capital in the future. With current high debt levels threatening the stability of the financial system, equity investors may be in short supply.

Source: Robots Take Over – The Apparel Production | Susanna Koelblin | Pulse | LinkedIn

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A huge hole in Trump’s promise to bring back US manufacturing jobs | Business Insider

By Pedro Nicolaci da Costa:

US manufacturing employment has been declining since a 1970 peak, a drop that accelerated after China’s entry into the World Trade Organisation but, tellingly, not after the US entered the North American Free Trade Agreement with Mexico and Canada in 1994.

….SoftWear’s business, along with so many others across the US, should remind Trump of a factor he has yet to acknowledge: the role of automation in reducing the number of manufacturing jobs available…..

That fits a nationwide pattern of manufacturing output hitting record highs in recent years, even as manufacturing employment continues its steady decline.

….Mark Muro, a senior fellow and the director of policy at the Metropolitan Policy Program at the Brookings Institution, wrote in MIT’s Technology Review. “No one should be under the illusion that millions of manufacturing jobs are coming back to America.”

Source: There is a huge hole in Trump’s promise to bring back US manufacturing jobs | Business Insider

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Australia’s economic growth is slowing.

Employment and Participation rates are falling.

Australia Employment & Participation Rates

Wage rate growth is slowing.

Australia Wage Rates

Slowing wage rate growth and inflation confirm that the economy is faltering.

Australia Underlying Inflation

The RBA, with one eye on the housing bubble, has indicated its reluctance to cut rates further. Increased infrastructure spending by Federal and State governments seems the only viable alternative.

With the motor industry winding down and apartment construction headed for a cliff, this is becoming increasingly urgent.

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Robust Job Growth, Solid Labor Market | WSJ

From WSJ:

The pace of job creation remained robust in February, with payrolls rising by a seasonally adjusted 235,000 new jobs, the Labor Department said.

Evidence of continued health in the U.S. labor market likely cleared the way for the Federal Reserve to raise short-term interest rates next week. The unemployment rate ticked down to 4.7%, as both workforce participation and employment rose….

Source: Robust Job Growth, Higher Wages Show Solid Labor Market – WSJ

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Rising debt—not a crisis, but a serious problem | Brookings

Testimony by Alice M. Rivlin, Senior Fellow – Economic Studies, Center for Health Policy, before the Joint Economic Committee of the United States Congress on September 8, 2016:

…..our national debt is high in relation to the size of our economy and will likely rise faster than the economy can grow over the next several decades if budget policies are not changed. Debt held by public is about 74 percent of GDP and likely to rise to about 87 percent in ten years and to keep rising after that.

This rising debt burden is a particularly hard problem for our political system to handle because it is not a crisis. Nothing terrible will happen if we take no action this year or next. Investors here and around the world will continue to lend us all the money we need at low interest rates with touching confidence that they are buying the safest securities money can buy. Rather, the prospect of a rising debt burden is a serious problem that demands sensible management beginning now and continuing for the foreseeable future.

What makes reducing the debt burden so challenging is that we need to tackle two aspects of the debt burden at the same time. We need policies that help grow the GDP faster and slow the growth of debt simultaneously. To grow faster we need a substantial sustained increase in public and private investment aimed at accelerating the growth of productivity and incomes in ways that benefit average workers and provide opportunities for those stuck in low wage jobs. At the same time we need to adjust our tax and entitlement programs to reverse the growth in the ratio of debt to GDP. Winning broad public understanding and support of basic elements of this agenda will require the leadership of the both parties to work together, which would be difficult even in a less polarized atmosphere. The big uncertainty is whether our deeply broken political system is still up to the challenge.

…..There are three necessary elements of a long-run debt reduction plan:

  • Putting the Social Security program on sustainable track for the long run with some combination higher revenues and reductions in benefits for higher earners.
  • Gradually adjusting Medicare and Medicaid so that federal health spending is not rising faster than the economy is growing….
  • Adjusting our complex, inefficient tax system so that we raise more revenue in a more progressive and growth-friendly way and encourage the shift from fossil fuels to sustainable energy sources…..

Source: Rising debt—not a crisis, but a serious problem to be managed | Brookings Institution

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