There were several recent market moving reports, including some positive data on U.S. and Chinese manufacturing. But, the biggest news was the seemingly positive March employment data which sent equity markets up, as the initial take on the headline Establishment Survey (ES) data (+196k) fit the narrative that the soft economic patch is now passing and a recession will be avoided. Because it doesn’t fit the narrative, there has been no recognition that employment is a coincident/lagging indicator, which means that it really doesn’t say anything about the future.
The Two Employment Reports are Contradictory
There are many issues with the employment report. The most glaring to me is the fact that, for the third month in a row, the two employment survey headline numbers (Establishment (Payroll) Survey (ES), and Household Survey (HS)) told drastically different stories. In March, The ES showed +196k jobs, while the HS indicated -201k. In February, the weak ES report (+33k) was offset by the strong (+255k) HS. Going back to January, the +312k in the ES was contradicted by a -251k print in the HS. In each case, the equity market simply latched on to the number that fit the narrative, ignoring the observation that did not fit. So, what should the public believe?
Digging deeper, the March ES headline (+196k) is really misleading. The 196k “solid” growth headline should be tempered by the following:
- There was a surge of +212k in multiple jobholders, indicating that the number of people with jobs actually declined (+196k -212k = -16k). This is in keeping with the HS (-201k);
- Full-time employment fell -190k;
- Part-time for economic reasons (i.e., want full-time, but unavailable), +189k;
- The unemployment rate, calculated from the HS, was unchanged at 3.8% only because the labor force fell -224k. It would have risen if not for people dropping out;
- The ES has a +75k to +100k bias due to the Birth/Death model addendum. The BLS simply “plugs” in a “guess” as to the number of jobs created by small business, as the ES does not survey mom and pop shops;
- Employment gains were mainly in non-cyclically sensitive areas like Government, Professional, and Education. But here are some cyclically sensitive numbers:
- Retail: -12k (-20k February) – no net growth since November;
- Durable goods manufacturing: -7k;
- Construction: +16k (but -25k in February);
- Transportation: -2k;
- Overtime in manufacturing fell -2.6%;
- Average and median durations of unemployment rose;
- Temporary Agency employment, always a leading indicator, fell -5k in March after falling -23k in February. Businesses apparently aren’t so pressed that they need temporary workers!
The other big story, again fitting the narrative that the soft patch had passed, was the minor upticks in U.S. and Chinese Manufacturing PMIs. Ignored was the disappointment in U.S. ISM Services which, at 56.1, was the weakest reading since August ’17. Within the Services Index: New orders fell -6.2 points, Export orders -2.5 points, Business activity -7.3 points, and Inventories -1.0 points.
On the positive side, loose interest rates in the U.S. pushed mortgage applications up 29.8% Y/Y, most of which were refis. The 30-year fixed rate fell 9 basis points to 4.36% in the week ended March 29th, the lowest level since January ’18. It is a foregone conclusion that lower interest rates will help housing, likely slowing or stopping its plunge. (Prices in places like Manhattan and San Francisco are now falling.) However, it will take a lot more than just lower rates to bring housing back to a leadership role.
In Europe, there was some stabilization in the data out of Italy and Spain, although Italy remains mired in recession. But, Europe’s economic engine, Germany, saw industrial orders plunge -4.2% in March M/M (consensus was +0.3%!!). The plunge was broad based with capital goods down -6.0% and consumer goods down -3.5%.
A Look Ahead
Earnings will again be in the forefront in the weeks ahead. There were a lot of disappointments in Q4, and Q1 won’t be much different. Last week, Walgreens proved to be a big disappointment (for their quarter ended February 28). Currently, Q1 S&P 500 earnings are forecast as -4.0% Y/Y. It wasn’t that long ago (6 months) when they were +8%+! As is wont on Wall Street, analysts lower earnings enough so that most reporting companies (60%+) beat. But that doesn’t change the basic downtrend. And, don’t forget, 46% of S&P 500 revenues come from outside the U.S. It is likely that Q2 S&P 500 earnings (currently estimated at +0.1%) will be lower than year earlier levels – thus, an “earnings recession” is likely. In addition, there has always been a very high correlation between earnings growth and equity market performance (just saying). The wild card here is the Fed (and other central bank) innuendo that they have the equity markets’ backs. And it appears that markets are behaving with that in mind.
There are always some positives. But often, headline numbers are spun, like the most recent employment data. It is a fact that the majority of the recent economic data point to continued economic deceleration, both in the U.S., and in the world’s major developed economies. Sooner or later, the markets reflect the underlying economics.
Robert Barone, Ph.D. (Georgetown) Formerly: Prof of Finance, bank CEO, Chair of FHLBSF. Currently: Director CSAA Ins., Norcal AAA, Allied Mineral Products. Co-manager: FFIU (NYSE traded) bond fund.