Springing Forward


“It was one of those March days when the sun shines hot and the wind blows cold.” – Charles Dickens, Great Expectations

It was in the paper, so it must be true. “Jobs Gains Ease Recession Worries,” read the front page of the Saturday Wall Street Journal, leaving the impression that the jobs report could be responsible for last week’s gains in equities, along with its evidence that recession worries were perhaps overblown.

All in a week’s work for the tape, I would say, adding my periodic reminder that in Wall Street, the tape makes the news. Rising prices are accompanied by stories and commentary that attempt to justify them, along with pictures and clips of bullish analysts and pundits. Last week they were adding a heavy dose of “See, I told you there was nothing to worry about.” Falling prices get similar treatment, with January featuring lots of frightened momentum traders talking about recession here, there and everywhere.

Regular readers know that I have been arguing for some months now that recession is imminent in the U.S., and the recent data I have seen has not changed that outlook, the latest jobs report notwithstanding. The recent rally is not much of a surprise, as equities had become strongly oversold and technical factors were suggesting the tape was ripe for reversal. Throw in positive seasonal factors (March-April is historically the best two-month period), a seeming break in bad economic news (several reports being made to look better than they were) and conditions are right for what appears to be a garden-variety bear-market rally. Over in commodities land, some of the reversals were quite vicious, e.g. an historic bounce in iron ore and above all oil, whose rally went a long way in helping out equities.

It also helps a great deal, if not most of all, that we are in the valley between the disappointment of fourth-quarter profit reports that petered out last month, and the disappointment of first-quarter profit reports that won’t get started until next month. S&P 500 profits have fallen for three consecutive quarters now, with the declines slowly widening to (-3.4%) in the fourth quarter of 2015 and estimates for the first quarter now down to (-8.0%), according to FactSet. A reading of the estimate tea leaves would suggest that the overall estimate should dwindle to something south of (-10%) by the time the reporting season begins, implying real expectations of an overall decline of over 5%.

However, that is still some weeks away, and next week offers the promise of a Fed meeting that might offer up further delay in raising rates. The current week’s calendar is nearly empty, a phenomenon that strongly favors the current short-term trend, which in this case is up. There could be some gas left yet in this current rebound, and many are citing the 2020 range on the S&P 500 (currently at about 2000) as the next resistance level. Those kinds of things aren’t set in stone, but you can expect traders to be ready with their fingers on the button. A little bad news and they’ll flee, a little good news and some short-squeezing will be the order of the day.

You would do best to keep in mind, however, what is most important: declining profits. They won’t be in the headlines much the next few weeks, but the rise and fall of corporate profits ultimately lies behind every bull and bear market. Right now they are falling, and nearly all the economic data has been telling us that the business cycle is ending. Caveat emptor. When this column next appears, most of us will be back on Daylight Savings time in the U.S; now there is a spring forward I can enjoy without reservation.

The Economic Beat

The jobs report took its usual place as the highlight of the week. At 242,000, or 242K seasonally adjusted (SA), it was well above consensus for something in the 190K-200K range and belied some of the so-so reports earlier in the week. As I often remind readers, though, jobs are a lagging indicator. They are also a doubtful indicator of future GDP growth, as 2015 employment started somewhat stronger while the growth rate of nominal GDP declined for the year. That won’t stop the upgrades coming out of the ever-hopeful windows on Wall Street.

The jobs number was a sound one at first look, though February 2015 was a bit better in the face of much worse weather. We don’t really know if the economy is gaining jobs at this point, of course, as the actual jobs count declines every January and then rebounds over the following months. The estimates are based on small samples, too, but the seasonal adjustment process works well enough most of the time. It can run into trouble when the trend is changing, making hiring counts seem to turn abruptly.

We’ll worry about that another time, as for now most of the report and data seems benign enough. Weekly jobless claims appear to me to be finally turning, but the process usually takes time and the evidence is still fragile. Claims levels are still quite decent, it’s more that the change in the rate of change – the “second derivative,” as Street wonks like to say – is slowing. The ADP payroll report was also a little better than expected, at 214K vs. expectations for 200K.

The jobs report wasn’t one of unalloyed good, as you might expect in our fitful economy. Though the not-in-labor-force category declined and the participation rate increased, the overall unemployment rate remained steady at 4.9%. There was a large jump in part-time employment, apparently, which might be partly responsible for the downward pressure on hourly wage growth, (-0.1%) in February, though still 2.2% above a year ago while weekly wage growth remains only 1.6%. Average weekly hours also fell.

The alternative unemployment rate, called the “U-6,” fell two ticks to 9.7%, a good improvement. However, the rate is also a great example of how unemployment is a lagging indicator – it fell two ticks in both February 2007 (to 8.2%) and February 2008 (to 9%) as well. The last recession is dated as beginning in December 2007.

The composition of the payroll figure had some weaknesses – manufacturing reported a sizable loss of 16K (SA) and the temps category, often thought of as a rough leading indicator, declined for the second straight month, this time by about 10K. Ditto for transportation and warehousing, also down for a second straight month (-5.3K). The gains were heaviest in retail (55K) and “education and health services” at 86K, while leisure and hospitality made its usual gain, this time by 48K. The foregoing represent jobs that are typically further down the pay scale, probably a contributing factor to the downward wage figure.

The report was belied by trends in the two national purchasing manager reports, the ISM manufacturing and non-manufacturing reports. Employment turned slightly negative (49.7, 50 is neutral) in the latter survey and remained negative, though less so, in the manufacturing survey (48.5). Neither survey is a good measure of actual output, just trends in how the managers are feeling. The manufacturing ISM overall result was a better-than-expected 49.5, with new orders stable at 51.5 and the industry growth-contraction score at 9-7 in favor of growth. It was by no means a good report, but it was better than January and so tossed into the basket of positive economic surprises.

The non-manufacturing main index came in at 53.4, down from 53.5 in January and a “two-year low.” However, a one-tenth difference is really a very trivial one – the main inferences of the report is that non-manufacturing activity appears to be currently stable, though at somewhat subdued (sub-55) levels of growth. The best news in the report was the growth-contraction score, a healthy 12-4 and a nice improvement over the 10-8 result in January. However, prices, which are the best leading indicator on the service side, weakened again to a reading of 45.5, partly a result of the carnage in commodity pricing. The respondent comments cited each month in both reports are not scientifically chosen, but the samples were mostly positive this month, if not wildly enthusiastic. In a similar vein, the Fed’s Beige Book was a compendium of results that talked of growth that was weak to flat.

Factory orders were announced as being at 1.6% for January, a good reversal from December (-2.9%), yet short of the consensus for 2.0%. The business cap-ex category, announced in last week’s durable goods order as a healthy 3.9%, is now only a healthy 3.4%, but that’s all seasonal adjustment. The year-on-year decline for January was revised down to (-4.9%), compared to a year-ago (-1.1%). The notion that the sector is rebounding is an illusion.

In other industrial activity, construction rose an estimated 1.5% in January, with nearly all of the gain due to highway spending; pending home sales were off by 2.5% in February. The Dallas Fed delivered up one of its worst readings in years, (-31.8) for its activity index and (-17.4) for new orders. The energy-centric region has been the worst hit in the last year. The Chicago purchasing report took another big swing, this time from 55.6 to 47.6; its heightened volatility has been reducing its influence with the market.

Productivity for the fourth quarter was revised up to a loss of 2.2%, thanks mostly to an unwanted inventory gain that previously boosted the fourth-quarter GDP estimate but will weigh on first-quarter GDP. International trade continues to paint a gloomy picture, with the January result of exports falling faster than imports another reduction to the outlook for first-quarter GDP.

Next week is a very quiet one, with a calendar quirk pushing the February retail sales report – which I had expected for next Friday – all the way back to Monday the 14th, where it will arrive in a very crowded calendar (e.g., the Fed meeting two days later). The most interesting report for next week will be wholesale trade on Wednesday, usually not a market mover. The other reports include import-export prices on Friday and the usual weekly readings, along with the Fed’s labor market index (Monday) and a speech by Fed vice-chair Stanley Fischer on Monday that traders will be watching closely for clues to the mood of the FOMC when it meets the following week.

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