Westpac Leading Index counters jobs surge

In stark contrast to the buoyant recent ABS jobs numbers, the Westpac Leading Index slowed:

From Matthew Hassan at Westpac:

The six month annualised growth rate in the Westpac-Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, eased from 1.01% in April to 0.62% in May.

…..The index is pointing to a clear slowing in momentum. While the growth rate remains comfortably above trend, the pace has eased markedly since the start of the year….

Read more at Westpac.

Australia: Jobs surge

The May 2017 ABS Labour Force Survey surprised to the upside, with employment increasing by 42,000 over the previous month (full-time jobs even better at +52,100). These are seasonally adjusted figures and the trend estimates are more modest at 25200 jobs.

Australia Jobs and Unemployment

Seasonally adjusted hours worked also jumped, reflecting an annual increase of 2.3%.

Australia Hours Worked and Real GDP

The Australian Dollar surged as a result of the impressive numbers but Credit Suisse warns that there may be some issues with the latest strong NSW estimates:

By state, the gains in full-time employment were particularly strong in NSW…..

But beware the sample rotation bias ….the ABS has confessed that for the sixth time in seven months, it has rotated the sample in favour of higher employment-to-population cohorts. Officials report that this has had a material impact on the NSW employment outcomes.

If the numbers are correct, there are only two areas that could account for the job growth: apartment construction and infrastructure. The former is unlikely to last and the latter, while an important part of the recovery process, are also not a permanent increase.

I would prefer to wait for confirmation before adjusting my position based on a single set of numbers.

One swallow does not make a spring, nor does one day.

~ Aristotle

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.

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.

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

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.

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.

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

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

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.

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

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

Does Government Spending Create Jobs?

By William Dupor, Assistant Vice President and Economist

The most recent U.S. expansion, however lackluster, entered its eighth year in June.1 In anticipation of the possibility (or perhaps inevitability) of another recession, observers have remarked on how and whether countercyclical fiscal policy should be used to combat an economic downturn….

Gauging Effects through Military Spending
Research Analyst Rodrigo Guerrero and I took up the issue of the efficacy of government spending at increasing employment. We looked specifically at over 120 years of U.S. military spending, which provides a kind of “natural experiment” for our analysis.

Looking at government spending more generally suffers from the problem that the spending may be correlated with economic activity: The government may spend more during a recession (as with ARRA) or more during an expansion (when tax revenues are high). This might bias the results, which economists call “an endogeneity bias.”

Military spending, on the other hand, is likely to be determined primarily by international geopolitical factors rather than the nation’s business cycle.

….We used a similar methodology and found that military spending shocks had a small effect on civilian employment. Following a policy change that began when the unemployment rate was high, if government spending increased by 1 percent of GDP, then total employment increased by between 0 percent and 0.15 percent. Following a policy change that began when the unemployment rate was low, the effect on employment was even smaller.

In the event of another recession, policymakers have a number of stabilization tools at their disposal, including quantitative easing, negative interest rates and tax relief. The research discussed above suggests that one other device, namely countercyclical government spending, may not be very effective, even when the economy is slack.

I think the authors of this research come to the wrong conclusion. Instead they should have concluded that military spending is not very effective in creating jobs.

Military spending provides no lasting benefit to the economy in terms of tax revenue or saleable assets, leaving future taxpayers with public debt and no means of repayment. Other than an austerity budget which would risk another recession.

Whereas infrastructure projects can be selected on their ability to generate market-related returns on investment, providing revenue to service the public debt incurred…..and saleable assets that can be used to repay debt.

But there are two caveats.

First, project selection must not be a political decision. Else projects likely to win votes will be selected ahead of those that generate decent financial returns.

Second, the private sector must have skin in the game to ensure that #1 is adhered to. Also to reduce cost blowouts. Private companies are not immune to blowouts but government projects are in a league of their own.

The added benefit of infrastructure spending is the free lunch government gets from reduced unemployment benefits. Money they would have spent anyway is now put to a more productive use.

Source: Does Government Spending Create Jobs?

The Internet of Things: it’s arrived and it’s eyeing your job

From Malcolm Maiden:

The Internet of Things is “billions of connected devices from vending machines to mining equipment, aircraft engines and their componentry, agricultural sensors and cars,” [Andy] Penn said in his first keynote speech as Telstra CEO in July last year.

It both offers opportunities and poses threats. Penn mentioned in his first speech for example that a Committee for Economic Development of Australia report on Australia’s future workforce had estimated that almost 40 per cent of the jobs that exist in Australia had a moderate to high likelihood of disappearing in the next 10 to 15 years.

“Machine learning is the biggest driver of this because of its implications for the service industry,” he said. “In future, many traditional services type activities will be done by computers more quickly, more cheaply and more accurately.

“New jobs will be created by the Internet of Things, too of course. We just don’t know yet exactly where they will be…..”

Source: The Internet of Things: it’s arrived and it’s eyeing your job

Banana Republic Budget |MacroBusiness

David Llewellyn-Smith sums up Australian Treasurer Scott Morrison’s Budget with one chart:

According to Treasury, Australia’s terms of trade are going to settle at a gentlemanly plateau far higher than they have even been in history outside of the China boom.

Source: Welcome to the Banana Republic Budget – MacroBusiness

Carl Icahn warns of ‘day of reckoning’

Reuters:

Billionaire activist investor Carl Icahn ….. said he was “still very cautious” on the US stock market and there would be a “day of reckoning” unless there was some sort of fiscal stimulus.

…..Icahn, who owned 45.8 million Apple shares at the end of last year, said China’s economic slowdown and worries about how China could become more prohibitive in doing business triggered his decision to exit his position entirely.

Icahn is right about fiscal stimulus. Easy money policies implemented by central banks around the globe are an effective tool to stem the flow when financial markets are hemorrhaging but they are not a long-term solution. The only effective means of halting the long-term, downward spiral is fiscal stimulus.

The biggest obstacle to fiscal stimulus is resistance to increasing public debt. There is good reason for this as wasteful deficit spending in the past has left taxpayers with a massive debt burden and nothing to show for it. Governments ran deficits to cover a shortfall in tax revenue or an increase in expenditure without thought as to how the debt would be repaid.

But if debt is used to fund investment in productive infrastructure, revenue from the asset can be used to pay off the debt over time, or the asset can be sold to repay the loan. There is an immediate double benefit to government, with increased wages — directly from infrastructure projects and indirectly from suppliers of goods and services — boosting tax revenues while also saving on unemployment benefits. The long-term benefit is retaining and developing skills in the economy that would otherwise be lost through long-term unemployment.

Politicians have a poor track record, however, when it comes to selecting productive infrastructure projects. Instead favoring projects that will garner the most votes. This can be improved by setting up a non-partisan planning and selection process with a long time horizon. Also partnership with the private sector would eliminate projects with weak or unpredictable revenue streams.

Partnerships with the private sector also help to leverage funds raised through public debt, limit cost overruns and contain on-going running costs. But both sides must have skin in the game.

To be effective, infrastructure programs must address the long-term needs of the economy and should be carried out on a broad, even global, scale to re-invigorate the faltering global economy.

Source: Carl Icahn sells entire Apple stake on China worries, warns Wall Street of ‘day of reckoning’

Risk of a global down-turn remains high

Stock markets in Asia and Europe have clearly tipped into a primary down-trend but the US remains tentative. The weight of the market is on the sell side and the risk of a global down-turn remains high.

Dow Jones Global Index found support at 270 and is rallying to test resistance at the former primary support levels of 290/300. 13-Week Twiggs Momentum peaks below zero flag a strong primary down-trend. Respect of 300 is likely and reversal below 290 warn of another decline. Breach of 270 would confirm.

Dow Jones Global Index

* Target calculation: 290 – ( 320 – 290 ) = 260

Willem Buiter of Citigroup warns that further monetary easing faces “strongly diminishing returns”, while “hurdles for a major fiscal stimulus remain high”. To me, major infrastructure spending is the only way to avoid prolonged stagnation but resistance to further increases in public debt is high. The only answer is to focus on productive infrastructure assets that generate returns above the cost of servicing debt, improving the overall debt position rather than aggravating it.

North America

Dow Jones Industrial Average recovered above primary support at 16000 and is headed for a test of 17000. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Respect of 17000 is likely and would warn of continuation of the primary down-trend. Reversal below 16000 would confirm the signal, offering a target of 14000*.

Dow Jones Industrial Average

* Target calculation: 16000 – ( 18000 – 16000 ) = 14000

The most bearish sign on the Dow chart is the lower peak, at 18000, in late 2015. Only recovery above this level would indicate that long-term selling pressure has eased.

The S&P 500 is similarly testing resistance at 1950. Breakout is quite possible but only a higher peak (above 2100) would indicate that selling pressure has eased. Declining 13-week Twiggs Momentum, below zero, continues to warn of a primary down-trend. Reversal below 1870 would confirm the primary down-trend, offering a target of 1700*.

S&P 500 Index

* Target calculation: 1900 – ( 2100 – 1900 ) = 1700

CBOE Volatility Index (VIX) is testing ‘support’ at 20. Respect is likely and would confirm that market risk remains elevated.

S&P 500 VIX

Canada’s TSX 60 respected the descending trendline after breaking resistance at 750. Reversal below 750 would warn of another test of 680/700. Rising 13-week Twiggs Momentum is so far indicative of a bear rally rather than reversal of the primary down-trend.

TSX 60 Index

* Target calculation: 700 – ( 750 – 700 ) = 650

Europe

Dow Jones Euro Stoxx 50 is rallying to test resistance at the former primary support level of 3000. The large 13-week Twiggs Momentum peak below zero confirms a strong primary down-trend. Respect of resistance is not that important, but another lower peak, followed by reversal below 3000, would signal a decline to 2400*.

DJ Euro Stoxx 50

* Target calculation: 2700 – ( 3000 – 2700 ) = 2400

Germany’s DAX recovered above resistance at 9300/9500. Expect a test of 10000 but buying pressure on 13-week Twiggs Money Flow appears secondary and reversal below 9300 would signal another decline, with a (long-term) target of 7500*.

DAX

* Target calculation: 9500 – ( 11500 – 9500 ) = 7500

The Footsie recovered above 6000, and the declining trendline, but the primary trend is down. Buying pressure on 13-week Twiggs Money Flow appears secondary and reversal below 6000 would signal another decline, with a target of 5500*. The long-term target remains 5000*.

FTSE 100

* Target calculation: 6000 – ( 6500 – 6000 ) = 5500

Asia

The Shanghai Composite Index rallied off support at 2700 but respected resistance at 3000. Reversal below support would offer a target of 2400*. The primary trend is clearly down and likely to remain so for some time.

Shanghai Composite Index

* Target calculation: 3000 – ( 3600 – 3000 ) = 2400

Japan’s Nikkei 225 Index is in a clear primary down-trend. Expect a test of 17000/18000 but respect of 18000 would warn of another test of 15000. Decline of 13-week Twiggs Money Flow below zero would flag more selling pressure.

Nikkei 225 Index

* Target calculation: 17000 – ( 20000 – 17000 ) = 14000

India’s Sensex primary down-trend is accelerating, with failed swings to the upper trend channel. Breach of 23000 would offer a short-term target of 22000*. Reversal of 13-week Twiggs Money Flow below zero would warn of more selling pressure.

SENSEX

* Target calculation: 23000 – ( 24000 – 23000 ) = 22000

Australia

The ASX 200 rally from 4700 respected resistance at 5000. Reversal below 4900 warns of another decline. Breach of support at 4700 would confirm. Divergence on 13-week Twiggs Money Flow indicates medium-term (secondary) buying pressure and reversal below zero would flag another decline. The primary trend is down and breach of 4700 would offer a target of 4400*. The long-term target remains 4000*.

ASX 200

* Target calculation: 4700 – ( 5000 – 4700 ) = 4400; 5000 – ( 6000 – 5000 ) = 4000

Banks are taking a hammering, with the Banks index (XBAK) in a clear down-trend. Retracement to test resistance at 78 is weak and another strong decline likely. Declining 13-week Twiggs Money Flow, below zero, reflects long-term selling pressure.

ASX 200 Financials

Gold testing $1100/ounce

Solid job numbers have boosted the prospects for an interest rate hike before the end of the year. Employment is growing steadily, having exceeded its 2008 high by more than 4.2 million new jobs.

Employment and Unemployment

Unemployment is falling as job growth holds above 2.0 percent a year.

Interest Rates and the Dollar

Long-term interest rates are rising, with 10-year Treasury yields headed for a test of resistance at 2.50 percent after breaking through 2.25 percent. Recovery of 13-week Twiggs Momentum above zero indicates an up-trend. Breakout above 2.50 percent would confirm.

10-Year Treasury Yields

The Dollar strengthened in response to rising yields, the Dollar Index breaking resistance at 98. Respect of zero by 13-week Twiggs Momentum indicates long-term buying pressure. Breakout above 100 would confirm another advance, with a target of 107*.

Dollar Index

* Target calculation: 100 + ( 100 – 93 ) = 107

Gold

Gold fell as the Dollar strengthened, testing primary support at $1100/ounce. 13-Week Twiggs Momentum peaks below zero indicate a strong (primary) down-trend. Follow-through below $1080 would signal another decline, with a target of $1000/ounce*.

Spot Gold

* Target calculation: 1100 – ( 1200 – 1100 ) = 1000