Sure, they were bad. But at least they weren’t terrible! That’s the rallying cry today I’m hearing in the wake of the latest jobs report figures from the Bureau of Labor Statistics. It showed …
The U.S. economy created 151,000 jobs in August, missing forecasts for a reading of around 180,000. July’s figures were revised up, but June’s numbers were revised down, essentially netting each other out.
Where were the jobs created? Food and drink establishments hired 34,000 workers, while social-assistance facilities added 22,000. Professional and technical services added 20,000, while finance firms hired 15,000 and healthcare companies brought 14,000 new workers on board.
On the flip side, mining lost another 4,000 workers. Manufacturing cut 14,000, the most in three months. And in the single-most important development from a longer-term perspective (more on that in a minute), construction cut 6,000 jobs.
The unemployment rate held at 4.9%, whereas economists expected it to drop to 4.8%. Labor force participation remained unchanged at 62.8%.
Average hourly earnings rose just 0.1%, down from 0.3% a month earlier and below forecasts. The average workweek also missed forecasts by dipping slightly to 34.3 hours from 34.4.
With everything from monthly job creation to wages to hours worked missing targets, I think it’s fair to call the figures disappointing. But they weren’t awful, and that led Wall Street investors to conclude we’re in a “Goldilocks” situation. By that, I mean the figures lower the chance of a September Federal Reserve rate hike, but don’t suggest a recession is imminent.
|“Look beyond the immediate market reaction … and look at the underlying trends.”|
Me? I’m the kind of guy who likes to look beyond the immediate market reaction to these kinds of numbers and look at the underlying trends. When I do, I see that manufacturing has been a sector showing persistent weakness. It has shed jobs in four months so far this year. That’s up from three months in 2015 and none in 2014.
I don’t see things improving any time soon, either, in part because of the struggles in the auto sector. We just got another lousy month of auto sales in August, with Ford Motor (F), General Motors (GM), Toyota Motor (TM), Nissan Motors (NSANY), and Honda Motor (HMC) all reporting worse-than-expected declines.
The seasonally adjusted annual rate of sales slipped to 16.98 million from 17.9 million in July, even as incentives jumped almost 8% from a year ago to $3,331 per vehicle. With banks just starting to tighten standards on new auto loans and with delinquencies on previously issued loans rising, I expect to see more problems in this sector throughout the rest of 2016 and 2017.
Now let’s get back to construction. The sector has now shed jobs in four out of the last five months. We haven’t seen persistent weakness like this since all the way back in 2010, when the housing sector was finally emerging from its epic bust.
|The construction sector has shed jobs in four out of the last five months.|
What’s going on? We’ve had a tremendous, out-of-control bubble for one thing. Commercial real estate values have soared a whopping 95% from their lows. That’s even greater than the 81% surge during the last real estate mania, which everyone pretty much agrees was the worst bubble in real estate ever. Key valuation metrics like capitalization rates have plunged to all-time lows. We’ve also seen a surge in commercial-real-estate lending and construction, particularly in the multifamily subsector.
But CRE lending standards are tightening consistently now, as I highlighted a month ago. Boston Fed President Eric Rosengren just gave a speech in Shanghai warning of the CRE mania. And there are tentative signs the big run-up in pricing could be played out.
Can strength in the services sector offset the longer-term weakness we’ve seen in manufacturing AND the more-recent weakness we’re seeing in construction? Bulls will say “no problem,” while bears will say “no way.”
I’m personally in the pessimist camp, but I’d love to hear from you in the comment section below. Will strength in services be enough to offset the dual threats I mentioned? Is the Fed going to hike rates in light of these figures? Or will they hold off again in September? What are you seeing in your own back yard these days – strength or weakness in hiring?
In any event, if you’re looking for investment opportunities, you probably want to steer toward service-based companies and away from manufacturing and construction names.
Until next time,
Fed policy. “Real” unemployment. Auto loan problems. You discussed a lot of important issues at the website this week, so I want to cover as many of your comments as possible.
Reader Thomas said the following on the economy and policy: “As long as there is such political insecurity, the consumer-spending trend will stay stagnant. Political stability and economic growth are closely correlated. No sales, no growth.
“An interest rate rise will only exacerbate stagflation at this juncture. The average household debt is also facing trouble as the rise in real income is still at an all-time low.”
Reader Howard weighed in on the Fed, saying: “The low level of confidence in the Fed is exacerbated by the perception that they have completely mishandled the situation regarding free markets. It is always easier to lower rates than raise them, and the distortions now created from this mismanagement have led to a loss of confidence in monetary policy.
“In reviewing rate adjustments prior to the election of previous new administrations, the only predictable certainty is of a bubble being popped. Fundamental economic growth is only seen when risk takers have the perception of control over outcomes. These manipulated circumstances don’t encourage market risk.”
Reader Vinman was very succinct about why he doesn’t think rates are headed higher: “The national debt is just too high for them to raise the rates. Every quarter-point increase will mean $50 billion more in interest.”
As for the state of the job market in advance of today’s figures, Reader Mike said: “Looking at the labor-participation rate now versus 10 years ago, there are about 12.6 million more people who would be looking for a job if the economy was actually vibrant. That would make the headline U-3 about 10%, and the more descriptive U-6 about 16%.
“Even at full employment, about 33% of working-age people aren’t looking for work. The “Bureau of Lying Statistics” is a farce whose only task is to put a smiley face on a pile of dog dung.”
Finally, on the topic of auto lending, Reader Chuck B. said: “Fitch Ratings says that not only was the subprime auto loan, 60-day delinquency rate up 13% in July year-over-year, but the prime loan delinquency rate was up 21% from July 2015.
“Ford Motor (F) still is giving 72-month, zero-rate loans to get rid of its 2016 overstock. It doesn’t look too good for F over the next few years, since these are company-issued loans.”
I appreciate you sharing your thoughts here. It’s clear the Fed’s omnipotence and foresight are being questioned more aggressively now than ever before, and for good reason. They have repeatedly failed to grasp the magnitude of the bubbles that they have created in the asset markets. And they have repeatedly missed their growth and inflation forecasts over the past several years.
Want to weigh in on those or other topics? Remember to use the comment section as your outlet.
Samsung Electronics (SSNLF) is offering to replace Galaxy Note 7 devices worldwide after consumers reported that their smartphones were catching on fire during recharging. The Korean company goes head-to-head against Apple (AAPL), and the embarrassing recall will cost untold millions of dollars. It has sold 2.5 million of the Note 7 phones since the model was launched in mid-August.
Speaking of Apple, CEO Tim Cook said the company will start bringing a portion of its $215 billion overseas cash hoard back to the U.S. It plans to begin the process next year, and it’s setting aside billions of dollars to cover the additional U.S. taxes the move will require.
If you’re looking for signs the mega-bubble in real estate is starting to deflate, this Bloomberg story gives you ammunition. It chronicles how slowing sales and weakening market sentiment in New York is forcing condo and rental developers to offer all kinds of concessions to generate interest. One luxury broker notes that high-end property sales have dropped more than 21% year-over-year.
Hurricane Hermine slammed into the Florida panhandle overnight, lashing the coast with 80 mph winds and torrential rains. The storm will weaken over land, but it’s expected to re-emerge off the U.S. East Coast over the weekend. It will likely deliver heavy rains and wind-driven storm surge to the Mid-Atlantic coast well into next week.
So what do you think of the latest news on Samsung and Apple? Is the Note 7 battery problem going to give Apple a leg up in the smartphone market? Do you believe the commercial real estate market is starting to weaken, or is it too soon to worry about that? You know where to sound off.
Until next time,