Monday, December 19, 2011

Crude Oil Price and S&P 500 Energy

The macroeconomic case for owning Energy stocks is weakening along with the price of oil. As global economic growth slows, so does the demand for oil. The price of oil is the key determinant of the performance of energy stocks relative to the S&P 500. The price of a barrel of Brent crude oil has been trending down in a volatile fashion since it hit a cyclical peak of $126.47 on April 8 of this year. This morning, it is down to $103.86. The S&P 500 Energy sector has been underperforming the S&P 500 since April 11.

Contributing to last week’s 4.7% drop in the price of Brent was news that US petroleum usage fell sharply in early December. I track the four-week moving average, which fell to 18.3 million barrels per day as of the week of December 9. That’s below the comparable readings for 2007 through 2010. The latest gasoline usage was 3.4% below the comparable year-ago pace, and gasoline inventories are the highest ever at this time of the year. (See our US Petroleum Weekly.)

Nevertheless, there is a case to be made for owning Energy stocks as a hedge against turmoil in the Middle East. On Friday, Bloomberg reported: “The US is concerned Iran is on the edge of enriching uranium at a facility deep underground near the Muslim holy city of Qom, a move that may strengthen those advocating tougher action to stop Iran’s suspected nuclear weapons program. Iranian nuclear scientists at the Fordo facility appear to be within weeks of producing 20 percent enriched uranium, according to Iran analysts and nuclear specialists in close communication with US officials and atomic inspectors. US officials, speaking on condition of anonymity, worry Iran’s actions may bolster calls for a military response and ratchet up pressure to limit Iran’s oil exports, which might send oil prices soaring.”

Friday, December 16, 2011

Friday Essay: “We are the 64%”

Be afraid, be very afraid. I’m not warning you about the stock market, though it has been performing poorly in recent days. I am warning you about big government. Actually, the warning has been issued by a recent Gallup poll of the polis. Let’s have a look:

(1) The overwhelming silent majority think that big government is the biggest problem. On Monday, the polling organization reported: “Americans’ concerns about the threat of big government continue to dwarf those about big business and big labor, and by an even larger margin now than in March 2009. The 64% of Americans who say big government will be the biggest threat to the country is just one percentage point shy of the record high, while the 26% who say big business [will be] is down from the 32% recorded during the recession. Relatively few name big labor as the greatest threat.”

(2) Big business and big labor aren’t as worrisome. Gallup adds: “Historically, Americans have always been more concerned about big government than big business or big labor in response to this trend question dating back to 1965. Concerns about big business surged to a high of 38% in 2002, after the large-scale accounting scandals at Enron and WorldCom. An all-time-high 65% of Americans named big government as the greatest threat in 1999 and 2000. Worries about big labor have declined significantly over the years, from a high of 29% in 1965 to the 8% to 11% range over the past decade and a half.”

(3) Even Democrats are disillusioned. Now get this: “Almost half of Democrats now say big government is the biggest threat to the nation, more than say so about big business, and far more than were concerned about big government in March 2009…. By contrast, 82% of Republicans and 64% of independents today view big government as the biggest threat, slightly higher percentages than Gallup found in 2009.”

President Barack Obama seems to be completely out of touch with the popular sentiments expressed in this important poll. Neither he nor the Occupy Wall Street (and the Ports) crowd have convinced the citizenry that the number one threat to our national prosperity is big business, in general, and big banks, in particular. Rather, the vast (silent) majority of the people see big government as the number one threat.

In his latest campaign speech on this subject on December 6 in Osawatomie, Kansas, the President was on the wrong side of this debate. To be fair and more accurate, he was on the wrong side of the latest Gallup poll on this matter. It’s certainly true, however, that as hard as he has tried, he hasn’t convinced the majority of Americans that their problems should be blamed on the collective villainy of big business, Wall Street, and the rich. There is a huge gap between the “we-are-the-99%” crowd, who chant the anti-business mantra every day, and the “we-are-the-64%” crowd, who fear big government.

The 99 crowd actually represents no more than 26% of Americans who believe that big business is the biggest threat to the country according to the latest poll. If they want to represent the majority, they should occupy Washington.

So why did our President schlep to a very small town in Kansas to give a speech at the Osawatomie High School? He was channeling Theodore Roosevelt, who gave his famous “New Nationalism” speech in that town on August 31, 1910. Like Teddy Roosevelt, Mr. Obama argued that the government needs to have more power to direct business. He said, “Yes, business, and not government, will always be the primary generator of good jobs with incomes that lift people into the middle class and keep them there. But as a nation, we’ve always come together, through our government, to help create the conditions where both workers and businesses can succeed.” He added: “And it will require American business leaders to understand that their obligations don’t just end with their shareholders.”

In his speech, Roosevelt also advocated a greater role for government: “The National Government belongs to the whole American people, and where the whole American people are interested, that interest can be guarded effectively only by the National Government. The betterment which we seek must be accomplished, I believe, mainly through the National Government.”

In conclusion, President Obama’s version of the New Nationalism isn’t resonating with the voters. In fact, I’ll bet you $10,000 that the next President of the United States is Newt Gingrich. I’m just kidding--about the $10,000! Too bad that Mitt Romney wasn’t just kidding when he challenged Rick Perry to a $10,000 bet on a disputed comment Perry made about Romney in their latest debate on December 10. If Romney does prevail over Gingrich, you can bet that the Democrats will run that video in their attack ads.

By the way, the scary phrase that starts this post originated in the 1986 horror film The Fly, starring Jeff Goldblum (as Seth Brundle) and Geena Davis (as Veronica Quaife). Quaife is a reporter working on the teleportation story, which is the subject of the movie. When it becomes clear that Brundle is starting to turn into an insect, he reassures one of the characters, “Don’t be afraid.” Quaife’s response is: “No. Be afraid. Be very afraid.”

Thursday, December 15, 2011

Professors Copper & Gold

What are Professors Copper and Gold saying about the outlook for 2012? Copper is the metal that is renowned for having a PhD in economics. Yesterday’s 4.7% plunge to $3.27 per pound was a bad break, though it remains above the most recent low of $3.05 on October 20. It suggests that global economic growth is weakening. That’s confirmed by the decline in the CRB raw industrials spot price index, which includes copper along with 12 other commodity prices. This index fell to a new low for the year at 514.6 yesterday, but remains above the 2010 low of 463.5 on February 8, 2010.

Gold is the metal that is renowned as a great inflation hedge. I’ve always viewed it more broadly as a hedge against out-of-control governments with reckless fiscal and monetary policies. Yesterday, the price of gold plunged 4.2% to $1,603 an ounce. It found support at its 200-day moving average. Could it be that governments are embracing fiscal and monetary discipline? That’s a stretch.

Another interpretation of the weakness in the price of gold is that governments have reached the limits of their recklessness. They have run out of effective policy options to either clean up or cover up their fiscal messes. They can’t even reflate their way out of their excessive debt burdens, though they’ve tried. European governments have formulated four Grand Plans that haven’t worked to end their financial crisis. So here comes the dreaded Endgame, including failed government bond auctions, sovereign debt defaults, the collapse of the euro and European banks, deflation, and depression. Sorry, I think that’s a stretch too.

More likely is that governments around the world won’t let the global economy roll over into a recession--which could quickly turn into a depression. They may be much more limited in using fiscal policy to boost economic growth than they were three years ago. But there is always another round of massive quantitative easing of their monetary policies. If so, then gold may very well rebound off its 200-day moving average.

If it fails to do so, it will be because the only safe asset will be deemed to be the US dollar and US Treasury bonds. Last week in Kansas City, one of our long-only accounts was especially concerned that the Endgame scenario is upon us. We discussed the best way to preserve capital in such a calamitous environment. The conclusion was to load up on the US dollar and US Treasury bonds, the scenario that seems to be working so far this week.

Wednesday, December 14, 2011

US Treasury Outlays & Receipts

Is Gridlock bullish or bearish? In the past, it’s probably been bullish more than it has been bearish. After all, our constitutional system was designed by our Founders to disperse power among the Executive, Legislative, and Judicial branches of our government. Congress was designed so that special interest groups more often than not would be stymied from achieving their legislative agendas by resistance from “factions” with opposing interests. In Civics, Gridlock is called by the less pejorative name of “Checks and Balances.”

So the system seems to have worked exactly as it was designed (i.e., not to work) this year. According to the Congressional Record, this year through November, the House approved 326 bills, the fewest in at least 10 non-election years; the Senate passed 368 measures, the fewest since 1995. Conversely, the House passed 970 measures in 2009 and 1,127 in 2007, and the Senate for those years approved 478 and 621, respectively.

So far, that hasn’t been very bullish for the stock market. That’s because the legacy of all the lawmaking over the past few years has been to saddle the US economy with huge federal deficits and rapidly mounting federal debt. Various attempts to narrow these deficits have failed miserably. From this perspective, Gridlock is bearish. The outlook is for more of the same next year, and beyond depending on the election results on November 6, 2012.

How did we get to this sorry state? The special interest groups learned that they could achieve their goals through cooperation rather than conflict with one another. Most importantly, they figured out that the government’s budget isn’t a zero sum game if the resulting spending binge is deficit financed. The Constitution needs a Balanced Budget Amendment. European governments seem to be moving in exactly that direction as a result of their fiscal crises.

We monitor the latest developments and trends in the US federal government’s budget in our US Government Finance briefing book. Let’s have a look:

(1) A trillion here, a trillion there. Over the past 12 months through November, the federal deficit was $1.01 trillion. On this basis, it has exceeded $1 trillion since June 2009 (Figure 1). Federal government outlays totaled $3.6 over the past 12 months through November. That’s up 50% since March 2005. Over this period, receipts totaled $2.3 trillion, up 14.8% from the most recent cyclical low during January 2010, but still 11.1% below the previous record high during April 2008 (Figure 2).

(2) Lots more IOUs. Total US government debt outstanding rose to a record $15.1 trillion during November. It is up 50% since September 2008 and 100% since December 2004 (Figure 17). The per capita comparisons are shocking. The government’s debt divided by the labor force, which represents actual and potential taxpayers, rose to a record $9,819 in November, a 100% jump since the spring of 2004 (Figure 23). In October, the government’s debt was 1.6 times greater than a year’s worth of disposable income excluding government transfer payments. That’s a record high, and up from 1.0 during May 2008 (Figure 24).

(3) Tax revenues are up and down. Total federal tax receipts tend to be a lagging indicator of the economy (Figure 12). They rose to a cyclical high of $2.3 trillion over the past 12 months through November, led entirely by individual income tax receipts, which rose to $1.1 trillion (Figure 2 and 9). Corporate tax receipts have flattened at around $200 billion. That’s really puzzling given that corporate profits are at a record high; yet these receipts are about 50% below the record high of $382.3 billion during June 2007. It may be that US corporations are earning more of their profits overseas and aren’t repatriating them because of the high corporate tax rate in the US.

In the past, payroll tax receipts (so-called “social insurance and retirement receipts”) rose during economic expansions, and even during recessions. They’ve been falling since November 2008, when they peaked at $905 billion. They were down to $806 billion over the past 12 months through November (Figure 9). That’s because Washington has been cutting payroll tax rates in an effort to stimulate economic growth.

(4) No more PayGo. The problem with cutting payroll tax rates is that the result is a rapidly widening social welfare deficit in America. Our Social Security and Medicare entitlement systems were designed to be fully financed by payroll taxes, which was the case until the middle of the previous decade. But then the social welfare deficit ballooned to a record high of $402.3 billion over the 12 months through November of this year (Figures 13 and 14).

By the way, a “do-nothing” congressional session, which passes relatively few bills, does not necessarily mean that the power and scale of our government in Washington has been diminished. When Congress cannot approve multiple separate pieces of legislation in a timely fashion, it will often bundle the bills together into the scheme known as an “omnibus” spending bill--which often leads to billions of dollars in pork being wasted on congressional cronyism in one piece of legislation.

Tuesday, December 13, 2011

S&P 500 Sectors’ Performance & Earnings

In my meetings with our accounts in Kansas City last week, everyone said that they are very tired of the volatility in stock prices this year. Don’t stare too long at the chart above of the year-to-date performance of the S&P 500's 10 sectors. It can make you very dizzy. The volatility has been especially intense since late July. That’s when the 10 sectors’ respective volatilities became increasingly correlated while at the same time Stable sectors began outperforming Cyclical ones, in a significant reversal of their relative fortunes so far this year. Here are the latest derby results ytd as of yesterday’s close: Utilities (9.7%), Consumer Staples (7.3), Health Care (5.6), Consumer Discretionary (4.5), Information Technology (2.6), Energy (0.8), Telecom Services (-3.1), Industrials (-5.0), Materials (-12.8), and Financials (-20.2).

Since the last week of July through the start of December, there has been a noticeable drop in consensus expected earnings growth for the 10 sectors in 2012. The most pronounced declines have been for Energy (from 11.9% down to 2.8%), Materials (14.2% to 10.6%), Industrials (18.0% to 13.4%), Telecom Services (13.5% to 7.6%), and Financials (35.9% to 23.5%). The other sectors’ earnings growth expectations have been relatively more stable. Earnings growth for the overall S&P 500 for next year has declined from a peak of 15.2% during the week of July 22 to 10.1% in the latest week.

These earnings revisions help to explain some of the reversals of fortune in the sectors’ performances since the summer. The extreme volatility reflects a number of other factors too. Investors’ sentiment has been buffeted by the ongoing crisis in Europe. The Cyclical sectors all tend to rise in lock step when Europe’s leaders are scrambling to formulate yet another plan to clean up their mess. Then when the latest plan is announced and found to be lacking, the Cyclical sectors all go down together--while the Stable ones outperform, but head in the same direction. Financials tend to be among the worst performers during these letdowns. The widespread and highly correlated volatility on a short-term basis can also be attributed to high frequency trading and the impact of ETFs, especially leveraged ones. Needless to say, all these factors are likely to continue to buffet stock prices in the coming year.

Meanwhile, one source of underlying stability has been industry analysts’ expectations for total S&P 500 earnings this year and next year. This year’s estimate has ranged between $95.97 and $100.09 per share since the beginning of the year. The 2012 estimate has ranged between $107.95 and $113.83 over this same period. Next year’s estimate mostly fell from the top of this range to the bottom of this range since the beginning of the year, but it has stabilized around $108 over the past couple of weeks. That’s noteworthy given the bad news coming out of Europe.

Then again, there was some bad news coming out of some big companies in recent days that may push the 2012 consensus estimate lower again. That wouldn’t surprise Joe and me since we are forecasting that earnings will be $100 next year. Executives at DuPont, 3M, and Texas Instruments warned that they are seeing signs that their customers are trimming their inventories in anticipation of weaker sales. One of the concerns is a slowdown in the European auto industry. Another problem is that the shortage of disk drives following flooding in Thailand is depressing the demand for semiconductors. Intel announced yesterday that its revenue this quarter would be lower than previously expected--at $13.7 billion versus the earlier projected $14.7 billion.

Sunday, December 11, 2011

US & Chinese Economic Indicators

Last week’s batch of better-than-expected US economic indicators helped to offset the ongoing jitters about the Euro Mess. On Thursday, the Bureau of Labor Statistics reported that initial unemployment claims dropped by 23,000 during the week of December 3 to 381,000, the lowest reading since the last week of February. The four-week average declined to 393,250, the lowest since the first week of April. It is not unusual for jobless claims to plunge during the first few months of an economic recovery, then stall for a while at levels still well above previous cyclical lows, and then move lower again.

The same pattern seems to be happening again. I think it was starting to do so a year ago. However, it was aborted by the Fed’s misguided QE-2.0 policy, which boosted food and fuel prices. Those higher prices flattened consumers’ purchasing power and spending, and also depressed their confidence. So it is encouraging to see that the Consumer Sentiment Index rebounded in mid-December to 67.7 from a recent low of 55.7, which tends to confirm that labor market conditions are improving.

China’s monetary policy is turning stimulative again. That’s the good news, and so is the recent drop in China’s measures of inflation. The bad news is that the People’s Bank of China (PBoC) is easing in response to some weakening in economic activity. On December 5, bank reserve requirements were lowered by 50bps. The CPI inflation rate has plunged from a recent peak of 6.5% y/y during July to 4.2% during November, just about matching the PBoC’s target of 4.0% for the year. The PPI inflation rate plunged from 7.5% during July to 2.7% last month.

Europe accounted for 17.7% of China’s exports during November. Over the past 12 months through November, those exports are up only 5.2% compared to 34.4% last November. On a seasonally adjusted basis, China’s exports to Europe dropped sharply by 7.1% m/m during September and 5.5% during October, but moved up 5.1% during November. China’s total exports edged up to a record high of $2.0 trillion (saar) during November. Industrial production was also at a new high in November. However, it was up “only” 12.4% y/y, the lowest growth rate since August 2009.

Thursday, December 8, 2011

S&P 500 Revenues and Margins

Do you recall what the bears were saying about the earnings-led bull market during 2009 and 2010? They fought it all the way up as the S&P 500 increased 101.6% from a closing low of 676.53 on March 9, 2009 to a high, so far, of 1363.61 on April 29. The Naysayers dismissed the dramatic rebound in earnings as unsustainable. They claimed that it was all based on cost cutting, which couldn’t continue for very long. They predicted that revenue growth would be subpar, at best. So let’s see what actually happened using data we compiled on forward revenues, earnings, and profit margins for the S&P 500 and its 10 sectors in our new publication titled S&P 500 Sector Squiggles: Revenues, Earnings, and Margins. 

S&P 500 forward revenues did decline by 6.1% during 2009, while forward earnings rose 0.3% as the forward profit margin rose from 7.7% at the start of the year to 8.4% by the end of the year. But in 2010, forward revenues rose 7.1%, which along with an increase in the profit margin to 9.6% at the end of last year, boosted forward earnings by 23.8%. Data available through early December show that revenues and earnings are up 7.8% and 11.7% so far this year, while the profit margin has stalled since the spring around 10%.

Looking into 2012, it’s hard to see much upside for these three variables. I expect that they will be flat. More specifically, revenues could average $1,050 a share, about the same as this year. The profit margin might edge down to 9.5%. The result would be earnings around $100, up slightly from about $97 this year.

The scenario behind these numbers is slower global growth, with Europe in a mild recession while the US economy continues to muddle along with real GDP growing around 2%.

Wednesday, December 7, 2011

S&P 500 and Industrial Commodity Prices

One of the best ways to assess whether the global economy is progressing and regressing on a real-time basis is to track the CRB raw industrials spot price index. It includes the prices of 13 industrial commodities. I like it because it excludes petroleum and lumber products, which have their own unique supply and demand fundamentals. The index is highly correlated with global industrial production and global exports. (See Figures 1 and 2 in our High Frequency Economic Indicators.)

The CRB index is also highly correlated with the overall S&P 500, especially with its Transportation index. Indeed, this commodity price index is one of the three components of our Fundamental Stock Market Indicator (FSMI), which has an especially tight fit with the S&P 500 (Figure 55). The message from these sensitive indicators is that the global economy remains relatively weak:

(1) As of yesterday, the CRB raw industrials spot price index (1967 = 100) was 527.4, down 17.3% from its record high of 638.1 on April 12. However, it remains just above its previous cyclical peak of 525.7 on May 13, 2008, and 66.7% above its previous cyclical low of 316.3 on December 5, 2008.

(2) Our Boom Bust Barometer (BBB)--which is the ratio of the CRB index to the four-week moving average of initial unemployment claims--was 133.9 at the end of November, which is 16.1% below the most recent cyclical peak of 159.6 on March 12, 2011 and 14.4% below the prior cyclical peak on August 11, 2007 (Figure 54).

(3) Our FSMI--which averages our BBB and Bloomberg’s weekly Consumer Comfort Index--edged down at the end of November to 91.9. It is 15.5% below its most recent cyclical peak on February 26, 2011. It suggests that the S&P 500 should be trading between 1150 and 1200 (Figure 55).

Tuesday, December 6, 2011

S&P 500/400/600 Forward Earnings & Factory Orders

Industry analysts who cover the S&P 1500 either didn’t receive or didn’t read the European recession memo. European economies are heading down, according to November’s purchasing managers indexes (PMIs) for the euro zone and the UK. Emerging economies--including Brazil and China--are showing some signs of stress too, which most likely reflect their weakening exports to Europe, as well as the depressing impact of previous tightening of their monetary policies.

Yet, in the US, forward earnings managed to rise to new record highs for the S&P 400 MidCaps and the S&P 600 SmallCaps during the week of December 2. The forward earnings of the S&P 500 remains in a record high flat trend, which started earlier this year. It is up for the fifth straight week to $107.18, the highest reading in eight weeks.

The V-shaped recovery that started in early 2009 for the forward earnings of all three market cap indexes may be over for the LargeCaps, but it seems to be resuming now after stalling earlier this year. This may be happening because LargeCaps tend to be more exposed to sales within Europe and exports to the region than smaller US companies, which are more highly leveraged to growth in the US.

Industry analysts are clearly giving more weight to signs of resilience in the US economy despite the weakening outlook for the global economy, particularly in Europe. The US purchasing managers’ surveys for both manufacturing and nonmanufacturing stood out during November with readings above 50. Most other PMI readings around the world were below this make-or-break level for economic growth. While it’s hard to imagine that the US can decouple from the weakening global trend, industry analysts are relatively sanguine about this prospect, for now. That could all change quickly if Europe’s recession gets much worst and if Europe’s credit crunch depresses economic activity beyond the region as European banks cut back on their global lending.

So while the resilience of the three measures of forward earnings is impressive, I should warn you that they also took last gasps in mid-2008. Then they keeled over during the second half of that year through early 2009 as the US financial crisis intensified, causing a severe global recession.

The flattening of the S&P 500’s forward earnings poses a risk to Industrials. There is a very tight relationship between S&P 500 forward earnings and new factory orders. Profitable companies expand, while unprofitable ones do not. So it isn’t surprising that total orders have stalled over the past three months through October around $5.4 trillion, at a seasonally adjusted annual rate, along with the forward earnings of the S&P 500.

On the other hand, nondefense capital goods orders, which are volatile on a m/m basis, remain on an uptrend, though they dropped in October, led by a sharp decline in civilian aircraft orders. Shipments of nondefense capital goods rose to a new cyclical high of $862.4 billion (saar) over the three months through October, with new orders for construction equipment jumping to a new record high during the month.

Monday, December 5, 2011

US Employment Indicators

The Birthers were quiet on Friday following the release of November’s payroll employment report. They usually get all hot and bothered about the so-called birth/death adjustment (BDA) to total payrolls. Whenever it is up, they claim that it is bogus and immediately subtract it from the total to demonstrate that the labor market is weaker than suggested by the headline employment number. They did that last month when the BDA added 102,000 to October’s payrolls, which showed a gain of 80,000 on a preliminary basis. November’s report showed that this adjustment reduced payrolls by 29,000. Yet the Birthers didn’t bray that the increase in payrolls must have been greater than the first-reported official estimate of 120,000.

The Birthers will be back as soon as the BDA is positive again, which won’t be long. The statistical model used by the Bureau of Labor Statistics (BLS) is “designed to reduce a primary source of non-sampling error which is the inability of the sample to capture, on a timely basis, employment growth generated by new business formations.” Even during 2008, 2009, and 2010 the BDA added 724,000, 477,000, and 288,000 to payrolls. By the way, that adjustment is added to the data before the total is seasonally adjusted. Yet the Birthers always make the serious mistake of comparing the seasonally unadjusted BDA to the seasonally adjusted total.

Friday’s employment report was mostly chock full of good news. However, there was some bad news too. Let’s review:

(1) All employment measures showed solid gains in November. Total nonfarm payrolls rose 120,000 and household employment jumped 278,000 during the month. Private-sector employment rose 140,000 according to the official release, while ADP reported a solid gain of 206,000. The irrelevance of the BDA issue is confirmed on a regular basis by the close correlation of the trend and magnitude of changes in the comparable BLS and ADP statistics. So for example, the private payrolls over the past 12 months have increased 1.88 million according to BLS and 1.86 million according to ADP. Household employment (which includes government workers) is up 1.67 million over this same period.

(2) The revisions in the previous two months tend to be more important employment indicators than the preliminary estimate. I have long argued that more weight should be placed on those revisions than on the first reported estimate. The revisions tend to be upward during economic expansions and downward during recessions. September’s preliminary gain for total payroll employment has now been revised up twice by a total of 107,000 (from 103,000 to 158,000 to 210,000). October’s estimate has been revised up once by 20,000 (from 80,000 to 100,000), and will likely be revised upward again when December payroll data are released on January 6. Over the past 12 months through October, revisions have boosted payrolls by 326,000 (231,000 the past three months).  

(3) Total hours worked rose to a new cyclical high during November. The index of aggregate weekly hours in private industries edged up 0.1% during the month, despite a 0.5% downtick in manufacturing, which seems a bit odd, given the strength in industrial production.

(4) The evidence on part-time vs. full-time jobs is mixed. The household survey shows that full-time employment increased by 323,000 during November to a new cyclical high of 113.1 million. That’s still 8.7 million below the record high of 121.8 million during November 2007. Part-time employment fell 91,000 during the month, and remains near recent record highs. During November, nearly 20% of household employment was part time.

The payroll data show that the temporary help services industry increased headcount by 22,300 during November. Other industries that tend to rely on part-time workers also expanded during November, with retail and leisure & hospitality jobs up 49,800 and 22,000, respectively, during the month. Over the past 24 months, the temporary help service industry added 484,000 employees, accounting for 21.4% of the gain in total payroll employment.

(5) The pace of hiring is improving, but the pace of firing remains elevated. The latest available JOLTS data through September show that the pace of hiring rose during the month to the highest in 16 months. On a 12-month basis, total hiring started to exceed total separations during September 2010 for the first time since the spring of 2008. Over the past 12 months through September, total hires were 48.0 million and total separations were 46.7 million, yielding an employment gain of 1.3 million.

This improvement in hiring activity is consistent with the Monster Employment Index, a measure of online job ads. This index has been trending higher all year. However, it did dip slightly during November, but remained at the third highest reading of this year. All of the major industries included in the index were flat to down during November with the exception of Transportation and Warehouses, which climbed to a new high for the series going back to 2003. While initial unemployment claims rose back above 400,000 during the week of November 26 (402,000), the four-week average was 395,750 during that week.

(6) The bad news is that wage gains aren’t keeping up with inflation. The good news is that the falling real cost of labor should continue to boost employment. Average hourly earnings for all workers rose 1.8% y/y through November. Over the same period, we estimate that the CPI rose 3.6%. So there has been an erosion of purchasing power for workers. In the past, real pay per worker tended to be highly correlated with productivity. Recently, there has been a divergence as productivity continues to grow rapidly. That’s certainly boosted corporate profits, which in turn may be starting to boost employment. My mantra: “Jobs are created by profitable companies, not by government programs.”

Thursday, December 1, 2011

US Employment & Confidence Indicators

Yesterday’s ADP report on private-sector payroll employment during November was magnificent. No wonder that consumer confidence rebounded during the month. Chicago’s purchasing managers also had good things to say about business activity in their neighborhood. The evidence continues to demonstrate the resilience of the US economy. It’s doing remarkably well despite all the loco commotion in Europe and Washington. Let’s review the latest batch of happy data:

(1) This may be the third “new normal” jobless recovery in a row that’s starting to morph into an old normal recovery. Sure enough, November’s gain of 206,000 payroll jobs in the private sector, as reported by ADP, is the kind of gain that could start lowering the unemployment rate if it continues. The ADP report was chock full of good news, including an upward revision in October’s gain from 110,000 to 130,000. Especially impressive is that 53% of November’s new jobs were created by small businesses with under 50 employees. Note to Washington: Government doesn’t create jobs; small businesses do as they grow into bigger businesses. Just don’t get in their way.

(2) November’s bounce in consumer confidence confirms that the labor market is improving. The Consumer Confidence Index rebounded 15.1 points during November to 56.0 from 40.9 during October. It was the biggest m/m rebound since April 2003. This index tends to give more weight to consumers’ assessment of the labor markets than the Consumer Sentiment Index, which increased 3.2 points during November.

(3) Chicago’s purchasing managers are showing thumbs up. Chicago’s Institute for Supply Management yesterday reported that its business barometer increased to 62.6 in November from 58.4 the prior month as orders and production strengthened. The group's production gauge increased to a seven-month high of 67.3 from 63.4. Their new orders index rose to 70.2, the highest since March, from 61.3. Manufacturing in the Midwest is benefiting from rising auto sales and the strength in demand for capital goods at home and abroad.