Capital Spending

As go profits, so goes business spending. The recent stall in S&P 500 forward earnings isn’t a good omen for new factory orders, which have already stalled so far this year. Profitable companies expand their capacity by spending more on plant and equipment. Unprofitable companies scramble to cut their costs by reducing their capital outlays. In the real GDP accounts, the pace of capital spending has been slowing. It rose 5.3% (saar) during Q2 following a gain of 7.5% during Q1. Last year, such spending increased 8.6%.

The recent stall in orders is widespread. Orders for Machinery look especially toppy, led by recent weakness in Construction Machinery, Farm Machinery, and Mining, Oilfield & Gas Machinery. The slowdown in the growth rates of major emerging economies is depressing demand for construction machinery. The severe drought in the US is bad for farm incomes and outlays on farm equipment. The glut of natural gas is depressing the demand for rigs.

Today's Morning Briefing: ECB’s New Mandate. (1) The mandate question. (2) Draghi is focusing on spreads. (3) Hurry up, and drag your feet. (4) At WIT's end? (5) Less than zero IOER? (6) S&P 500 earnings expectations down across-the-board. (7) Energy and Materials estimates especially weak. (8) SMidCaps outpacing LargeCaps forward earnings. (9) Not-so-durable goods orders. (More for subscribers.)

WIT (“Whatever It Takes”)

Mario Draghi likes his job and wants to keep it. He is the President of the ECB, which was created to manage the euro within the European Monetary Union implemented on January 1, 1999. Therefore, it wasn’t all that surprising to hear him say last week that “the ECB is ready to do whatever it takes to preserve the euro” since he wants to keep his job. Nevertheless, the S&P 500 rose 3.6% on Thursday and Friday after Draghi's assurances, while the MSCI Europe stock price index jumped 3.9%. The Spanish 10-year government bond yield plunged from a record high of 7.63% on Tuesday to 6.50% this morning. The euro also surged.

The hoopla was triggered by Draghi’s presentation on Thursday, July 26 at the Global Investment Conference in London. Given the importance of what he said and its impact on the markets, it was very odd that the speech wasn’t based on a prepared text. The ECB’s website billed it as the “Verbatim of the remarks by Mario Draghi.” According to the official transcript, Draghi said, “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” A video shows that he actually repeated “within our mandate” twice. Draghi seems to be saying that his mandate is to save the euro no matter what.

The markets were happily surprised because Draghi’s remarks suggested that the ECB’s Governing Council--which includes six members of the Executive Board and the governors of the 17 euro zone central banks--may vote on Thursday to restart the central bank’s program of buying government bonds of debt-challenged euro zone members like Spain and Italy. Not so happy might be the other members of the Governing Council, who apparently were also surprised by Draghi’s off-the-cuff statement.

Financial markets will be nervously awaiting the results of Thursday’s meeting to see if the ECB’s Governing Council will buy Draghi’s “more Europe” by agreeing to purchase more Spanish and Italian bonds.

Financial markets will also be nervously awaiting the conclusion of the next FOMC meeting on Wednesday. A week ago, John Williams, president of the Federal Reserve Bank of San Francisco, said he favored QE3, with the Fed buying mortgage-backed securities, in an interview reported in the FT. He is a voting member of the FOMC. In his interview, he warned of significant downside risks to the US economy from the fiscal cliff, the euro zone crisis, and the global slowdown. He proposed that the next round of QE be open-ended without specifying how much the Fed would purchase and when the program would end.

Then last Wednesday, Jon Hilsenrath reported in the WSJ that Fed officials “are moving closer to taking new steps to spur activity and hiring.” Mr. Bernanke is frustrated that the economy is “stuck in the mud” and has yet to achieve “escape velocity.” QE3 is on the table, and the Fed is “exploring other novel measures,” such as to provide cheap credit directly to banks that make new business or consumer loans.

On Friday, we learned that real GDP rose only 1.5% (saar) during Q2, down from 2.0% during Q1 and 4.1% during Q4. Real final sales rose just 1.2% (saar) during the second quarter, the slowest since Q1-2011. On a year-over-year basis, real GDP is up 2.2%, with consumer spending up 1.9%, while real wages and salaries are up only 1.6%. We now have four July regional Fed business surveys, for New York, Philadelphia, Richmond, and Kansas City. The average of the composite business indexes remained negative for a second month in a row at -4.4, led by a negative reading for orders.

This could be an interesting week if both the Fed and ECB implement another round of WIT ("whatever it takes").

Today's Morning Briefing: Whatever It Takes. (1) ECB wants to stay in business. (2) Mario’s WIT, i.e., “Whatever It Takes” (3) The Bundesbank is not amused. (4) Cheerleaders in Paris and Berlin. (5) Bottomless pit in Spain. (6) Schäuble says nein. (7) The euro is a bumblebee. (8) Will the ECB buy “more Europe?” (9) Will the Fed buy more bonds? (10) WIT makes stocks smile. (11) Do earnings matter? (12) America’s two economies. (13) Britain gives itself gold medal for entitlements. (14) “The Intouchables” (+++). (More for subscribers.)

China

Recently, lots of doubts have been raised about the accuracy of official economic measures released by China’s government. I don’t doubt that the quality of much of the data is questionable. We regularly update our China chart book and try to assess the big picture as best we can using all the available data as a whole.

We are constantly on the lookout for more data to add to our chart book. I recently asked one of my colleagues to work on China’s official tax revenues. He found the latest official release in Chinese and used Google’s translation utility to read it. He ran a chart showing tax revenues in yuan during H1-2012. A second chart shows the y/y growth in revenues during H1-2012 versus during H1-2011.

The data were released by the Ministry of Finance on Tuesday of this week and outlined in a story appearing in the English version of xinhuanet.com. The data confirm a significant slowdown in Chinese economic growth during the first half of this year:

(1) Tax revenues rose only 9.8% y/y during H1-2012, down from 29.6% over the same period a year ago. Growth rates were down across all 11 major revenue sources.

(2) Personal income taxes actually declined 8.0%. A year ago, they rose 35.4%. Corporate income taxes rose 17.3%, but that was down from 38.3% a year ago.

(3) Revenues from property transactions took a hit. The ones from “Land Value Increment” rose 14.7% vs. 91.1% a year ago. “Deed” revenues fell 9.9% after rising 27.5% a year ago.

Today's Morning Briefing: The Best & the Brightest. (1) Weill, Greenspan, and Blankfein have seen the light. (2) Bair is flabbergasted. (3) The Great Barofsky. (4) Other Peoples’ Money. (5) Capitalism’s weakest link. (6) Geithner’s turn to come clean. (7) Nowotny’s golden opportunity? (8) Don’t bank on bank stocks. (9) Europe has very good Health Care for investors. (10) China’s tax revenues confirm slowdown. (More for subscribers.)

Europe

Eurostat reported on Monday that government debt in the euro area rose 4.5% y/y to a record €8.3 trillion during Q1-2012. Economic activity did not increase as fast as government debt, which rose to 88.2% of the euro area’s GDP from 86.2% a year ago. Greece’s ratio was one of the few that fell (from 152.4% to 132.4%), but remained the highest in the area. Rising were Italy (from 119.5 to 123.3), Spain (64.7 to 72.1), and France (84.3 to 89.2). Europeans seem to be struggling to resolve their debt crisis by trying to lower their borrowing cost so they can borrow more!

Yesterday, Markit reported that the Flash Eurozone PMI Composite Index remained unchanged at 46.4 during July. The services PMI edged higher (from 47.1 to 47.6) while the manufacturing PMI edged lower (from 45.1 to 44.1). The manufacturing output PMI fell to a 38-month low of 43.6 with Germany’s output down for a third month in a row. This morning we learn that Germany’s Ifo business climate index dropped to 103.3 in July from 105.2 in June. The sub-index measuring the current business situation fell to 111.6 in July from 113.9 in June, while the outlook sub-index dropped to 95.6 from 97.2.

Late on Monday, Moody’s issued a “negative” outlook for Germany, the Netherlands, and Luxembourg. The triple-A credit ratings of the three are vulnerable to downgrades because of the risk of more euro zone bailouts. The Germans must be having quiet debates among themselves about whether they might be better off exiting the euro zone themselves rather than continuing to play the role of widely dissed authoritarian paymaster demanding austerity in exchange for bailout funds.

Today's Morning Briefing: Wobbly World. (1) Unsettling news out of China, the US, and Europe. (2) Home sweet home. (3) China’s PMI is up, but still down. (4) Three bad US regional surveys. (5) Europe hooked on debt. (6) Germany can’t run, can’t hide from European woes. (7) Moody’s says outlook is negative for Europe’s Triple-A’s. (8) Hilsenrath says Fed is toying with novelties. (9) Closer to zero. (10) King of the World. (11) Geopolitical tensions. (12) Healthier in the US. (More for subscribers.)

S&P 500 Earnings

Every Tuesday, I scrub the weekly consensus expected earnings data for the S&P 500. I get the stats from the folks at Thomson Reuters I/B/E/S, who missed a few spots during the week of July 12. They reported an uptick in the quarterly consensus earnings expectations for Q2, Q3, and Q4. Now their numbers show that Q2 has been flat for the past two weeks through July 19 at a new low for the series around $25 per share, which would be an increase of just 4.5% y/y. The latest numbers also show that Q3 and Q4 estimates have been lowered every week since the start of Q2. In other words, the upticks two weeks ago are gone.

As a result, the 2012 and 2013 estimates are at new lows of $104.11 and $116.41, respectively. These numbers imply earnings growth rates of 6% this year and 12% next year. They may still be too optimistic since revenue growth is likely to be closer to 5% during 2012 and 2013, while profit margins are likely to remain flat over this period.

S&P 500 forward earnings, which is the time-weighted average of the current and coming year estimates, has flattened out over the past seven weeks at a record high around $110. That happens to be my forecast for next year’s earnings, and is a relatively bullish outlook. Forward earnings tends to be a very good year-ahead leading indicator of actual earnings when the economy is growing. It will be way off the mark if the US economy falls off a fiscal cliff into a recession next year. Nevertheless, it tends to be highly correlated with the Index of Leading Economic Indicators, which fell 0.3% during June, but remains on an uptrend.

Today's Morning Briefing: Food for Thought. (1) Droughts and depressions. (2) QE and the price of corn. (3) Consensus earnings expectations may have further to fall. (4) Yet forward earnings are still at record highs. (5) No recession in analysts’ earnings forecasts. (6) NERI tumbles. (7) A bubble in dividend yielders? (8) Riding the rails. (More for subscribers.)

Obama vs. Romney & the Fiscal Cliff

My informal poll of our accounts suggests that most of them believe that the US economy is more likely to go off the fiscal cliff early next year if President Barack Obama is reelected. That’s because there is likely to be more gridlock that will stymie a political compromise on government spending and taxation. If Mitt Romney wins, there might be a better chance of averting the cliff, especially if the Republicans keep their majority in the House and gain some seats in the Senate.

A couple of our accounts attributed the rally in stocks during the first four days of last week to Barack Obama’s campaign speech on Friday the 13th, in which he declared, “If you’ve got a business--you didn’t build that.” They perceived that it might somehow increase Romney’s chances of winning in November.

Earlier this summer, I expected a Romney-might-win rally during August. I’m wondering if it might have occurred last week. Romney seems to be on the ropes as Obama attacks him about his tenure at Bain and about his unwillingness to release his tax returns.

Of course, Obama’s chance of winning another term is likely to depend on the performance of the economy, in general, and the jobs market, in particular, in the next few months, especially in the swing states. Concerns about the fiscal cliff may be weighing on the economy already. If so, then Romney might win, which would increase the odds of averting the cliff. That might explain why recently released weaker-than-expected economic indicators haven’t been depressing stock prices. Last week’s retail sales report for June caused some Wall Street firms to lower their forecast for Q2’s real GDP. I expect an anemic 1.8% increase. Last week’s initial unemployment claims report for the week of July 14 showed a jump of 34,000, reversing the outsized 36,000 drop during the previous two weeks. June’s Index of Leading Economic Indicators was a downer. So was July’s regional business survey conducted by the Philadelphia Fed. The surveys employment index was especially weak.

For now, bad news about the US economy might not be all that bad for the stock market if many investors perceive that it reduces the odds of a second term for Obama and averts the fiscal cliff scenario. On the other hand, bad news coming out of Europe is still bad news, as we saw on Friday when stock prices sold off on the spike in Spanish bond yields. It's even worse this morning.

Today's Morning Briefing: The Sisyphus Solution. (1) The Great Trango. (2) Obama vs. Romney and the fiscal cliff. (3) Winning and losing scenarios. (4) Is the Romney rally over already? (5) Why bad economic indicators might be bullish for stocks. (6) King Sisyphus and Spanish bond prices. (7) The pain in Spain is spreading from the plain. (8) Bundestag wants less, not more Europe. (9) Mr. Henkel has an exit plan for Germany. (10) The Fed's Sisyphus. (More for subscribers.)

Railroads



The stock market’s rebound since the year’s low on June 1 is impressive. The S&P 500 is up 7.4% since then. It certainly belies the notion that the US economy is on the verge of a recession or that it is at risk of stalling into one. The market certainly seems to be ignoring the fiscal cliff scenario so far, even though Fed Chairman Ben Bernanke seemed quite alarmed about it in his congressional testimony this week.

Confirming this upbeat sentiment is the Transportation index of the S&P 500. It is up 0.5% so far this week, back to the year’s high and only 2.7% below last year’s record high. The Railroads stock price index is back at its record high. This industry accounts for 44% of the market capitalization of the S&P 500’s Transportation index. The Air Freight & Logistics stock price index has also rebounded recently despite plenty of signs that global economic activity is slowing. The forward earnings of both industries are at record highs.

While there is much angst about the economy’s “stall speed,” rail freight traffic seems to be picking up. This is especially so if we exclude car loadings of coal, which have been depressed by the warm weather and the switching of fuel sources to cheap natural gas. Let’s review the latest data (using 26-week averages to reduce the seasonal volatility) through the week of July 7:

(1) Total railcar loadings excluding coal have rebounded in recent weeks back to a cyclical high. The same can be said for car loads excluding coal.

(2) Total intermodal loadings is approaching last year’s cyclical high. Excluding trailers, intermodal loadings of containers is back at a new cyclical high.

(3) Loadings of both motor vehicles and lumber products rose to new cyclical highs during the first week of July, auguring well for the auto and housing industries.

Today's Morning Briefing: Earnings Outpacing Revenues. (1) Stocks rise despite gloomy Ben. (2) An uptick in earnings estimates. (3) Revenues estimates getting cut. (4) Margins holding up. (5) Decoupling attributed to accounting magic. (6) So far, the market isn’t buying recession scenario. (7) Transportation stocks aren’t stalling. (8) Rail freight is chugging along, especially excluding coal loadings. (9) Housing is recovering. (10) Government is the issue on the campaign trail. (More for subscribers.)

Information Technology

Industrial production rose to a new cyclical high during June. However, it is still 3.3% below its record high at the end of 2007. Manufacturing output rose 0.7% in June, reversing May’s 0.7% drop, but it seems to have stalled since February. The stall is attributable to consumer goods production, which remains 8% below its record high during February 2007. Output of business equipment rose back to its previous record high during June led by both Information Technology and Industrial goods.

Within the IT industry, the recovery since 2009 was led by Semiconductor & Other Electronic Components, though this output has been relatively flat at a record high for the past two years. Computer & Peripheral Equipment output actually fell in June to the lowest level this year, and is 42% below its record high during May 2008. Communications Equipment output has been moving sideways in a very volatile fashion since 2000.

There is a strong correlation between the forward earnings of the S&P 500 Information Technology industry and the production index for high tech. The former has been rising into record territory since February 2010, led by the Computer Hardware and Systems Software industries.

The earnings and market capitalization shares of the S&P 500 Information Technology sector are both back above 20%, the highest in over a decade. So why did the forward P/E of the sector drop during June to the lowest relative valuation since early 1996? The multiple was 11.2 in June, at a 5% discount to the market.

After the IT bubble burst at the beginning of the previous decade, investors have been willing to pay less and less for growth in general. While IT industries remain among the fastest growing ones in the world, they also face lots of competition and disruptive new technologies such as the iPad and the Cloud. Creative destruction is the norm among IT industries.

Today's Morning Briefing: Ben Is Gloomy. (1) QE3 delayed? (2) Worse than CBO’s scenario. (3) Ben challenges Congress. (4) No more promises. (5) Lame options. (6) Chuck tells Ben to get to work. (7) Manufacturing’s recovery losing steam. (8) IT is cheap, but has some issues. (9) A European cure for back aches. (10) Germexit? (11) Germany wants Europe to be more like Germany. (12) French frying business. (13) Spain’s great perks. (More for subscribers.)

Valuation

Downward revisions are in fashion this summer. Eventually, they should be followed by upward revisions, which might be in season later this year. Yesterday, the IMF cut its forecast for global economic growth. Also yesterday, economists lowered their Q2 forecasts for real GDP in the US following a weaker-than-expected retail sales report for June.

Last Friday, Citigroup’s Economic Surprise Index (ESI) was at -64. It’s been fluctuating around this level for the past two weeks. Last time it was this low was about a year ago. It’s slightly below 2010’s lowest reading. The forward P/E of the S&P 500 is positively correlated with the index. The former tends to rise or fall when the latter is doing the same.

The weakening outlook for global and US economic growth is driving the 10-year Treasury bond yield to record lows. Prior to 2007, falling bond yields tended to boost the P/E multiple. Since then the P/E has tended to rise and fall along with the yield.

The good news is that the S&P 500’s P/E is holding up reasonably well so far this year. While the ESI is down from a peak of +92 at the start of the year to -64 now and the bond yield remains at a record low, the P/E peaked at 12.9 on March 26, fell to 11.5 on June 1, but is back to 12.0 presently. It remains well above last year’s low of 10.2 on October 3.

Today's Morning Briefing: Global Revenues Outlook. (1) Downward revisions for global and US growth. (2) Economic Surprise Index deep in negative territory. (3) Valuation multiple down, but not out. (4) IMF global forecast jibes with our S&P 500 revenues forecast. (5) A good proxy for revenues is up 5%. (6) Retail sales are down, and up. (7) The IMF’s assumptions. (8) German Constitutional Court has a date. (9) China is building more trains again. (More for subscribers.)

Policy Debate

The foes of austerity are up in arms, demanding even more reckless fiscal and monetary madness to counter the consequences of recent reckless fiscal and monetary policies. They are disciples of Paul Krugman, who believes that policy makers have failed by doing too little rather than too much. In the 7/9 FT, the lead editorial calls on the Fed to launch QE3 at its next meeting because, “the Fed is still the only game in town.” In a 7/13 WSJ op-ed, James Carville and Stanley Greenberg, who are former Clinton advisors, write that the “actual solution to our economic situation is straightforward: increased government spending, well in excess of what the 2009 Recovery Act contemplated…”

In a 7/5 FT op-ed, Robert and Edward Skidelsky advocate more France for everyone: “Government should restore the full employment guarantee. This does not mean guaranteeing everyone a 40-hour a week job. Government should gradually reduce the maximum allowable hours of work for most occupations, guaranteeing a job for everyone who wants to work that amount of time.”

The editors of the NYT are also against austerity. They are all for the federal government to aid state and local governments to create more public sector jobs, as they argued in an editorial dated 7/12 and titled, “The Road to More Jobs.” Wasn’t that one of the main goals of the American Recovery and Reinvestment Act (ARRA) passed during February 2009? Yet it failed to boost public construction on infrastructure and to save lots of state and local jobs, as was promised by its promoters. Indeed, since ARRA was implemented, public construction fell 16% to $269.6 billion (saar), the lowest since November 2006! Since February 2009, state and local payrolls decreased by 645,000 workers to 19.1 million, the lowest since February 2006! Why will the results be any different if we spend another $800 billion?

Given the recent municipal bankruptcies announced in California and the budget squeeze in Scranton, PA, it seems that municipalities have too many workers receiving excessively generous retirement and health care benefits. Property taxes have been depressed by falling home prices while pension payouts continue to soar. Cities and towns simply don’t have enough money to pay their bills. Chapter 9 bankruptcies may be the only way for them to reduce the out-of-control cost of benefits paid to municipal workers.

Today's Morning Briefing: Head Spinning Stuff. (1) Mind numbing issues. (2) No wonder S&P 500 marking time. (3) Popcorn and global warming. (4) Banksters and their inside jobs. (5) From the Persian Gulf to the China Sea. (6) Krugman’s disciples. (7) Chapter 9 is the way out. (8) What if there is a tie? (9) Waiting for better times with a sector-neutral portfolio. (10) Staying home beats going global. (11) US tax receipts stall. (12) “Beasts of the Southern Wild” (+++). (More for subscribers.)

Brazil and China

In addition to the fiscal cliff, there is another item rising toward the top of the “Checklist for Pessimists,” based on what I heard over the past couple of days in my meetings with our accounts in Los Angeles. It is that the global economy is slowing not only because Europe is in a recession, but also because emerging economies are slowing significantly. They are doing so not just because their exports to Europe are slowing. Many also have home-grown problems. Let’s have a look at the latest developments in Brazil and China:

(1) Brazil. Brazil’s central bank board members voted unanimously on Tuesday to cut the benchmark Selic rate by a half-point to 8%. In a statement almost identical to ones issued at their two previous meetings, policy makers said “fragility” abroad is having a “disinflationary” impact in Brazil. It is the eighth straight cut since the rate peaked at 12.5% about a year ago.

Retail sales volumes dropped 0.8% in May, the biggest monthly decline since November 2008, government data showed Wednesday. Brazil’s merchandise exports plunged 18.3% y/y in June. Industrial production was down 5.7% y/y during May, to the lowest level since November 2009.

(2) China. The good news is that inflation is moderating significantly in China. That is also the bad news. June’s CPI rose 2.2% y/y, down from a recent peak of 6.5% and the lowest since January 2010. That’s good because it should boost the purchasing power of Chinese consumers as wages rise faster than prices. On the other hand, the decline in the PPI inflation rate is more worrisome since it suggests that China’s industrial economy is slowing. The PPI fell 2.1% y/y during June, down from a recent cyclical high of 7.5% July 2011. That’s the fourth consecutive negative reading and the lowest PPI inflation rate since November 2009. The PPI tends to be one of the better indicators of Chinese economic growth and suggests that it is slowing significantly.

Today's Morning Briefing: Rebel Without a Cause. (1) City by the Bay. (2) City with a cliff. (3) CBO sees fiscal tightening causing mild recession next year. (4) Fiscal cliff concerns already weighing on economy say FOMC members. (5) Another kick down the road? (6) Simpson-Bowles is the solution. (7) Obama’s “Chickie Run.” (8) Home-grown problems depressing Brazil and China. (More for subscribers.)

US Employment Indicators

In yesterday’s Morning Briefing, I showed that there was some very good news in the latest employment report that had been widely reported as being full of nothing but bad news. Nevertheless, there was more bad news about the employment situation, which was reported yesterday right after we sent our Morning Briefing. May’s JOLTS report showed that the latest hirings and separations data yielded an employment gain of only 12,000 in May. That’s much weaker than the weak 77,000 payroll gain reported in the more widely followed Employment Situation released at the beginning of every month by the Bureau of Labor Statistics. Over the past 12 months through May, payrolls are up 1.78 million according to the former and 1.80 million according to the latter survey.

Also disappointing yesterday was June’s NFIB survey of small business owners. The NFIB reported: “The percent of owners reporting hard to fill job openings lost 5 points, falling to 15 percent of all owners.…Seasonally adjusted, the net percent of owners planning to create new jobs fell 3 points to 3 percent, an unfortunate reversal of three months of improved readings. This is definitely not typical of an expansion.”

Yet, I remain impressed by the strength of wages and salaries during June. The actual data will be released on July 31 in the Personal Income report. However, the preliminary estimate is based on data already released in June’s Employment Situation report. Total aggregate hours worked rose 0.4% m/m during June to 3.8 billion hours, the most since November 2008. Average hourly earnings rose 0.3% m/m. If we multiply the two of these variables together, the resulting Earned Income Proxy rose 0.6% in June to a new record high. The proxy is highly correlated with aggregate wages and salaries in private industry. It suggests that retail sales and personal consumption expenditures might have been surprisingly strong in June. We will soon find out.

Today’s Morning Briefing: Golden State. (1) From Gold Rush to Chapter 9. (2) Another Bill of Rights. (3) From fracking boom to the minimum wage. (4) The Muddling Model vs. the Meltdown Model. (5) The right way vs. the wrong way. (6) ECRI doubling down on imminent recession. (7) Waiting for the FSMI to turn up. (8) More bad news from the labor market. (9) So why is the Earned Income Proxy so strong? (More for subscribers.)

S&P 500 Consensus Expected Earnings

On April 5, I started tracking consensus expected earnings for the S&P 500 for each quarter of this year on a weekly basis. I haven’t found a historical database with this information, so I’m doing it myself for now. I’ve observed a recurring pattern of estimate cuts in the weeks leading up to the reporting season for total S&P 500 earnings. Now I’ll be able to track how widespread this pattern is among the 10 sectors.

From April 5 through July 5, the S&P 500 consensus expected earnings estimate has been cut by 3.3% down to $25.22 per share. All but one of the 10 sectors' estimates was lowered over this period. Leading the way down has been Financials, which isn’t surprising given JP Morgan’s whale of a trading loss during the quarter. Among the losers, Industrials estimates have been cut the least. Here is the earnings derby so far: Telecom Services (3.3), Industrials (-0.7), Information Technology (-1.4), Health Care (-2.2), Utilities (-2.2), Consumer Staples (-3.9), Energy (-4.1), Materials (-4.5), and Financials (-7.7).

Are we set up for lots of positive earnings surprises as a result of these downward revisions? That was the pattern since Q1-2009. My hunch is that the pattern will be broken this quarter as companies report results that are in line with downwardly revised forecasts. More important may be how they guide for the rest of the year. They are likely to guide downwards. Industry analysts have been anticipating this by lowering their Q3 estimates for all but two of the 10 sectors.

Today’s Morning Briefing:  Some Good News, Really! (1) Silver linings in dark clouds. (2) YRI Earned Income Proxy soared in June, especially adjusted for inflation. (3) Our proxy closely tracks actual earned income and consumer spending. (4) German manufacturers had a good May. (5) China’s NM-PMI had a good June led by property sector. (6) Japan’s Tankan isn’t tanking. (7) Q2 earnings estimates cut for 9 of 10 S&P 500 sectors during Q2. (More for subscribers.)

US Employment

The latest US employment indicators weren’t all as bad as the official report released on Friday. The unseasonably warm weather earlier this year undoubtedly boosted payrolls during Q1, when they rose by 225,670 per month on average. That probably contributed to the slowdown during Q2 to 75,000 per month on average. Nevertheless, it was hard to find any good news in June’s employment report. A couple of forward-looking indicators improved, with temporary help climbing to a fresh four-year high of 2.53 million and the index of aggregate weekly hours jumping 0.4% to a new cyclical high. Average hourly earnings rose 0.3% m/m, matching its high for the year. That was about all there was. There was more good news in other employment indicators:

(1) Business surveys. Among the positive indicators were June's employment indexes included in the national and regional business surveys. Both the manufacturing and non-manufacturing employment indexes were relatively strong at 56.6 and 52.3, respectively. The average employment index of the regional surveys conducted in several Federal Reserve districts also remained relatively high.

(2) ADP. The ADP measure of private payrolls showed a solid gain of 176,000 during June. It’s up 173,000 per month on average since the start of the year versus up 158,670 for private payrolls reported by the BLS. (Over the past three months, the comparison is 141,300 vs. 91,300.) The ADP numbers are widely dismissed as less accurate than the official numbers. I am not sure why. The ADP totals are based on actual payroll data as opposed to estimates statistically derived from samples. The BLS doesn’t even attempt to sample small businesses and instead relies on a controversial Birth/Death Adjustment factor that is based on a statistical model. ADP disaggregates their data to show payrolls by small, medium, and large companies. The small company data look quite plausible and correlate well with the findings of a monthly national survey of small business owners.

(3) Monster. The Monster Employment Index, which is based on a broad and comprehensive monthly analysis of US online job demand conducted by Monster Worldwide, Inc., jumped 5% y/y and 4% m/m.

Today's Morning Briefing: Banks of Last Resort. (1) A third year like the previous two. (2) Spain needs another round of sangria already. (3) Bears can take comfort in latest jobless report. (4) There is still a case for a rally over the rest of the year. (5) Another checklist for optimists with some caveats. (6) China has a beige book, which is flashing green. (7) How’s sector-neutrality working out? (8) Fiscal and monetary policies are both up to no good. (9) Central banks working hard to lose their credibility. (10) From NZIRP to NIRP. (11) Some signs of life in employment indicators. (12) “Savages” (- - -). (More for subscribers.)

US Manufacturing Purchasing Managers Index

US manufacturing activity contracted for the first time since the recovery began. The M-PMI fell an unexpected 3.8 points in June to 49.7, the lowest since July 2009. First, the good news: Manufacturers kept expanding payrolls at a solid pace. The employment index barely changed at 56.6, holding near April’s ten-month high of 57.3. Now for the bad: The new orders index posted its second largest one-month decline since December 1980, tumbling 12.3 points to 47.8. Slower global economic growth is depressing US factories; the new export orders index dropped 6.0 points to a three-year low of 47.5. The production index has lost 10 points since April to 51.0, the lowest since May 2009. Inflationary pressures are easing rapidly; the prices-paid index is down 24.5 points since February to 37.0.

Today's Morning Briefing: Global Soft Patch. (1) From dynamo to drag. (2) Export orders down in China and US. (3) Big dive in US M-PMI new orders. (4) Industrial commodity prices are down ytd. (5) Europe is in a recession. (6) No recession in consensus earnings estimates for S&P 500. (7) Analysts no longer cutting profit margin forecasts. (8) Is latest European Grand Plan unraveling already? (9) Happy Fourth of July! (More for subscribers.)

US Economy

US economic growth continues to slow. Last Wednesday, I observed, “All the unsettling headlines coming out of Europe and the uncertainty about the November elections seem to be weighing heavily on the US economy.” Maybe we’ll get a vacation from the bad news out of Europe for the rest of the summer now that European leaders have managed to kick the can down the road over there yet again. They’ve certainly ruined the summer vacations of lots of their subordinates, who have been tasked with working out the details of the latest Grand Plan.

There is no longer any uncertainty about what the Supreme Court will do with ObamaCare. It remains the law of the land under one of the most convoluted decisions in Scotus history. However, that decision only exacerbates the uncertainty about the outcome of the November presidential and congressional elections. The outcome of the fiscal cliff and the monetary ledge are also contributing to uncertainty about the economic outlook.

For now, the latest batch of US economic indicators is decidedly weak. It’s the third summer soft patch in a row. It’s getting harder to blame it on a distortion of the seasonal pattern caused by unseasonably mild weather earlier this year, thus boosting growth during the winter and dampening it in the spring. Let’s review the latest batch of downbeat indicators:

(1) Initial unemployment claims. Over the past several weeks, jobless claims have tended to fall after the previous week's figure was revised higher. It’s been one step forward and one step back with eight consecutive weekly upward revisions and 20 in the last 21 weeks. The result has been that initial unemployment claims continue to hover just south of 400,000. Earlier this year, they seemed to be heading down to 350,000.

(2) Durable goods orders. Over the past three months through May, nondefense capital goods orders excluding aircraft fell 7.6% (saar) compared to the previous three-month period. That’s the first decline since the previous recession. The recent weakness has been widespread.

(3) Regional business surveys. All five of the regional Fed surveys we track now have June results. Only Dallas showed some strength. The overall business indexes were down for Kansas City, New York, Philadelphia, and Richmond. The average of the five fell from a recent peak of 16.1 during February to 3.8 in May and to -1.7 in June. The average for the five Fed regional new orders indexes fell from a recent peak of 11.2 during February to 3.5 in May and -5.5 in June. The good news is that the average employment index remained north of zero, but it fell from 10.3 in May to 7.8 in June.

(4) Consumer sentiment. The Thomson Reuters/University of Michigan final index of sentiment fell from 79.3 in May to 73.2 last month, the lowest level this year. The Michigan survey’s index of current conditions asks Americans whether they’re better off than they were a year ago and whether they think it’s a good time to buy big-ticket items like cars. In June that measure dropped to 81.5 from 87.2. The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, dropped sharply to 67.8 from 74.3, which was the highest since July 2007.

(5) Consumer spending. Personal spending fell less than 0.1% in May, the first decline since last November. April’s preliminary 0.3% increase in spending was revised down to a scant 0.1% gain. And spending in March was revised down to a 0.1% increase from 0.2%.

Today's Morning Briefing: Encore! Encore! (1) Is 19 the charm? (2) Endgame averted again. (3) Is the correction over? Will the summer rally last? (4) Walk in the park, but beware of the muggers. (5) Watch out for that cliff! (6) A two-page memo kicks the can down the road in Europe. (7) From “nein” to “jawohl” in one long night. (8) Bad for Bunds. (9) Shaving our GDP forecast. (10) A bunch of weak US numbers. (More for subscribers.)