Monday, July 6, 2015

US Economy Is Still the Promised Land (excerpt)

June’s employment report was released on Thursday rather than Friday, when US markets and government offices were closed for the long Fourth of July weekend. Overall, there weren’t any fireworks in the report. Our Earned Income Proxy rose to a new record high in June, edging up only 0.2% m/m. Last month’s 223,000 payroll gain was fine, but the previous two months were revised downwards by 60,000. The labor force fell 432,000, while the household measure of employment declined 56,000.

Wages rose, but by only 2.0% y/y, which remains remarkably low given that the JOLTS measure of the jobs openings rate rose during April to the highest since January 2001. The unemployment rate is down to 5.3%, the lowest since April 2008. It is just 4.8% for adults, a new cyclical low. Yet despite the tightness in the labor markets, wage inflation remains remarkably subdued. On the other hand, Q1’s Employment Cost Index for private industry rose to 2.8% y/y, the highest since Q3-2008.

Like Moses, Fed Chair Janet Yellen has pledged to bring us to the Promised Land of milk and honey, i.e., good jobs and good wages. Are we there yet? There certainly are plenty of job openings that can’t easily be filled by the available supply of labor. Apparently, employers aren’t convinced that raising wages will attract the workers they need. Workers who have the right skills to match the available jobs are in the Promised Land. The ones who don’t qualify are still wandering around in the desert, or they’ve dropped out of the labor force and stopped searching for the Promised Land.

There are plenty of other economic indicators suggesting that the US is still the Promised Land for most Americans. Here’s a brief review of the latest:

(1) Construction spending, especially on factory capacity. Construction spending rose to a cyclical high of $1.04 trillion (saar) during May. Leading the way was a 1.5% m/m jump in nonresidential private construction, with manufacturing soaring 6.2% during the month. The latter has been climbing almost vertically this year, posting a 70% y/y gain. This is certainly consistent with the view that despite the strong dollar, the US may be enjoying an industrial renaissance based on cheap energy and technological innovation.

(2) Business equipment spending, especially on heavy trucks. Another category of capital spending that’s showing strength is sales of medium and heavy trucks. It rose to 450,000 units (saar) during June, a new cyclical high and the best pace since February 2007. That’s impressive given that the oil patch has been hard hit by the plunge in oil prices since last summer.

(3) Consumer spending, especially on autos. Retail auto sales averaged 17.1 million units (saar) during Q2, the best such pace since Q3-2005. Overall retail sales have rebounded smartly this spring following the winter’s ice patch. There seemed to be a spring soft patch in retail sales, but it was revised away. While June’s employment report had some soft spots, there was enough strength to provide consumers with more purchasing power.

(4) Purchasing managers, especially the ISM survey. There was also a soft patch in the M-PMI earlier this year. The index fell from 55.1 last December to a recent low of 51.5 during March and April. But it rose during the past two months to 53.5 in June.

Today's Morning Briefing: Ye Shall Merge & Acquire. (1) Greece: This too shall pass? (2) Greeks invented mythology and mathematics. (3) Be fruitful and multiply. (4) M&A and buybacks are shrinking supply of stocks. (5) The Wilshire 3,666. (6) Jump-starting growth with M&A. (7) America is still the Promised Land for most Americans. (8) Janet and Moses. (9) Wages: Are we there yet? (10) More evidence of US industrial renaissance. (11) Pedal to the metal. (12) “Terminator Genisys” (+). (More for subscribers.)

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