Auto sales rose 3.3% in June as consumers bought cars and light trucks at a…
Warning lights grab our attention – whether it’s a yellow light flashing in traffic, or the “Check Engine” indicator flashing on the dashboard. We shift gears and slow down until we can figure out if there’s something we should be concerned about. The markets have been barraged with warnings about China, falling oil, rising credit spreads, etc., since the start of the year, and the reaction has been a defensive one – reduce risk and seek out the safety of US Treasuries. The result pushed the S&P 500 stocks down 10% from their 2015 close and long (10-year) rates to near-historical lows. Now, those warning signs seem to be fading. The S&P has recovered 80% of the drop in the last month as economic data shows that, for the US at least, the risk of a recession has faded.
The Employment picture remains healthy. Non-farm payrolls grew 242,000 in February – above the 220,000 expected – while December and January figures were revised a combined 30,000 higher for an average gain of 228,000 for the past three months. The Household Survey (of smaller firms and start-ups – from which the unemployment rate is calculated) showed 530,000 new jobs created for the month (following 615,000 in January). That gain, coupled with 555,000 workers entering the labor force in January, kept the unemployment rate at 4.9%. The labor force has grown 1.8 million in the past year, which is the largest 12-month increase since the end of the recession. Both total and private payrolls are up about 223,000 per month over the past year.
The labor participation rate rose to 62.9% in February. After hitting a 4-year low last September (62.4%), the participation rate has increased by the most over the past five months than any five-month period going back to 1993. More jobs and a pick-up in wages (after inflation) are pulling more workers back into the labor force – offsetting the retiring Baby-Boomers, and rising disability recipients. It wasn’t all roses in the report. Workers’ earnings fell 0.5% in February, due to a 0.4% drop in total hours worked, and average hourly earnings slipped 0.1%. That still leaves workers’ earnings up 3.8% – well ahead of inflation, and enough to boost their “real” purchasing power.
The manufacturing sector continues to show signs of improvement. The ISM Manufacturing Index for February rose to 49.5. While still below the “50” mark that delineates expansion from contraction, the slowdown in the manufacturing sector continues to fade. February was the best reading since the index dipped below 50 in October, and the details in the report point to stronger growth in the months ahead. The two most forward-looking measures, new orders and production, continue to show expansion. Twelve industries that make up the index reported growth in new orders, while just four reported declines. New orders lead to increased production, and as companies hire to fill new demand, manufacturing employment should improve as well.
The ISM Non-Manufacturing Index slipped to 53.4 in February. Service sector activity has grown for 73 consecutive months, and the new orders and business activity indexes show positive signs for the months ahead. This marks a stark contrast from the much smaller manufacturing sector, where recent readings, though stabilizing, have indicated contraction. Fourteen of eighteen industries that the ISM surveys reported growth last month. The business activity index rebounded from January – rising 3.9 points to 57.8. The new orders index eased to a still-robust 55.5. One real negative in the report was a decline in the employment index to 49.7. This was the first time that the employment portion of the index dipped below 50 in nearly two years.
The US Trade Deficit widened in January as exports fell to the lowest level since mid-2011.
Slower growth abroad, along with a stronger dollar have slowed exports, while imports are also well below year-ago levels. Petroleum has been a key element in the drop in imports, with petroleum imports down 41.8% from a year ago. For the past year now, the US has been running a trade surplus with OPEC, and this means that OPEC has fewer dollars to purchase US goods. This has more to do with the drop in global trade – not a global recession.
Construction Spending rose 1.5% in January (it rose 2.2% including upward revisions for November and December), to the highest level since 2007. The gain in January was led by government projects (paving roads and building bridges) and private construction of manufacturing facilities, power plants, and hotels.
Global commodity prices are rebounding along with stocks and interest rates. Industrial scrap metal prices are up 10% since January, Crude oil prices are up 37% over the same period. Rising commodity prices are a signal the global growth is improving. This is a welcome sign and puts more pressure on the Fed to manage interest rates correctly. Gold has risen 20% over the past two months. No doubt that fears of a global meltdown (like 2008) pushed some investors to gold, but the pick-up in inflation of late may also be a contributing factor. The yields on 5-year TIPS, which are inflation-indexed Treasury bonds are up nearly a half-point in the past month (from 1.00% to 1.45%), as the markets recognize that the threat of deflation is evaporating, while the threat of inflation moves to the forefront.
This may be a new warning light that is drawing attention from the markets. If they sense that the Fed is falling behind the curve in managing inflation, long-term interest rates will start to rise higher and faster. The Fed meets again on March 15 – 16.
For the week:
Interest Rates (5-Yr Treasury): + 14 basis points to 1.38%
Stocks (S&P 500): + 52 points to 2000