Market Update



Market Update – 9/14

Sometimes you need to take a break – a week away from the markets and news reports (except for an occasional listen for the weather…). The week after the employment report is bereft of major economic news and, if China collapsed … well, we’d check on things when we got back. It’s nice to get away from the bad news that seems to pervade the media reports that seem bent on making mountains out of molehills. Two weeks ago, we reported that August car sales rose to a 17.8 million annualized pace which, if continued, would give the US its best year ever for auto sales. Good news, right? Especially in light of the stock market turmoil that began mid-month. Not so, according to The Wall Street Journal, which ran a piece this week on why record auto sales were bad news; because the Fed might feel compelled to raise rates in September.

A year ago, there were complaints about the US Dollar being too weak. Now it’s too strong and could hurt exports. A week ago, pundits complained that wages only grew 0.3% in August. That works out to 3.6% annualized and, with inflation currently running at 2%, that’s not too shabby. After all, it’s inflation that drives wages and prices and, with inflation tame, wages are staying ahead of inflation. If inflation flares up and wages don’t keep pace, that will be the time to complain.

Is it any wonder why the average American is in a funk; being bombarded daily with unfiltered bad news? As we remind everyone constantly, this recovery has been sub-par, but there’s a lot to cheer about.

First off, the Bureau of Labor Statistics (BLS) reported this week that total job openings in the US increased in July to 5.75 million. This is an all-time high for this series that began keeping track of this in 2000. Job openings have grown 47% since the end of 2013 – a 26% annualized rate of growth – suggesting that businesses are much more confident about the future. Private sector jobs also set a new record in July at 5.27 million.


The Conference Board (which tracks consumer confidence and leading economic indicators) has a separate index (Employment Trends) which includes the above BLS information, plus 7 other indicators. This, too, hit a 15 year high in August. According to the Conference Board, “With solid job growth expected to continue, the unemployment rate is likely to go below 5 percent by year’s end.”

For another, the US energy picture continues to shine brighter. Based on data through May 2015, the US produced 49 quadrillion BTUs of oil and gas last year, the highest level of oil and gas production in US history, and 4 quadrillion BTUs above the previous peak of 45 quadrillion BTUs in 1971. Through May, domestic production of oil and gas has increased by nearly 11% compared to last year, putting US production on track this year to top 54.3 quadrillion BTUs, which would be more than 70% above the 2005 level of fewer than 32 quadrillion BTUs.


US oil production, coupled with that from OPEC, is expected to keep crude prices in the $45 per barrel range right through 2016. This is substantially lower than the near-$60 per barrel estimate at the start of 2015, and good news for US consumers.

Over the past four years, the US has generated 212,000 jobs each month, on average. The jobless rate has fallen to 5.1%. Since 1960, there have only been about 15 years where the unemployment rate was lower than it today.  As we noted last week, US workers’ total cash earnings (wages plus hours worked) are up 4.9% over the past year, giving consumers the ability to spend. This should continue to drive retail sales (including autos), housing and other durable purchases.

eco2The problem with this recovery is that, while the average American has, for the most part, returned to “business as usual,” Corporate America hasn’t. They continue to hold on to their wallets as if the next recession could start tomorrow. They are also beset with heavy regulations, tax implications (both corporate taxes and depreciation issues). They content themselves with spending only on immediate needs, with little expenditure on productivity-enhancing investment. This lack of cap-ex is showing up in productivity figures, which show US productivity up only 0.7% over the past year, down from a tepid 1.0% rise in the prior 12 months.

Perhaps things are about to change, as illustrated by the rise in job openings. As companies fill the openings, perhaps they will begin to invest in making these workers more productive. Until then, the great American economic V-8 engine is not running on all cylinders. As the Fed meets this week, they will mull this over in the context of a slowing global economy. It’s a strange time in the markets where, as we pointed out above, good news is bad for the markets and bad news is good. That’s no way to run a business or the largest economy in the world.

The Fed Funds futures market points to a 28% chance that the Fed will raise rates this week. Market analysts are more divided, with 50% expecting the Fed to raise rates. We’ll soon see who’s right.