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September Jobs & Manufacturing Reports Disappoint Again |
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FORECASTS & TRENDS E-LETTER IN THIS ISSUE: 1. September Jobs Report – Another Big Disappointment 2. ISM Manufacturing Index Continues Its Severe Slump 3. Consumer Confidence & Sentiment Up Again in September 4. Do Weak Jobs Reports Put Fed “Lift-Off” on Ice? Maybe 5. Head of IMF Issues New Warning on the Global Economy 6. NEW SPECIAL REPORT: Overview As is becoming increasingly frequent, we will touch on several bases today, given that there’s so much going on these days. (Speaking of bases, How ‘bout them Texas Rangers!!) Hitting several topics in a single E-Letter makes it more interesting and fast-paced for me, and I hope the same is true for you. After all, YOU are what this is all about. That’s why I always value your input, positive or negative, so much. Today, we’ll start with the latest economic reports. I wish I could tell you they were encouraging – most were not. There was last Friday’s disappointing unemployment report for September – which was below expectations for the second month in a row. Then there was last Thursday’s decidedly downbeat report on US manufacturing, which was yet another big disappointment. These two negative reports have most Fed-watchers very confident now that there will not be a rate hike this year. Most now believe that “lift-off” won’t happen until early 2016. Yet the Fed may fear it will lose its credibility if it doesn’t make at least one move this year. So expect this debate to continue at least until December 17 when we will know for sure. Last Wednesday, the head of the International Monetary Fund warned that there are new reasons to be concerned about the global economy, and emerging economies in particular. IMF Managing Director Christine Lagarde issued the latest warning, along with another call for the US Fed to delay the first rate hike until next year. But does the Fed care what she thinks? Probably not. Finally, I have just completed a new SPECIAL REPORT: Seven Risk Factors That Could Drive the Markets Lower. Back in March and April, I saw the storm clouds gathering on the horizon and warned my readers to reduce their long-only (buy-and-hold) positions in stocks and equity funds. Still, most investors don’t understand why this six year-old bull market seems to have run off the tracks. In this new Special Report, I discuss in detail the unique combination of risk factors that are weighing on the markets today and may continue to do so. Best of all, I offer advice on what you can do to protect yourself should the latest market downturn continue. If you are looking for some clarity in this crazy market and some advice on how to protect your portfolio, be sure to download my latest FREE SPECIAL REPORT at the end of today’s E-Letter. September Jobs Report – Another Big Disappointment Last Friday’s unemployment report was a disappointment all the way around. The latest employment data from the Bureau of Labor Statistics (BLS) showed that American employers added just 142,000 jobs last month. The pre-report consensus for September indicated a gain of 203,000 new jobs last month. For the year-to-date, new jobs have averaged almost 200,000 per month, but not so in August or September. Revisions to prior months’ data were disappointing as well. Gains for August, initially recorded at 173,000, were revised lower to 136,000. The last months of summer are notorious for coming in low and being revised higher in September and October – so the 37,000 decrease in August jobs was a big negative surprise. In addition, the July new jobs count was revised lower to 223,000 from the initial estimate of 245,000 jobs.
The report showed that the official unemployment rate was steady at 5.1% for the second month in a row. The unemployment rate has been declining steadily, but that has come in large part due to the lowest Labor Force Participation Rate in a generation. The participation rate fell to a new low of 62.4% percent in September, its lowest reading since October 1977 (38 years), as more people gave up looking for work. The total labor force fell to a new 2015 low, losing another 350,000 people. Those reported not in the labor force or not looking for work increased by 579,000. In addition to the weak jobs numbers, wages were flat last month, indicating continued low inflation, which is a concern for the Fed. Average hourly earnings declined a penny in September to $25.09. The 12-month wage growth rate was only 2.2%. Before the Great Recession, the normal year-over-year wage gains were between 3% and 4%. Finally, the average work week actually fell a fraction to 34.5 hours. “Every aspect of the September jobs report was disappointing,” wrote Michelle Girard, chief US economist at RBS, echoing a sentiment widespread among economists, as well as among investors. On Friday morning as the jobs report came out, the Dow was down about 250 points in early trading. But another lousy jobs report in a row likely means that the Fed won’t raise interest rates this year (more on this below). As a result, stocks mounted a comeback, and by the end of the day, the Dow closed up just over 200 points. Stocks were up even more yesterday. ISM Manufacturing Index Continues Its Severe Slump The Institute for Supply Management released its ISM Manufacturing Index last Thursday, and it fell more than expected to 50.2 in September, down from 51.1 in August. That’s the lowest reading in 28 months and the trend has been down since late 2013. The internals of the report – production, employment and pricing – all weakened, while new orders fell to the lowest level since November 2012. Meanwhile, business inventories also piled up at a faster rate – a sign that production will need to slow further to bring them back down. The ISM’s New Orders Index registered 50.1% in September, a decrease of 1.6 percentage points when compared to the August reading of 51.7 percent – indicating growth in new orders for the 34th consecutive month, but at a much slower rate.
If the Index falls below the 48.9 level from November 2012, it would confirm that manufacturers are suffering the most since the end of the Great Recession. While the Index remained just a hair above 50 last month, the trend is clearly in the wrong direction. The last time the ISM Index was as low as it was in September, the Dow Jones Industrial Index was trading at around 15,000. Consumer Confidence & Sentiment Up Again in September On a brighter note, consumer confidence rose for a second month in a row. The Consumer Confidence Index from the Conference Board rose to 103.0 in September from 101.3 in August. The Conference Board said that consumers were more confident about the economy and the prospects for higher wages. The reading in September puts the Index near its highest level this year. The Conference Board also reported an increase in the share of respondents planning to buy a home in the next six months from 4.4% in August to 6.3% in September. The survey also asked for respondents views on interest rates a year from now, and 64.4% expect rates to be higher in September 2016.
The University of Michigan’s Consumer Sentiment Index, another indicator of confidence, also improved last month, rising to 87.2 from 85.7 in August. Both of these consumer confidence readings beat their pre-report consensus. On another encouraging note, new home sales for single families totaled 552,000 units in August (latest data available). That’s the best monthly figure since February 2008 and an encouraging sign of the housing market’s growing momentum. It was nearly a 6% increase from July, which was also revised up, according to the Census Bureau. Still, the figure is a far cry from the historic average: the average monthly number of new home sales over the last 30 years is 706,000 according to government data. Do Weak Jobs Reports Put Fed “Lift-Off” on Ice? Maybe Following Friday’s stinker of a jobs report and the surprise downward revisions to the August and July reports, many analysts and investors concluded that a hike in the Fed Funds rate is off the table for this year. After all, those two jobs reports marked the smallest two-month gain in employment in over a year. Going into Friday’s report, Fed Funds futures were predicting a 50% chance of lift-off at the December Fed meeting. After Friday’s report, however, the odds fell sharply to only 30%. Investors saw virtually no chance the Fed would end its near-zero interest rate policy at its only other scheduled meeting this year, to be held later in October. Futures prices indicated investors were betting the Fed would probably not hike until March of next year. But before we get too confident that lift-off is off the table until next year, let’s not forget that Chair Janet Yellen said clearly in the last week of September that the Fed still intends to hike rates before the end of the year. “It will likely be appropriate to raise the target range of the federal-funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter.” Many Fed-watchers believe the Fed Open Market Committee should have raised its key rate several months ago. More importantly, they believe the Fed risks losing credibility if it doesn’t raise the Fed Funds rate at least one time this year. No doubt Yellen & Company are well aware of this issue of credibility. For this reason, some have suggested that the FOMC might go ahead and vote to hike the Fed Funds rate at the December 15-16 meeting, just to get it over with – but be willing to lower it again early next year if the markets’ reaction is too negative. There is precedent for this: Canada did it, Sweden did it and so did Israel and the European Central Bank this year. Imagine what could happen in December if the Fed raises rates even as the global economic slowdown is starting to take hold in the US, at a time when most investors and consumers believe that a rate hike is off the table for this year. Assuming lift-off happens in December, negative headlines would plaster the newspapers, and households and businesses could begin to delay big purchases in response. That could cause job growth to slow significantly. The markets could revolt again, with volatility climbing to even higher levels in early 2016. In that case, the Fed could feel compelled to return to ZIRP (zero interest rate policy) early next year. I do not consider this the most likely scenario in the months ahead, but I don’t think investors should rule it out. Head of IMF Issues New Warning on the Global Economy Last Wednesday, the head of the International Monetary Fund warned that there are new reasons to be concerned about the global economy, and emerging economies in particular. IMF Managing Director Christine Lagarde issued the latest warning. The IMF international organization headquartered in Washington, DC consists of “188 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.” FYI, the IMF is considered to be a left-leaning organization. Ms. Lagarde said that her organization sees more troubling signs in the world’s finances, especially in emerging countries, and that it is unclear if the current situation is cyclical, or if it represents a long-lasting fundamental downturn.
“The simple answer is that there is no simple answer. Certainly, we are at a difficult and complex juncture,” Lagarde said, explaining she is increasingly worried about recent global affairs – and international economics that are similarly distressing. She added: “On the economic front, there is also reason to be concerned. The prospect of rising interest rates in the United States and China’s slowdown are contributing to uncertainty and higher market volatility. There has been a sharp deceleration in the growth of global trade. And the rapid drop in commodity prices is posing problems for resource-based economies. If we put all this together, we see global growth that is disappointing and uneven. In addition, medium-term growth prospects have become weaker.” She said global growth will likely be weaker this year than last, and she only expects a modest acceleration in 2016. While advanced economies are seeing a “modest pickup,” Lagarde said emerging economies will likely see their fifth consecutive year of declining rates of growth. She also warned that China will likely further reduce its appetite for commodities as its economy slows and the country invests less overall. Ms. Lagarde predicted what could be a prolonged period of low commodity prices. This will be bad for many emerging nations that depend on commodity exports. As she has done recently, Ms. Lagarde took the occasion of her speech last week to call on Janet Yellen not to raise the Fed Funds rate this year. She added that the IMF does not believe that the US or global economies are strong enough for higher interest rates – as if we care what the progressive IMF has to say. SPECIAL REPORT: The stock markets plunged lower in late August and most investors are puzzled as to the reason(s) why this happened – and worry whether this pattern is a short-term bump in the road or something more serious. Back in March and April, I saw the storm clouds gathering on the horizon and warned my readers to reduce their long-only (buy-and-hold) positions in stocks and equity funds. Still, most investors don’t understand why this six year-old bull market seems to have run off the tracks. For this reason, I have just completed a new Special Report: Seven Risk Factors That Could Drive the Markets Lower. In this report, I discuss in detail the unique combination of risk factors that are weighing on the markets today and why they may continue to do so. Best of all, I offer advice on what you can do to protect yourself should the latest market downturn continue. If you are looking for some clarity in this crazy market and some advice on how to protect your portfolio, CLICK HERE to download my latest FREE SPECIAL REPORT. Wishing you profits,
Gary D. Halbert
SPECIAL ARTICLES Share of Americans in labor force shrinks to 38-year low |
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As you can see in this chart, we are dangerously close to breaking below the 50 mark. When the ISM is above 50, it signals that the economy is expanding, whereas anything below 50 indicates an economy that is contracting.
