US Economy Still Wobbly
The US economy is still pretty weak, reminding me of how I feel towards the end of my weekly “long run,” with occasionally short bursts of energy that quickly peter out into awkward limping along – getting older is not for whiners.
Housing
Earlier this month new single family home sales missed expectations, coming in at a seasonally adjusted annual rate of 511,000 versus expectations of 520,000, for a year-over-year decline of -1.92%. That miss was slightly offset by an upward revision to the prior month’s data, from 512,000 SAAR to 519,000 SAAR. While total sales for new homes remain in an uptrend, they haven’t made a new high in well over a year.
New single family home prices have also softened, with median price falling 1.8 year-over-year and 6.4% month-over-month. In addition, both months current supply and median months on the market have risen which indicates weaker new home markets across the country than we have previously seen.
Mid month we also received the NAHB/Wells Fargo Housing Market Index, which came in at 58 in May, unchanged from the three previous months versus expectations for the index to inch up to 59. Much like what we are hearing from the National Federation of Independent Businesses with respect to the biggest concerns for small business, “builders are facing an increasing number of regulations and lot supply constraints,” according to NAHB Chairman Ed Brady. Tuesday the Commerce Department will release a separate report on new residential construction for April.
Bottom Line: Housing is doing pretty well overall, but builders are reporting being constrained by the availability of land due in large part to land-use regulation, particularly in the geographies with the greatest demand. We are also seeing a lot less inventory available than is typical at this point in the cycle, meaning fewer people are putting their homes on the market, which is pushing prices up.
Manufacturing & Services
U.S. durable goods orders rose just 0.8% in March missing expectations for 1.8%, as demand for cars, computers and electrical goods slumped. This after a downwardly revised decline of -3.1% in February, previously reported as a -3.0% decline. Excluding transports, durable goods declined -0.2% versus expectations for an increase of +0.5% with prior month revised downward as well to -1.3% from -1.0%.
All the regional Fed Surveys all came in weaker than expected and are in contraction territory. Empire State was expected to be +6.5, but came in -9.02. Philadelphia was expected to be +3.0, but came in -1.8 and Richmond was -1 versus +8 expected. Finally Kansas City Fed was -5 versus -3 and Dallas was the worst offender at -20.8 versus expectations for -8.0.
Markit’s April US Manufacturing PMI points to weakest performance since September 2009. At 50.8 for the month (down from 51.5 in March), manufacturing activity in the current quarter started off at an even slower pace than the 1Q 2016 average of 51.7. Six of the ten subcomponents declined in April with Customer Inventories and New orders showing the largest declines while Prices Paid increased to its highest level since September 2014, up 7.5 points to 59.0. The Employment component is still below 50, indicating contraction, but did reach its best level since November.
Markit’s April US Services Business Activity Index rose to 52.8 in April, up from 51.3 in March, but we’d caution excitement as it was only the second month above the expansion/contraction line at 50.0. Despite the softening of the US dollar since early February, new work from abroad decreased at the fastest pace for nearly one-and-a-half years.
Bottom Line: Manufacturing continues to be weak and given the tight correlation between the ISM Purchasing Manager’s Index versus the S&P 500, this is not something to be ignored.
Employment
Both the ADP and Bureau of Labor April job creation figures were well below expectations. According to the Challenger Grey data on layoffs, the pace of downsizing in April rose by 35% percent to 65,141, from the 48,207 layoff announcements in March. In the first four months of 2016, employers have announced a total of 250,061 planned job cuts, up 24% from the 201,796 job cuts tracked during the same period a year ago. Job creation was a big miss at +160,000 versus an expected +200,000 after +215,000 in March. This is the fourth month without a print over +250,000, the worst such streak since 2013, indicating softening. On the other hand, the share of the labor force that’s been looking for work for at least 27 weeks and those who can only find part-time work have fallen, which is a sign of improvement. The employment-to-population ratio remains far below where it sat during the peak of the last two expansions and fell again 0.3% month-over-month. Overall, not a great picture, but not an alarmingly bad one either.
When we are talking about the employment situation, keep in mind that given the low-to-no-growth environment and low interest rates, companies are likely to utilize M&A activity to bolster revenue and profits. The issue there is layoffs are one of the quickest means to achieve cost savings or “synergies” to use the finance lingo.
Retail Sales
You’ve probably heard about the serious pounding the retail sector took this earnings season, with the headlines mid-month mostly dominated by dour news from the retail sector, with a set of bleh (technical term) earnings reports coming from the likes of Macy’s, Dillards, Kohl’s, Gap, and Nordstrom, all of which are trading down between -45% and -52% over the past year as of today’s close. Meanwhile Dollar General, Dollar Tree and Walmart all exceeded expectations, further emphasizing our Cash-Strapped Consumer theme. But it isn’t just about struggling brick and mortar retail, with Disney reporting its first earnings miss in five years. The next chart hows how retail spending is still in recessionary territory.
Challenges
America has for centuries been a nation on the cutting edge of change, with a highly flexible workforce, both in terms of geography and skills, that led the world in innovating. But that has been changing:
- Between the 1970s and the 2010, the rate of Americans moving between states dropped by more than 50%, from 3.5% a year to 1.4% a year.
- The fraction of workers required to hold a government-issued license has sextupled since the 1950s, from less than 5% to just under 30%, making the labor market less flexible because it is now more difficult to switch into an industry or to move from one state to another when licenses are required.
- The rising costs of health care on top of the tax incentives for employer health-care subsidies versus tax disadvantages for individual plans has made it more costly and risky for individuals to leave their company and start their own entrepreneurial ventures.
- Traditionally Americans have moved from poorer states to wealthier states, but the rise in federal taxes and federal regulation has muted the benefits from leaving one state for another. This has also reduced the need for states to compete with one another by fostering growth friendly environments.
- High land-use regulations in wealthier metro areas are making housing more expensive so that now we see more people moving from richer areas to poorer ones due to housing costs.
- In the past, high rates of migration served to reduce income inequality within the nation, but today the low migration rates have become a drive of such inequality.
- Entrepreneurship and innovation are contagious. In the past, smaller counties used to lead the nation in the growth of new businesses, even through the early 1990s, but since then, small counties have lost businesses with innovation and entrepreneurship becoming more concentrated in a few areas as regulations concerning angel/venture capital investing has concentrated capital allocation for such into fewer and fewer hands. Today Silicon Valley alone accounts for 40% of all venture investments and the addition of Los Angeles, Boston and New York City brings that to 2/3rd of the total in the nation.
Botton Line: The US is facing strong demographic headwinds as the largest generation, the Baby Boomer, move into retirement, and has a plethora of structural headwinds, a few of which I discussed above. Monetary policy could never address these problems, which is partially why it has been of limited use and of questionable efficacy, leaving us with an economy that is growing at a rate well below historical norms.
