Hiring and Wages are Up, Reinforcing the Economy’s Resilience The U.S. posted surprisingly large gains in both jobs and pay, even though the unemployment rate ticked up to 4%
Employers added 272,000 new jobs in May, the Labor Department reported on Friday, more than in April and well above the 190,000 that economists had expected.(…) Average hourly earnings also topped forecasts, rising 4.1% from a year earlier. (…)
It was the first time in more than two years that the jobless rate hit 4%. It also marked the extension of a steady climb higher; the rate was as low as 3.4% last year. (…)
Government jobs increased 43,000 last month, returning to the steady pace of gains that had paused in April when just 7,000 jobs were added in the sector. Private sector hiring also climbed, with a noticeable pickup among leisure and hospitality businesses. (…)
Survey says…???
- The BLS Establishment survey shows employment up 1.0% since November 2023 and +1.8% YoY in May.
- Its companion Household survey, used to calculate the unemployment rate, shows employment down 0.5% since November 2023 and +0.2% YoY.
- PMI surveys say employment was weak in the past 2 months, particularly in services.
- Job openings have declined 10% since December 2023.
- May’s jump in the number of unemployeds is from workers aged 24 and under: +205k (vs +157k overall). The unemployment rate for this group rose from 8.2% to 9.2%. Seasonal aberration?
BLS will cut the size by 5,000 households to a total of 55,000 a month starting in 2025, Commissioner Erika McEntarfer said at the quarterly meeting of the Council of Professional Associations on Federal Statistics. She noted there’s a “real risk” of a decline in quality, especially as response rates have declined substantially in recent years.
And this: hourly wages (black bar below) jumped by 0.40% MoM in May, much faster than April’s +0.23% and the last 3-month average of +0.25%. Wages for Private Production and Nonsupervisory employees (80% of total) jumped 0.47% in May (+5.8% a.r.) vs +0.2% in April and +0.23% in the previous 3 months, and the fastest monthly growth rate since March 2023.
On a YoY basis, the nice slowdown in wage growth stopped in April and ticked up to 4.2% in May.
Aggregate weekly payrolls (employment x hours x wages) suggest that consumer expenditures should hold up around 5.0% growth in May:
One more thing blurring the everybody’s vision:
About half of the non-farm payroll job growth since October 2023 has come from asylum-seekers, refugees and other migrants who have been authorized to work in the U.S., per a research note from Standard Chartered Bank released last month. Migrants comprised one-third of the monthly jobs numbers in the 12 months before that, per the report.
The figures line up with a Brookings analysis of Congressional Budget Office data earlier this year that attributed higher than expected post-pandemic job gains to immigration. (Axios)
On Tuesday, the administration issued an executive order preventing people who unlawfully cross the Southern border from seeking asylum. Instead, they’ll be sent to their home country or removed to Mexico.
Economic Data Paint a Picture of Two Americas A growing disconnect between the fortunes of upper- and lower-income Americans could account for some of the crossed signals in the U.S. economy.
(…) In the latest shocker, the Labor Department reported on Friday that the U.S. added 272,000 jobs in May, up from 165,000 in April and much higher than economists’ expectations. The strong reading is especially perplexing because it comes on the heels of a string of weak economic reports in recent weeks, including soft income and spending data for the month of April and a lower-than-expected reading on manufacturing sentiment in May.
It isn’t just government reports: Companies have been warning in recent weeks that consumers are pulling back. (…)
There were also disconnects within the May jobs report that had analysts scratching their heads. For instance, while the overall unemployment rate remains quite low by historical standards at 4.0%, unemployment among 20- to 24-year-olds was 7.9%, up from 6.3% a year earlier. And earlier this week, job openings fell to their lowest level in more than three years.
One possible reason for the mix of caution and abandon is that people lower on the income ladder who spend a bigger share of their income on necessities are feeling pinched and less confident about their job prospects. Meanwhile, wealthier households are still spending.
Consider one of the biggest surprises in the May jobs report, which was that the leisure and hospitality sector added 42,000 jobs. That was up from 12,000 in April and better than an average of 36,000 over the prior 12 months. By contrast, the entire goods-producing sector of the economy added just 25,000 jobs in May. Within leisure and hospitality, food services and drinking places added 24,600 jobs and the “amusement, gambling, and recreation industries” added 10,200. (…)
What is becoming hard to miss is that companies that serve a wealthier clientele sound much more confident lately. While food makers see shoppers struggling with inflation, cruise lines are booming. (…)
Stepping back, this makes a certain amount of sense. The upper cohort in the U.S. mostly own their homes, and the lion’s share are likely sitting pretty with ultralow mortgage rates taken out or refinanced during the pandemic. They are also benefiting from an effervescent stock market, including downright euphoric valuations for anything associated with the promise of artificial intelligence. They also aren’t struggling with high rates on credit card or auto loans. Instead, high interest rates are actually supplying them with record levels of investment income, as The Wall Street Journal recently reported.
It is this cohort, whether by splurging on vacations or further bidding up Nvidia shares, that is making it harder for the Federal Reserve to get comfortable cutting rates.
This is a good time to revisit my September 11, 2023 post The Wealth Defect which showed that when inflation-adjusted household net worth rises rapidly above trend, like in the late 1990s, the mid-2000s and recently, consumer expenditures grow faster than income, i.e. the savings rate declines.
The Bernanke/Yellen unconventional monetary policies have rendered the FOMC’s conventional playbook ineffective!
Monetary and fiscal policies boosted household wealth 25% above their 2019 level and 20% above trend, thanks to rising stock prices but, principally, to rising home values due to unusually low supply of existing homes due to Fed-supplied mortgage handcuffs.
From a monetary policy perspective, the wealth effect is now a wealth defect: rising interest rates have little impact on a very wealthy, under leveraged, American consumer looking to enjoy life AMAP (as much as possible) post pandemic.
And we’re not even going back to trend just yet, are we?
Hence the continued divergence between expenditures and income…
… causing real expenditures to keep rising 2.6% YoY when real disposable income is only up 1.0% in April.
Many April data revived “hopes” for the desired soft landing but May’s labor income data suggest expenditures growth still around a +0.45% monthly range, 5.5% annualized. With PCE inflation below 3.0% YoY (2.6% in April), the “no-landing” scenario remain possible.
Canada Unemployment Rate Inched Up in May With Softer Hiring A spike in wage growth, however, adds a wrinkle for a central bank pondering further rate cuts
Employers across the country added 26,700 jobs in May from April while the unemployment rate edged 0.1 percentage point higher to 6.2%, the highest since January 2022, Statistics Canada reported Friday. The pace of hiring was slightly stronger than market expectations for the addition of 22,500 jobs but follows a 90,400 jump in employment the month before.
Hiring in May was all for part-time positions.
Statistics Canada’s survey showed 62,400 part-time jobs were added, which more than made up for the drop of 35,600 full-time roles. And that came even as the start to the summer job market looked soft, with the employment rate for students planning to return to school in the fall lower than a year earlier.
When calculated using U.S. Labor Department methodology, Canada’s unemployment rate was inched up 0.1 point to 5.2%. In contrast, U.S. job creation blew past expectations even as the jobless rate ticked up to 4% for a mixed view of America’s labor market.
The unemployment rate in Canada has trended higher for a little over a year, rising 1.1 percentage points since April 2023 even as employers have continued to add to their ranks. Canada in May added 402,300 jobs compared with a year earlier, though that strength has been outpaced by immigration-driven growth in the population, with almost 100,000 added to the population during May alone. The employment rate, the proportion of the working-age population that is employed, eased 0.1 point from April to 61.3%. (…)
Still, earnings continue to advance more strongly than headline inflation and average hourly wages for permanent employees advanced in May by the most since January, rising 5.2% from a year earlier to beat the 4.7% growth economists anticipated. The re-acceleration comes after signs in recent months, including in separate payroll data, that the pace was cooling. (…)
Europe Readies Tariffs on Flood of Cheap Chinese EVs
The European Union is expected to tell manufacturers of EVs in China as early as [this] week whether it will impose provisional tariffs from July 4 that would boost import duties above the current level of 10%. (…) The EU’s tariff levels are expected to be significantly lower than the 100% duty introduced by the US as they are based on a different approach within World Trade Organization rules and procedures. (…)
The manufacturer [BYD] plans to build a factory in Hungary and has said it’ll bring its $10,000 Seagull hatchback to the region in 2025. (…)
- Nio Inc. has established sales and service networks in markets including Norway, Germany, the Netherlands, Sweden and Denmark. The brand’s ET5 sedan and EL7 sport utility vehicle won the maximum five-star safety ratings in the 2023 Euro NCAP safety tests.
- Xpeng Inc. this year started selling electric models including its flagship G9 SUV in Germany, Spain and France and has plans to expand to the UK and Italy. In Germany, unlike some of its Chinese peers, the company is selling via a local dealer network.
- Other Chinese companies have bought European brands to facilitate their entry into the market. SAIC has had success in the region with the British-origin MG badge, while Geely controls Norfolk, England-based sports-car maker Lotus and Sweden’s Volvo Car AB. (…)
Closer to home, manufacturers are racing to offer more affordable EVs to defend against the cheap Chinese competition:
- Volkswagen, which has been struggling with its EV shift, is introducing more than 30 new products this year including the all-electric Porsche Macan and the ID.7 sedan, which comes with a display that beams information into the driver’s field of vision. The German manufacturer also has plans for a €20,000 EV developed and produced in Europe, but that won’t arrive until 2027.
- Stellantis — owner of the Fiat and Peugeot brands — earlier this year introduced the €23,300 electric Citroën ë-C3 and in September will start sales of cars co-developed with China’s Zhejiang Leapmotor Technologies Ltd. in Europe.
- France’s Renault SA said in May it will develop much of its sub-€20,000 EV in China, part of a push to speed up time to market. It plans to start deliveries of the R5 E-Tech city car — which is assembled in France — in September, with a price tag of around €25,000.
- Mercedes-Benz Group AG and BMW last year unveiled prototypes for their next-generation EVs, but those models won’t be available until around mid-decade.
(…) The European Commission in March said it had found “sufficient evidence” that the imports of new EVs from China received subsidies including direct transfer of funds, tax breaks, or public provision of good or services below market prices. (…)
It’s still far cheaper to make a car in China than it is in Europe given the country’s low cost of land, energy and labor, and its vast economies of scale from being a first mover in mass-production of EVs. That’s reflected in the contrast in EV sticker prices between China and Europe. In Germany, SAIC’s MG4 costs €34,990. In China, it’s 109,800 yuan (€13,917). (…)
The companies that rely heavily on sales in China — mainly Volkswagen, Porsche, BMW and Mercedes — have much more to lose if trade relations continue to deteriorate. Earlier this month, Mercedes CEO Ola Källenius said Europe should resist the urge to take protectionist measures, repeating a mantra he’s been championing ever since the EU opened its probe. Slapping tariffs on Chinese EVs will delay the transition to a cleaner economy, with an escalating trade conflict poised to hurt “the whole world,” former Volkswagen CEO Herbert Diess — now Chairman for chipmaker Infineon Technologies AG — said during a BloombergNEF conference in Munich in June. The Germans and US rival Tesla produce cars in China that are then exported to Europe, adding to the potential impact on their businesses from an escalating trade spat with Beijing.
China has urged Brussels not to impose the EV duties, and signaled in May that it’s ready to unleash retaliatory tariffs as high as 25% on imports of cars made in the EU with large engines — which would affect Mercedes-Benz, Porsche and BMW the most. Beijing has also hinted at possible tit-for-tat levies on European aviation, agricultural and dairy goods and wine, and has begun an investigation into European exports of brandy. It could also restrict exports of goods that are vital for EV production, such as rare earths or battery metals like lithium. The EU mines only a small fraction of the lithium it consumes, and relies on China to process it. Another retaliatory tool China has used in the past is to restrict tourism to inflict economic punishment.
The EU is expected to privately notify the Chinese carmakers of its planned tariffs some time after the June 6-9 European elections. Brussels will then accept comments, before officially announcing the preliminary tariffs in July. Final levies are due to be set in November. (…)
- Turkey to Impose Additional 40% Tariff on All China Vehicles
CAPS, LARGE AND SMIDs
From Ed Yardeni:
- The S&P 500 absolute P/E (20.6) nears the high end of its P/E range, the latter rising along booming profits. Ed’s MegaCap-8 P/E is at 28.3. S&P 500’s ex-MegaCap-8 {/E is at 18.2, 4% above the 17.5x historical median.
- The S&P 400 MidCaps and S&P 600 SmallCaps are currently trading at forward P/Es of 15.0 and 14.2.
- The LargeCaps outperformed the SMidCaps mostly because the former’s forward earnings has rebounded to new record highs since the last earnings recession, while the latter two’s forward earnings have been mostly flatlining below their record highs in early 2022.
As a result, as Bespoke explains:
While weak breadth has become especially pronounced in recent days, the trend is not new. Look at the chart below which shows the performance of the S&P 500 market cap-weighted index versus its equal weight counterpart over the last two years. While the S&P 500 has rallied 30.3%, the equal weight index is up by just a little more than a third of that (11.3%).
Below we show the rolling two-year performance spread between the two indices over time. At the current level of 19 percentage points, the spread has reached its widest level in nearly 24 years (6/30/00) putting it in the 95th percentile relative to all other two-year periods since 1992. The last time the spread was this wide, it came just ahead of what ended up being a period of massive long-term underperformance for the cap-weighted index. That being said, the period during which the cap-weighted index had outperformed leading up to that lasted for years.
Yardeni’s price targets:
When we calculate our S&P 500 price targets for the end of each year, we project S&P 500 forward earnings per share for the end of each year and multiply it by a forward P/E range of 16 to 20. We are still forecasting the following forward earnings at the end of each year: 2024 ($270), 2025 ($300), and 2026 ($325). (FYI: “Forward” earnings and revenues are the time-weighted average of industry analysts’ consensus estimates for the current and following year.)
That gives us the following year-end target ranges for the S&P 500 stock price index: 2024 (4320-5400), 2025 (4800-6000), and 2026 (5200-6500). In our Roaring 2020s scenario, we are picking the tops of these three ranges as our point estimates: 2024 (5400), 2025 (6000), and 2026 (6500). By the end of the decade, we expect to see the S&P 500 at 8000, with forward earnings at $400 and the forward P/E at 20.
(…) the S&P 500 profit margin ticked up to 12.0% during Q1, while the forward profit margin rose to 13.3% during the May 30 week. Again, in our Roaring 2020s scenario, we expect the actual profit margin to rise from 13.2% this year to 13.7% in 2025, and 14.6% in 2026.
FYI, by comparison:
