Note: I am travelling (Pacific time zone) until August 10. Posting will be irregular and possibly limited by time and equipment constraints.
US Labor Costs Rise Less Than Forecast as Inflation Eases Employment cost index increased 0.9% in second quarter
The employment cost index, which measures wages and benefits, increased 0.9% in the April-to-June period, after rising by the most in a year at the start of 2024, according to Bureau of Labor Statistics figures out Wednesday. The median estimate in a Bloomberg survey of economists called for a 1% rise. (…)
The second-quarter slowdown in employment cost growth was broad across private industries and included declines in construction, wholesale trade and information, according to Wednesday’s report. Compared with a year earlier, the ECI climbed 4.1%, the smallest annual advance since 2021.
Though there are a number of other earnings metrics published more frequently — including average hourly earnings figures from the monthly jobs report — economists tend to favor the ECI because it’s not distorted by shifts in the composition of employment among occupations or industries. It’s also the Fed’s preferred wage measure.
Wages and salaries for civilian workers increased 0.9%, the smallest advance in three years. They were up 4.2% from a year ago, also the least since 2021.
Adjusted for inflation, private-industry compensation grew 0.9%, while wages increased 1.1% — both accelerations from the start of the year. The strength of the jobs market, including positive real earnings growth, has been key to sustaining household demand. (…)
Wages for service workers in the private sector rose 1% from the prior quarter, unadjusted for inflation. Since compensation is a major cost for employers in this sector, Fed officials monitor it closely through a subset of inflation known as core services excluding housing.
Worker pay in goods-producing industries climbed 0.2%, the smallest advance since 2009. That included construction, where wages declined by the most on record.
(…) With the ECI the Fed’s preferred barometer of labor costs growth, today’s data mark an important step toward the FOMC gaining “greater confidence” that inflation is cooling sufficiently to begin reducing the fed funds rate.
While still noticeably above last cycle’s peak of 2.9%, employment cost growth slowed to 4.1% year-over-year in Q2, the smallest gain in two and a half years. Moreover, having increased at an annualized rate of 3.7% in the three months ending in June, the second quarter’s figures show employment cost growth closely approaching a pace consistent with the FOMC’s 2% inflation objective once accounting for productivity growth (productivity gains allow businesses to raise compensation faster than prices). (…)
But importantly, the Employment Cost Index is considered the gold standard among Fed officials as it controls for compositional shifts in the economy’s jobs and is a more encompassing measure than average hourly earnings. The ECI accounts for the cost of employer provided benefits—which are just over 30% of total compensation costs—in addition to wage & salaries. It also includes labor cost growth for public sector workers in addition to private sector workers. As a result, the ECI’s moderation in Q2 marks an important step for the FOMC obtaining “greater confidence” that inflation is subsiding back toward 2%. (…)
Private sector compensation cost growth advanced 0.9% over the quarter after a 1.1% rise in Q1, with wages & salaries and benefit cost growth moderating. The slowdown came despite another hefty increase to private sector union workers (+1.6%) to help catch up to the compensation gains with non-union workers since the start of 2020. Public sector employment costs also eased over the quarter but are still running ahead of private industry gains over the past year after having initially lagged this cycle. (…)
As demonstrated in yesterday’s JOLTS report, employee retention has greatly improved, while waning demand for workers and growing pool of unemployed workers are lessening the extent to which employers need to raise compensation to retain existing or attract new workers. (…)
Ed Yardeni:
(…) [yesterday’s] employment indicators suggest that the labor market is in good shape. To some economists, it seems to be weakening. To us, it seems to have normalized. In July’s Consumer Confidence Index survey, the percentage of respondents agreeing that “jobs are plentiful” did fall to 34.1% from 42.8% in February, while the percentage saying “jobs are hard to get” edged up to 16.0% (chart). That means that 49.9% believe that jobs are available, which is slightly above the historical norm of 48.1%.
The jobs plentiful series closely tracks the JOLTS series on job openings and quits, both of which came out today but through June. Again, some economists look at these series and see weakening, while we see normalizing (chart). Take your pick.
China Home Sales Slump Drags On Despite Latest Rescue Effort New-home sales value slid 19.7% in July, faster than in June
The value of new-home sales from the 100 biggest real estate companies slumped 19.7% from a year earlier to 279.07 billion yuan ($38.6 billion), faster than the 17% decline in June, according to preliminary data from China Real Estate Information Corp. Transactions dropped 36.4% from June, after showing a notable increase in April and May. (…)
Bloomberg Economics estimates that the central bank’s $42 billion relending program can only help local governments purchase 0.8% of China’s 60 billion unsold homes.
S&P Global Ratings expects residential sales to drop 15% this year, more than the 5% decline it projected earlier. Fitch Ratings cut its annual sales estimate to a decrease of 15%-20%, worse than an earlier estimate of a 5%-10% drop. (…)
China PMIs Signal Continued Softness in Manufacturing, Slowdown in Services The manufacturing purchasing managers index dropped slightly to 49.4 in July, from 49.5 in June
Declines were seen in some key subindexes. The production subindex fell to 50.1 in July from 50.6 in June, while that for total new orders dropped to 49.3, compared with June’s 49.5. New export orders improved somewhat, rising to 48.5 in July from 48.3 in June.
China’s nonmanufacturing PMI, which covers both service and construction activity, also fell last month but remained in growth territory. The headline reading declined to 50.2 in July from 50.5 in June, the statistics bureau said.
The subindex that tracks service activity fell to 50.0 in July from 50.2 in June, while the construction subindex fell to 51.2 from 52.3.
Service activity in retail, capital market services and the property market all contracted in July, the data showed, reflecting subdued domestic consumption amid a protracted real-estate downturn. (…)
Canada Economy on Track to Grow 2.2% in Second Quarter
Gross domestic product is on track to grow at an annualized pace of 2.2%, according to Statistics Canada’s estimate Wednesday. That’s stronger than the Bank of Canada’s and economists’ forecasts of 1.5%, and is an acceleration from 1.7% between January and March.
The data point to Canada’s economy expanding 1.3% in the first half of the year, the fastest six-month period of growth since August 2022. Still, preliminary data suggest June output grew 0.1%, suggesting weakening momentum following a 0.2% expansion in May and 0.3% in April. (…)
Taken together with Canada’s rapid population growth due to strong immigration, Wednesday’s report shows an economy that’s still in excess supply and growing below its potential, which will continue to help cool price pressures as the Bank of Canada further reduces the restrictiveness of monetary policy.
While quarterly growth has picked up, data showed weakness in household spending as high interest rates weigh on consumers.
Retail trade was the largest detractor to growth in May, contracting 0.9% and more than offsetting the increase in the previous month. Wholesale trade also fell.
Manufacturing led the growth in May, with over half of the increase stemming from petroleum and coal products. That subsector rose 7.3%, its largest increase since June 2021.
The crude oil and other pipeline transportation industry rose 1.5%, reflecting in part the opening of the expanded Trans Mountain pipeline carrying Alberta crude to the British Columbia coast for shipment. (…)
In June, factories along with wholesalers saw declines in output, according to Statistics Canada’s early estimate. (…)
Three Big Differences Between the AI and Dot-Com Bubbles It’s looking a bit like summer 2000.
(…) Deluard draws a parallel between the present AI bubble (might as well call it what it is) and the bursting of the late 1990s dot-com bubble. He notes that the same thing happened in the summer of 2000. The US economy slowed, and money rotated from the similarly expensive tech leaders that were leading the market back then, and into the value laggards.
As some of you will recall, the 2000s cycle saw a shallow but eye-catching recession to accompany the bear market, plus big interest-rate cuts from the Federal Reserve.
However, Deluard argues, there are three major differences between now and then — ones that mean we may not see the recession, the cuts or even the same scale of bear market.
His first point is that the recession and rate cuts were largely driven by the September 11th, 2001, terrorist attacks on New York, “which we all hope were a one-time catastrophe”, as Deluard puts it. Without the terrorist attacks, there would probably have been a soft landing, and the rate cuts from the Federal Reserve would never have been as deep.
His second point is that fiscal policy is far more stimulative today than during the tech bubble. The idea of a developed economy government ever running a surplus seems unthinkable today, but that’s exactly what the US was doing back then. Today’s government spending forms another cushion against the potential impact of any bursting AI bubble.
His final point is probably the most intriguing, and one that perhaps points to deeper structural issues with our markets. This is about the rise of passive investing and how that might stifle the scale of any correction.
Passive investing has lots of advantages and I am by no means opposed to it. It’s cheap, it’s low maintenance, and it’s a very accessible way for “normal” people to invest their money without having to get deep into the weeds of financial admin. If anything has made investment more accessible — “democratised” it, if you must — it’s the rise of passive.
But you can have too much of a good thing. To put it simply, passive investing means a big dollop of money gets directed into stocks every month, without any discernment beyond “what’s biggest?” That’s a world in which active money — which is making judgements about value — has less power.
The exact levels and precise mechanisms are heavily disputed here, mainly because these days everyone has skin in the game on one side or the other. But it strikes me as common sense that if the majority of capital flows are being allocated on a passive, market-cap-weighted basis, that’s going to favour momentum investing — the big get bigger.
The risk, argues Deluard, is not so much that the great rotation stops altogether, but that “shorting” the momentum-driven side — i.e. betting that the Big Tech stocks will continue to fall — is just very dangerous.
The good news is that we’re all retail investors here (or at least hanging out in that camp for the purposes of this newsletter) and so actively shorting stuff or “pairs trading” indices is not the sort of thing most of us do.
From that point of view, investing in the boring value stocks that haven’t gone up is a reasonable way to bet on a rotation continuing, and one that’s nowhere near as likely to leave you nursing painful actual losses (as opposed to relative underperformance) as a short bet might. (…)
FYI:
Source: