While the markets loved last week's coordinated central bank action to calm investors panicky over Europe, I was more impressed with the strength of the U.S. economy.
Strong retail sales, an improving employment report, falling petrol prices, rising auto sales, and an improvement in the U.S. purchasing managers report all paint a picture of a stronger U.S. economy. Even as it appears that Europe may drift into a quarter or two of contraction (according to the Organization of Economic Corporation and Development), the U.S. appears to be poised to grow by 2.5%-3% in the fourth quarter and at least 2% in the first quarter of 2012.
While we all to need to be vigilant about the possibility of some type of European financial contagion, I wonder whether we just might have it backwards. Instead of Europe dragging the U.S. into a recession, could the U.S. drag the rest of the world into better times? With goods (at least half manufactured overseas, according to an ABC news report) flying off U.S. shelves, can U.S. consumers pull foreign manufacturers out of their soft patch? While not the most likely case, it is worth considering that the U.S could recapture its role as an engine of worldwide growth.
November's government employment report supported my thesis that employment is continuing its slow but steady progress. As regular readers know, I prefer to look at employment on a three-month average, year-over-year basis to eliminate antiquated seasonality factors and month-specific issues such as weather and strikes.
Employment Still Has Room for Improvement
Though economists date the end of the recession as June 2009, private employment continued to decline another eight months until February 2010. From peak to trough we lost 8.9 million private sector jobs according to the official establishment survey. Since the February 2010 bottom, we have recovered only 3.0 million of those lost private sector jobs. Construction employment still remains down over that same period. Overall, the 3 million jobs that were created translate into 140,000-150,000 jobs per month.
The raw numbers showed an increase of 140,000 private sector jobs added in November, close to the average noted above. That was an improvement from the 117,000 jobs added in October but not as robust as the 220,000 jobs added in September (aided by a return of 50,000 Verizon strikers).
Revisions in the employment sector continued to run rampant. September total employment (including both private sector and government workers) was revised up to 210,000 workers from 158,000, while the October figure was moved up to 100,000 from 80,000. This means that both personal income and consumption data will likely be revised upward (the first run of the personal income report is constructed from employment data multiplied by average wages and is later revised based on actual payroll data) explaining at least part of the mystery of why retail sales have "apparently" been trouncing income growth since late this past summer.
Unemployment Plunges, Half Due to People Leaving the Workforce, Half Finding Jobs
The unemployment rate made a stunning drop to 8.6% from 9.0% beating just about every forecaster's estimate. But half that decline was due to people leaving the workforce, half from people actually finding work. Without those people leaving the workforce, the unemployment rate would still have fallen--but to 8.8% from 9.0%.
I honestly don't know what to make of the decline in the number of people seeking employment. It's unusual at this stage of a recovery to see so many people continuing to drop out. The usual explanation is discouraged workers giving up even looking. But the lack of participation could also be attributed to people going back to school or training to learn a new profession. Certainly a rise in long-term disability claims and early social security benefits are causing a decline in the ranks of the unemployed. And as more workers hit the end-of-the-line 99 weeks of benefits, they may decide that they really didn't want to/need to work after all (now that they can't collect a monthly check).
Household Employment Survey on Fire
On the employment side, employment growth per household survey (which is used for the calculation of the unemployment rate but not for the single-point job growth figure) is on a tear.
Employment growth has averaged more than 300,000 over the past four months in the household survey versus 140,000 according the more widely cited establishment survey. The household survey badly lagged the establishment survey earlier in the year. As the table below shows, over time the two series tend to converge. I surmise that the incredible strength in the household survey might leak into the establishment report in the months ahead. This potential leakage is a real possibility since the household survey does a better job of capturing new small businesses and self-employment.
A Lower Unemployment Rate Is Nice, but Job Growth Is the Key Metric
While the lower unemployment rate makes for nice headlines, and maybe makes consumers feel a little better, it is really the number of new jobs that will move the economy forward. As I indicated, the improvement on the jobs front was good, though not nearly as good as this month's plunge in unemployment. And while the job growth rate seems well-entrenched, a bounce back in the unemployment rate looks like it might be in the cards, given the volatility in the labor force participation rate.
Retail Hiring Drove the Employment Report
By category, there wasn't really much new in the employment report with the exception of retail, which jumped by 50,000 jobs in just one month. I'd say longer store hours this holiday season are responsible for some of the increase; unfortunately, that is likely to reverse itself at the end of the holiday season. The jump in retail employment, a relatively lower-wage and lower-hours category, definitely put a lid on both the hours worked and hourly wage statistics; they were basically unchanged. Two higher-paying categories, construction and manufacturing, didn't fare as well; the construction industry showed yet another decline, and manufacturing hiring was basically on hold in November.
Retail Sales Held Their Own Despite Tough Comparison
November data from the International Council of Shopping Centers continue to paint a relatively optimistic picture. While this next table shows a slowing trend, further analysis suggests that retail is doing just fine, thanks. November of last year was one of the strongest months of 2010, making it a very tough comparison. Also, the tailwind from higher fuel prices for retailers that sell gas (think wholesale clubs like Costco) is finally beginning to fade. Some trends, including holiday shoppers that have yet to set foot in a store, strong weekly data, collapsing gasoline prices, and an easier comparison all suggest December's sales might look a little better.
The ICSC indicated that 28% of holiday shoppers had yet to set foot in a store compared with 26% last year, potentially indicating that sales won't peter out in December the way they did in 2010. Furthermore, sales in November were strongest at the end of the month, unlike last year. Weekly retail sales jumped 4% year over year for the latest week ending Nov. 26, though warm weather and big discounts certainly helped things along. For now, petrol prices are behaving themselves too, leaving more money to spend elsewhere. The 4% growth rate was the best reported since July, at least on a weekly basis.
U.S. Purchasing Managers Survey Outshines the Rest of the World
Based on recent strong industrial production numbers and non-transportation-related orders, I concluded that the manufacturing economy was on the mend. This month's purchasing managers report did nothing to deter my optimism. Eric Landry, director of our industrials team, summed up the report as follows:
ISM's strong showing indicates manufacturing activity ending the year in impressive fashion. The November purchasing managers survey, at 52.7, was an impressive 1.9 percent higher than October and the highest reading since June's 55.3. At a time when the rest of the world is registering sub-50 PMI readings, the ability of U.S. manufacturing to post an increase is impressive to say the least. What's more, the internals of the report are just as encouraging. New orders increased 4.3 points and now sit at their highest level since April, while inventories remain at levels of less than 50, indicating there is likely no overstock problem. The forward-looking new orders/inventories ratio sits at 1.17, its highest level since March. Elsewhere, production rose by 6.5 points to 56.6 and prices by 4 to 45. The latter, though up from October, remains well below the highs set in early 2011, meaning purchasing managers see materials inflation as much less of a threat now than several months ago. Even exports were up 2 points, which is odd considering the sorry state of most of the rest of the developed world and China's manufacturing slowdown.
Unfortunately Purchasing Manager Data from the Rest of the World Wasn't Nearly as Bright
Manufacturing data from the rest of the world looked pretty bleak. Without getting bogged down in the numbers, China's index hit a 32-month low, while both Europe and the U.K. hit a 28-month low. Falling export demand, a bigger factor for China and Europe, might explain why the U.S. fared better than the rest of the world.
The Auto Industry Is at Least Partially Responsible for Strong PMI Data
I have long held the suspicion that the auto industry holds tremendous sway over the purchasing managers survey, and this year certainly supports my thesis. Supply chain disruptions this summer caused the PMI to plummet, and now that the auto industry has rebounded, so has the U.S. PMI. November was another excellent month for the auto industry as our auto industry analyst David Whiston explains:
Auto OEMs enjoy strong November SAAR. Automakers reported November new U.S. light-vehicle sales on Thursday that posted the best seasonally adjusted annualized selling rate (SAAR) this year, the best SAAR since Cash for Clunkers’ 13.69 million in August 2009, and the biggest year-over-year volume increase since April. It was also the best November since 2007. The SAAR came in at 13.63 million vehicles per Automotive News, which beat the previous 2011 high of 13.29 million in February. In absolute terms, November sales totaled 994,786, up 13.9% from November 2010. November was the third consecutive month of a SAAR of over 13 million units, which suggests to us pent-up demand is finally starting to be absorbed by consumers. We have long argued that having several years of sales at or below replacement levels is not sustainable and we think that, barring another major supply shock, we will see our thesis begin to play out next year.
Every major OEM except Honda posted a year-over-year sales increase. Honda continues to trail Toyota (TM) in inventory replacement from the earthquake and Thai flooding. Chrysler had its best increase since exiting bankruptcy with a 45% year-over-year increase boosted by contribution from all of its brands. According to TrueCar.com, average industry incentive levels declined 0.5% from November 2010 to $2,534, but this level was a 2.5% increase from October 2011. We expect higher incentive activity in December relative to November, but we also expect solid ASPs as there is no need for any automaker to drastically overproduce anymore.
Housing News Mixed, Again
After several months of mostly good news, the most recent months of data were more ambivalent. Following five months of improvement in the Case-Shiller index of home prices, the index declined 0.6% from September. Taking a longer view of the data, year-over-year national prices for the third quarter were down 3.6%. Compared with the 30% or so decline during the recession, another small decline is no reason to panic. On the positive side, pending home sales jumped over 10.4% from September and 9.7% from a year ago. Usually that would be enough to get me very excited about existing home sales and the economy. Lately, however, many homes that went under contract (pending sales) have not closed (as measured by existing home sales) because of mortgage or appraisal issues. Maybe with the new lower prices, more of these deals will close, but I'm not holding my breath.
In neutral territory was the new home sales report, which remained mired in the mud at 307,000 units. Existing home inventories remained at a record low level of 162,000 which seem de minimis compared to over 70 million existing housing units. The good news is that conditions in the new home market can't get much worse from here.
Thin Week of Data Ahead
This week I don't expect much market-moving economic news other than the trade report, which is expected to remain virtually unchanged at $43 billion for October compared with September. On Monday we will also learn whether the services side of the economy continues to improve with the release of the ISM's report on nonmanufacturing industries. The consensus looks a tad optimistic to me as investors expect an increase to 53.9 from 52.9. Services have been a real laggard this recovery, and some good news here could provide a real boost to GDP.
Following Up: Boeing Labour Issue and U.S. Energy Independence
Boeing has been an engine of both export and manufacturing growth for some time. With 737 production ramping up and new versions on the drawing board, along with the first shipments of the 787 Dreamliner and a great looking order book, Boeing is poised to be a big help to the U.S. economy.
As I reported in my last quarterly piece, that position was threatened by a labour dispute concerning moving some Dreamliner production to a nonunion plant in South Carolina. It now appears the issue has been resolved, as noted in this Wall Street Journal article.
In my column two weeks ago, I was pretty fired up about the potential resurgence of the U.S. oil industry. Since then, the issue has gained more visibility, with the WSJ reporting that the U.S. has become a net exporter of petroleum products (products, not crude oil) for the first time in 62 years. And sister publication MarketWatch chipped in with a long article on our booming natural gas industry.
