America: jobs, profits and the stock market

THIS POST RESTORES A PREVIOUS POST THAT WENT DOWN FOR TECHNICAL REASONS

US stock market prices headed back towards all-time highs on Friday after the data on the increase in US jobs were released.  There was a sharp increase in net new jobs of 287,000 in June, much higher than expected.  Financial pundits reckoned that this showed the US economy was not heading into recession after all.  Instead full employment was approaching, wages were rising and things were looking better – contrary to the doom-mongers.

But a closer look at the jobs figures makes that conclusion somewhat suspect.  First, the previous month’s job figure, which showed only a rise of 38,000 in net jobs, was revised down to 11,000.  And taking the average of the last three months reveals that the monthly job growth was only 147,000.  Investment analyst, David Rosenberg, pointed out that job growth has been slowing down fast.  Back in June 2014, the three-month average growth rate in jobs was 2.4% a year.  In June 2015, that had slowed to 2.2% a year.  And now in June 2016, the rate of growth in jobs has dropped to just 1.2%.  The total unemployed (U6) rate, as it is called, is now 9.6% compared to 17% in the depth of the Great Recession and 6.8% at the peak of the last boom.  And now it has virtually stopped falling, some 30% above the last boom level.

U6

http://www.advisorperspectives.com/dshort/

Moreover, the job increases were not in areas of higher pay or higher productivity.  For instance, of the 19.6 million jobs in America’s good producing sector, in June there were only 9,000 new jobs, with none in construction, a fall in energy and mining and a tiny gain in manufacturing.  By contrast, there was a gain of 59,000 waiters, bartenders and bus boys in the leisure and hospitality category.

Those working in goods-producing jobs work on average 40 hours per week at $26.90 per hour. So, on an annualized basis, that’s a cash wage of $56,400.  By contrast, leisure and hospitality jobs are part-time, averaging just 26 hours per week at an average wage of $14.89 per hour. That amounts to an annualized cash wage of only $20,100. It’s 35% of a job compared to the goods-producing sector.  And this has been story of the entire ‘recovery’ period since the end of the Great Recession in 2009.

Indeed, in the last seven months, the number of goods-producing jobs reported has declined by 3,000.  What has been gaining has been the 35% jobs in the leisure and hospitality sector among others. That category is up by a whopping 200,000 since last November.  Likewise, the count in the retail sector, where jobs average 31.2 hours per week and $17.85 per hour, is also up by 200,000 since last November. Alas, at $29,000 per year in cash wages, these are ‘51% jobs’.  The US economy has lost 2.3 million goods-producing jobs since the year 2000 and replaced them with 2.6 million ‘35% jobs’ in hospitality and leisure.  So there are still 1.6 million fewer full-time, full-pay “breadwinner” jobs than when Bill Clinton left office in 2000.

Moreover, if tax returns are looked at, and often they are better guide to the state of the labour market and the health of capitalist sector, then it is a much more dismal picture.  Compared to a 5-6% average annual gain late last year, the tax collections trend has now fallen to just 3%. Strip out of that the 2.6% annualized rate of hourly wage and salary inflation reported for June and you get a tiny 0.5% growth in real labour inputs.

During the first nine months of FY 2016 (starting in October) individual income tax collections were $1.171 trillion. That was up just 0.3% from the $1.167 trillion collected in FY2015.  Likewise, corporate tax collections of $224 billion over the last nine months were down $32 billion or 12.5% from prior year.  And corporate tax collections in June dropped from $74.9 billion last year to $62.8 billion this year. That’s a 16.2% drop.  Even sales tax revenues are down by nearly 3% yoy.  So total Federal tax collections came in at $300.6 billion in June compared to $327.5 billion last year, and that’s an 8.2% year-over-year drop.

Yet the US stock market goes on booming, shrugging off all worries, including China, Brexit, collapsing energy and rising debt.  Driven by huge injections of central bank money, interest rates to borrow and speculate have never been lower.  Fictitious capital continues to expand with increasingly less relation to the state of profits generated in the productive sector of the economy.

When the S&P 500 stock index first hit 2130 back in May 2015, corporate earnings were $99.25 per share.  During the four quarters since then, reported earnings have slumped by 12.3% to $87 per share.  So the ratio of stock prices to earning has risen to 24 times, some 60% above the long-term average as corporate earnings fell 18% in the last year and a half.  Many investment houses have cut back their forecasts for future earnings growth among even the large US companies.

Bank of America Merrill Lynch (BAML) analysts have actually cut their S&P 500 earnings forecasts to reflect no growth on 2016.  JP Morgan notes that there is historical precedent for this: “Over the last ten years, the consensus growth estimate for the following year was typically revised down by ~5%… The downwards revision is expected to be even more pronounced for 2017 due to “unrealistic assumptions,” such as “7% sales growth and +50bp margin expansion.”

In a special report, JP Morgan economists warned that the US and global economy was heading for a fall.  The reason?  Falling profits and profitability!  JPM said: profits—alongside equity prices — have declined over the past four quarters, and global investment spending has moved in lock step with the disappointing pace of profit growth this cycle. There is a significant risk that a substantial drag on corporate spending remains in the pipeline.”

The report then referred to the global situation. “Perhaps the most telling sign of the global nature of the profit growth slump is the fact that the concentration of earnings growth around the world has reached its highest level in at least two decades, surpassing even the large concentrated hit to earnings during the global financial crisis.” In other words, what profits are being made are concentrated in just a few countries and a small number of companies.

JPM summed up the dilemma “The key question is whether the latest downshift in profit growth marks the beginning of a recession dynamic or simply reflects a temporary soft patch amplified by the commodity price plunge that has hit related earnings… Without a recovery in business confidence, it is hard to imagine a turn up in capital spending, and it is increasingly likely that the next leg down will be from a pullback in G-3 hiring.”

So unless profits pick up, investment will decline and, with it, employment, in the US and elsewhere, engendering a new global recession.  At the moment, profits are static globally, along with global investment.  The June jobs figures in America may be the last hurrah for this weak economic recovery.

Global profits growth

8 Responses to “America: jobs, profits and the stock market”

  1. sartesian Says:

    Look on the bright side, Michael. At least Boffy’s posts went down with it.

  2. billjefferies Says:

    Everything’s down, even when it’s up.

  3. Karl Martel Says:

    Reblogged this on Reconstruction communiste Comité Québec and commented:
    Bank of America Merrill Lynch (BAML) analysts have actually cut their S&P 500 earnings forecasts to reflect no growth on 2016. JP Morgan notes that there is historical precedent for this: “Over the last ten years, the consensus growth estimate for the following year was typically revised down by ~5%… The downwards revision is expected to be even more pronounced for 2017 due to “unrealistic assumptions,” such as “7% sales growth and +50bp margin expansion.”
    In a special report, JP Morgan economists warned that the US and global economy was heading for a fall. The reason? Falling profits and profitability! JPM said: “profits—alongside equity prices — have declined over the past four quarters, and global investment spending has moved in lock step with the disappointing pace of profit growth this cycle. There is a significant risk that a substantial drag on corporate spending remains in the pipeline.”
    The report then referred to the global situation. “Perhaps the most telling sign of the global nature of the profit growth slump is the fact that the concentration of earnings growth around the world has reached its highest level in at least two decades, surpassing even the large concentrated hit to earnings during the global financial crisis.” In other words, what profits are being made are concentrated in just a few countries and a small number of companies.
    JPM summed up the dilemma “The key question is whether the latest downshift in profit growth marks the beginning of a recession dynamic or simply reflects a temporary soft patch amplified by the commodity price plunge that has hit related earnings… Without a recovery in business confidence, it is hard to imagine a turn up in capital spending, and it is increasingly likely that the next leg down will be from a pullback in G-3 hiring.”
    So unless profits pick up, investment will decline and, with it, employment, in the US and elsewhere, engendering a new global recession. At the moment, profits are static globally, along with global investment. The June jobs figures in America may be the last hurrah for this weak economic recovery.

  4. ucanbpolitical Says:

    The reason the stock exchange is going up has everything to do with the trillions of dollars of unconsumed and un-invested capital looking for a home. GIven that shares still provide some form of income rather than bonds which don’t, they remain a destination for investors.

    • sartesian Says:

      You got that backwards, comrade. Shares MIGHT provide income, but in general, they are purchased for their “potential” for capital gains.

      Bonds are generally purchased for the income streams spun out as interest. However, with interest rates declining, and dramatically so {in direct contradiction to the world-famous Boffy’s predictions in January of this year), most of the move is to safety– to US Treasury instruments; Gilts; etc– with the simultaneous “resuscitation” of the Emerging Market” bond markets as interest rates decline and make the market a bit more liquid for issuers in EM countries.

      Major corporations have focused much of their free cash flows over the recent, and not so recent past (beginning in the late 1980s) into dividends and share buybacks to keep keep their share prices up, but in general, shares (in the US, other than utility companies) are not used to generate income streams.

      Current dividend yield on the S&P 500 is 2.04%– above 2000, but on a downward move since the 1980s when it stood above 6 percent.

  5. ucanbpolitical Says:

    Sartesian, everything has changed. A growing proportion of world debt is now yielding an interest rate below zero. US banks project that 10 year US bonds will yield below 1% soon and longer dated below 2%. Now while it is true that there is a direct but inverse relationship between interest and the capital cost of a bond, the same is not true for shares. Generally, as is implied in your reply, the yield and price of a share do not have an inverse relationship. Share prices do not go up as their yield falls, they tend to fall. The EPS of a share remains sensitive though far less so than before because of the glut of capital looking for a home. The US at present is a destination for international capital because it alone of all the major markets still gives positive returns. China too but its markets are not as open or as secure as the US.

    • sartesian Says:

      Equity markets in more places than just the US and China are providing positive returns– but the positives returns are in the appreciation of the shares; not in the income provided by the dividend stream.

      Everything has changed, sure thing. And everything is still the same. Capital is capital; shares are shares, providing “ownership” but absolutely NO claim on assets, while debt is secured by the underlying assets.

      While distressed debt is purchased to arbitrage the variation between perceived and actual potential for appreciation, bonds are used by investors, retail and institutional, for income purposes, for “cash streams.”

      Yes bond yields are dramatically reduced as a result of the flight to safety, and this presents a big problem to institutional and fund managers. This also triggers the “search for yield.”

      The “yield” on stocks, as measured by dividends, is immaterial to their valuation, unless and until the prospects for growth have dimmed. Hence, the “normal” configuration of “growth” stocks with low to no dividends in their “youth” and “young adult” stages– adopting dividend payouts only when growth has slowed, see for example the path of biotech, IT company valuations.

  6. ucanbpolitical Says:

    Sartesian. I disagree. Everything has changed and nothing has changed is an abstraction and a forced one at that. We have to deal with issues concretely. This period is unique. There has never been so much idle capital. Larry Fink talks of $55 trillion lying stranded on the shoreline of the markets. Under these conditions, with so much capital chasing so few shares and bonds, capital gains do provide the only “income”. But this is what is so peculiar and dangerous for capitalism tody because it is topsy turvy. Traditionally it is the future expected income stream that determines the capital “value”. The greater the stream the higher the capital “value”. You have made this point. Now investors buy bonds with negative returns in the hope of making a capital gain driving yields ever lower. This is not sustainable. However in a few areas income still determines prices. The shares that have risen the most over the last twelve months are dividend paying shares. But the average dividend is now falling faster than the decline in interest rates in the USA and it is troubling the markets because the last time this happened was in 1929 and 1959. Michael has shown the P/E ratio has risen to 24 which does not adjust for GAAP profits. Assuming that a cover of 100% is required for a dividend it means shares are yielding just 2% or approximately the same as long dated bonds. Unlike government bonds, shares are higher risk, and if profits do not improve significantly, we could be facing a 1929 rather than a 1959.

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