Volume 64, Number 1
The global monetary authorities used the return from the July 4th US Holiday to unfurl coordinated easing moves, with the ECB and Peoples’ Bank of China lowering interest rates and the Bank of England expanding it quantitative easing. These moves piggy back on the Federal Reserve’s extension of Operation Twist and the moves last weekend by the EU. Unfortunately, the markets were largely non-plussed by the latest round of minimalism. Even before the lackluster employment report on Friday, Spanish bonds had once again breached the 7% mark. After another muddle-along jobs report was confirmed in the US, the Euro slumped below 1.23 and seems headed for a major test at 1.20 – and lower. US ten year notes closed at 1.54%, again defying the optimistic view that they can’t go lower from this level. With the best of the policy moves now in the rear view mirror, it is increasingly apparent that the US is joining the rest of the world and sliding toward recession.
Second quarter growth is already widely predicted to be short of the tepid 1.9% growth rate in the first quarter. The ISM for manufacturing fell to 49.7, its first trip below the breakeven mark since the recovery officially began in July 2009. New orders were even weaker at 47.8, dragged down by weak exports. This mirrors the slide that has already taken all of Europe and China below 50 on their various purchasing manager indexes. In the US, ISM manufacturing new orders are following a distinct pattern of lower highs and lower lows as it swings from euphoria in the first half of recent years to a slump in the second half. The rest of the world is leaning on an already softening domestic economy, which is faced with a fatal fiscal cliff in less than six months.
Only the election can save us – and the latest polls still show that the race is neck and neck. This was the last employment report before the Fed meets again and it basically provides no new information. The conventions will be upon us immediately after the Olympics, so political polls will swing wildly as the faithful are rallied. No business can see through the policy murk until the election is decided – and that event is now close enough that wait and hold is the order of the day. Unfortunately, at 1.75% real growth and low inflation, not all businesses or underwater consumers will be able to hold until relieved, and especially if the cavalry is not coming until later in 2013 due to political delay. We expect the US to slip into recession in early 2013 – but would not be surprised if the dip started even before the election.
Same Old, Same Old
Payroll employment rose a disappointing 80,000 in June and revisions were basically a wash lifting the total of the previous two months just 1,000. The soft readings of the past three months offset the strength earlier in the year, leaving the six month average at 150,000. This is virtually identical to the 153,500 average for all of 2011 – with a 161,000 a month average in the first half and 146,000 in the second half. For all of 2011, real GDP averaged a tepid 1.6% fourth quarter to fourth quarter growth rate. The first half of 2012, seems destined to mirror that result with growth around 1.7%-1.8%. Unfortunately, as we saw last year, 150,000 jobs and 1.6% real GDP yields virtually no productivity growth, and a sharp slowdown in profits growth. This year’s first quarter saw productivity fall -0.9% and despite improvement in the second quarter, the first half average will also be near zero. With slowing profits growth at home and already declining profits abroad, firms are unlikely to be in an upbeat hiring and capital spending kind of mood.
Indeed, when we go inside the numbers, it is shocking to see just how few sectors are doing well. Total employment has risen just 1.3% from a year ago, due to the decline in the government sector. Private sector hiring is up 1.8%, but there are few upside outliers as most sectors performance is quite close to the average. The small natural resource & mining sector is up the most (+7.4%) led by a stunning 12.9% gain in oil and gas extraction. Unfortunately, that is just 57,000 new jobs over the year in the entire natural resources sector. The next strongest sector is professional business services, up 3.4%, but mostly due to a 10.7% surge in temporary services. Excluding temps, the sector is up just 2.3% — still the second strongest! Third, at 2.2%, is private education and health. Here, the 2.7% gain in private education is an inverse correlation with the sharp decline in public education – and the sector is particularly driven by tuition hikes in public higher education. We remain very concerned that health care – an almost purely domestic industry, which accounts for one out of every seven jobs – is up just 2.1%. The fastest growth is 6.4% in outpatient care, followed by 4.6% in home health care, as hospitals try to slash costs. The assault on health care is also reflected in the -7.4% decline from a year ago in pharmacy same store sales just reported. In earlier reports, we have noted that health care retail sales and Medicare and Medicaid transfer payments are all showing near zero growth. With both government and health care on the ropes, over 1/3 of the US economy is effectively already in recession. Finally, manufacturing employment is up 2.0%, driven by the post-Tsunami 8.6% gain in the auto sector and strength in related areas of metals and rubber. With only mining likely to continue to see outsized gains, it is tough to see how that little engine will pull the whole US economic train.