Canada: Labor market surges
The economy created +66.8k jobs in January, far greater than expectations, despite headwinds of delayed investment from NAFTA negotiations, the drag of the B20 mortgage rules, and plummeting prices for Canadian oil. On a y/y basis, jobs are growing at a stiff +1.8%, the fastest in over a year. Of the ten provinces, only Saskatchewan and the oil-producing province of Alberta had job losses, but on a y/y basis, jobs are growing in every province. The labor force surged by +103.7k, the second highest of the entire recovery, driving the participation rate up +0.2% to 65.6%, and raising the unemployment rate to 5.8%, just above last month’s record low 5.6%. Wages remained steady at 2.0%, right at the Bank of Canada’s inflation target, although full time wages rose from +1.5% y/y to +1.8% y/y. Despite some recent softness in the overall economy, the strong labor market suggests that the BoC may raise rates at least once this year.
US: Something’s not right here, part 1.
December’s retail sales report was so dismal that it has some economists, including this one, thinking that something’s not right here. Overall sales plunged -1.2% m/m, the most since just after the recession ended in September of 2009, over 9 years ago; the y/y rate fell from +4.1% to +2.3%. Sales were down in virtually every category except for a +1.0% m/m gain in autos and a +0.3% m/m gain in building materials/garden equipment/supply stores. Stripping out volatile auto, building materials, and gasoline sales brings us to “core” retail sales which were even worse at -1.8% m/m, the worst in 19 years, driving the y/y rate from +4.6% to +2.0%. One further detail stretches credibility; nonstore sales (mostly e-tailing) in December, the middle of the holiday sales season, fell an unbelievable -3.9% m/m, the most in 10 years! The y/y rate declined from +11.1% (near recent averages) to just +3.7%. Amazon had said at one point that holiday sales weren’t going to be as great as previously expected, but their sales were in fact up +8.2% y/y in Q4-18. Ok, let’s try it one last way, and strip nonstore sales out of core sales. The results are just like the headline with a -1.2% decline m/m, and the y/y rate falling from +2.9% to +1.5%. Two possible contributors to the startling declines were that the stock market was falling sharply, and worries over a government shutdown were hanging heavy, although it didn’t start until December 22nd. Q4 GDP forecasts plunged on the news, with the Atlanta Fed’s GDP Now model dropping from +2.7% q/q annualized to +1.7%. Something’s not right here. A sharp revision seems likely.
Employment data needs some interpretation.
The labor market was red-hot according the January Employment report. This week’s JOLTS data (Job Openings and Labor Turnover Survey) was from December, and it was also red-hot, showing job openings rising a sharp +2.4% m/m to another record high level of 7.3 million jobs. Since there are 6.5 million unemployed people looking for work, it’s another indicator of a very strong labor market. But that was then. The Employment report tells us what happened a month ago, and the JOLTS report tells us what happened two months ago. And on top of that, employment is a lagging indicator of the economy as a whole, so the reports probably more accurately reflect the state of the economy several months ago. Weekly jobless claims however, are more timely, and they have been on the rise, suggesting a slight cooling in the labor market. Claims are volatile week – to –week so we normally look at a four week rolling average. On that basis, (the four week average of) claims bottomed out four weeks ago and have risen +7.7% since then. It’s true that government workers were responsible for some increase in claims, but even when we strip them out, we get similar results: claims bottomed out four weeks ago and are up an estimated +12.1% since then. So on the surface it looks like the very strong Employment and JOLTS reports may contradict weekly jobless claims, but it’s more a matter of timing. Weekly jobless claims might be a better indicator at the moment. I’m betting on a slower Employment report for February.
Industrail production provided yet more dreary news, falling a sharp -0.6% m/m, the first decline in eight months. The y/y rate fell to +3.8% from a recent high of +5.7% in September. Manufacturing fell a steep -0.9% m/m, driving the y/y rate to +2.9% from September’s high of +3.8%.
We avoided another government shutdown until at least until October. But since the President didn’t get all the funding he wanted for his border wall, he declared a national emergency and scraped up more than enough funds from other government sources to build the wall. National emergencies are not rare. Since the 1976 National Emergencies Act, presidents have declared 58 national emergencies (apparently not including for weather events), and 31 are still in effect. But legal challenges are already in the works for this one.
The Fed is becoming so dovish it’s starting to grow feathers. St. Louis Federal Reserve Bank President James Bullard last week said “We’re a little bit restrictive here…” and that the Fed “should guard against the downside more.” In January Bullard had even said that the Fed was “bordering on going too far and possibly tipping the economy into recession”. On Thursday Fed Governor Lael Brainard said "Downside risks have definitely increased relative to that modal outlook for continued solid growth". She also said the Fed would wait to see "what move, if any, later in the year" it would take, clearly suggesting that the Fed could hike, stay put, or even cut this year. She also said the retail sales report “caught my eye”. Finally, last week former Fed Chair Janet Yellen chimed in saying “it's certainly possible that the next move is a cut". Financial markets are currently pricing in less than a 2% chance of a hike this year, and an almost 11% chance of a cut.
Notes from the road. We visited a convention of about 300 professionals at the Ohio Bankers League this week. The lack of labor still seems to be the number one problem. But I was also told that business conditions “aren’t great”, and I had not heard that in several years.
Something’s not right here, part 2.
Something’s not right here when politicians think that corporations should be “defeated” and that they “hold our democracy hostage.” That’s what some said when Amazon decided to pull out of its plan to move into New York City. Amazon was going to bring in 25,000 high paying jobs, thereby creating thousands of other accompanying jobs, fostering economic prosperity, and providing billions in tax revenues over time. But apparently, a small group of activists thought Amazon was being too greedy by accepting the subsidies and incentives the City offered. We don’t like subsidies either. But in this case they probably would have paid for themselves many times over. Give a little now, get a lot later.
Amazon had proposed to move into the Queens neighborhood of Long Island City. Now I’ve spent some time in Long Island City. It has a spectacular view of Manhattan… and not much else. It’s not what you would call a vibrant area, in fact some have even called it blighted. And now it will stay that way because some politicians believe that businesses should be shooed away. Businesses create jobs, income, retirement security, tax revenue, and charity. Governments do not. Politicians might want to remember that they are paid by the tax revenue businesses and their employees provide. Ten years from now my bet is that the places which brought Amazon in will be gleaming, and Long Island City and its local politicians will not be.
In a comical footnote, when Amazon left a politician who had opposed them said that the company’s decision “…shows why they would have been a bad partner for New York…” That’s like someone had invited you to their party, punched you in the nose as you arrived, and then as you left they shouted “See? I told you they’d be a rotten party guest!”