The dis­so­nance in jobs

Financial Mirror (Cyprus) - - FRONT PAGE - By Tan Kai Xian

This week has seen Gavekal se­nior part­ners reach a rare con­sen­sus of sorts, with Ana­tole Kal­tesky ac­knowl­edg­ing that May’s “pig ugly” US pay­rolls re­port upped the chances of Charles Gave’s US re­ces­sion sce­nario play­ing out. For me, the re­port offers a clas­sic mixed sig­nal: on the one hand the slow­down in US em­ploy­ment growth could stem from firms di­al­ing back hir­ing in an­tic­i­pa­tion of trou­ble ahead, or al­ter­na­tively it could be the re­sult of a tight labour mar­ket at the end of a long ex­pan­sion. As such, we may have reached a point of dis­so­nance in the busi­ness cy­cle when a bet­ter in­di­ca­tor than the head­line pay­roll num­ber is needed.

To ex­plain why, it may be use­ful to break the re­port down us­ing the sim­pli­fied dis­tinc­tion of firms of­fer­ing goods and ser­vices to con­sumers, and firms serv­ing busi­nesses. Com­pa­nies sell­ing to US con­sumers should have no prob­lem mak­ing their pay­rolls as spend­ing re­mains ro­bust—US real per­sonal con­sump­tion growth was 3% YoY in April, which is not sur­pris­ing as house­holds have healthy bal­ance sheets and seem happy to bor­row. As such, non-farm con­sumer ser­vices pay­roll growth re­mains strong at 1.44 mln YoY, just be­low its 20-year high of 1.5 mln. Pay­roll growth for con­sumer goods’ mak­ers is also ro­bust by his­tor­i­cal stan­dards. Go­ing for­ward, any slow­down in net hir­ing among con­sumer-fo­cused firms will likely stem from in­suf­fi­cient sup­ply of labour.

On the other hand, the el­e­vated level of the US dol­lar means that busi­ness goods’ pro­duc­ers have sharply slowed hir­ing to the point that on a YoY ba­sis, this sec­tor is close to con­trac­tion ter­ri­tory. This sit­u­a­tion re­flects US pro­duc­ers’ loss of com­pet­i­tive­ness and a broad-based build-up of in­ven­tory. As their prof­itabil­ity shrinks, US pro­duc­ers have no choice but to cut cap­i­tal spend­ing. In­deed, real non­res­i­den­tial fixed in­vest­ment con­tracted YoY for the first time since the 2008 cri­sis at -0.5% in 1Q16. Any firm which re­lies on such US cap­i­tal spend­ing will likely have shrunk its de­mand for la­bor and this trend is likely to per­sist a good while longer. In ad­di­tion, the com­mod­ity price col­lapse has pushed many raw ma­te­rial pro­duc­ers to the verge of bank­ruptcy, as re­flected in shrunken min­ing and log­ging pay­rolls. The blowback from the com­mod­ity un­wind has also hit trans­port ser­vices as de­mand for coal and other en­ergy ship­ments has col­lapsed.

A good ques­tion is thus whether the di­verg­ing out­look be­tween the “con­sumer” and “busi­ness” fac­ing sec­tors of the econ­omy ren­ders the head­line non-farm pay­roll data use­less as an in­di­ca­tor of US eco­nomic health—at least at this point in the cy­cle. After all, it can per­fectly log­i­cally be ar­gued that the read­ing is con­sis­tent with a late-stage busi­ness cy­cle ex­pan­sion, or the start of an eco­nomic col­lapse. At this point in the cy­cle, when the em­ploy­ment mar­ket is in­evitably sub­ject to dis­so­nance, it may make more sense to mon­i­tor job open­ings rather than hir­ing. The logic is that in a bust sce­nario, job open­ings would in­evitably fall, while in a tight la­bor mar­ket sit­u­a­tion, job open­ings should re­main solid. For now, the NFIB job open­ing in­dex shows the US cor­po­rate sec­tor de­mand­ing more work­ers, which is con­sis­tent with a “tight labour mar­ket” the­sis es­pe­cially as wage growth re­mains de­cently strong. In this view of things, it is not sur­pris­ing that Janet Yellen of­fered a fairly up­beat view on US eco­nomic prospects on Mon­day, and with them the chance for fu­ture rate hikes.

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