It’s Friday my fellas! This morning we got a data release from the US Bureau of Labor Statistics, as well as the final Markit and ISM reports. The reports were in line with the consensus views. The reports show that the expansion of both service and manufacturing based businesses is slowing. Coming out of the lockdowns, the economy was on fire. Now that the dust is starting to settle, demand has slowed. This adds to the “wall of worry”. Something to keep in mind is that these businesses are still expanding, just not at the breakneck pace that we saw earlier in the year. The challenges that these businesses are facing was summed up nicely by Anthony Nieves, the Chairman of the Institute for Supply Management (ISM):
“There was a pullback in the rate of expansion in the month of August; however, growth remains strong for the services sector. The tight labor market, materials shortages, inflation and logistics issues continue to cause capacity constraints.”
The thing that really stood out to me in the ISM’s report was the contraction in inventories. It was 49.2 in July but has fallen to 46.9 in August. I am sure that this is due to the “logistics issues” and could really put a damper on consumer spending. Businesses are struggling with product delivery issues due to the slowdowns at the ports and train systems. It will be incredibly difficult for consumers to spend the money they have in their wallets when there is nothing on the shelf to buy. This could cause a bidding war for the items that do make it to the shelf. It might be best to start your Christmas shopping early this year and when I say early, I mean now.
Speaking of money in wallets…
the employment situation data was released and it showed another increase in average hourly earnings.
On a year-over-year basis, earnings have increased 4.3%. This is well above the pre-pandemic trend. Looking at it on a monthly basis, it increased 0.6%. This would be 7.2% on an annualized basis! Employers are desperate for workers and are willing to shell out higher wages to attract them. On a dollar-per-hour basis, hourly employers are now averaging $30.73/hr! We are really blowing the previous trend line in wage rates out of the water.
To me, this is the most important data that came out of the employment situation report. This will put more money in the hands of consumers, who will spend it into the economy. As a reminder, the pandemic relief ends this week. Most of those that were on the unemployment dole, will be out in force looking for work. If employers continue to offer high wage rates, this could be like adding water to a grease fire!
On the other side of the report, we got the unemployment rate (5.2%) and the employment level (147,190,000). While the unemployment rate met consensus expectations, the employment level was quite disappointing to the markets. The market expected an increase of 665k and only got an increase of 243k. This divergence between the unemployment rate meeting expectations but the employment level missing badly tells me that there are many that are leaving the workforce.
My expectation was that those 55+ would be retiring. I always hear how the boomers leaving the workforce will have a big impact on the economy. The story goes that they have accumulated a lot of wealth and when they go into retirement mode, they won’t spend it like they did when they were employed. While this expectation did prove true, when I took a deeper dive into the numbers something else jumped out at me.
While on a year-over-year basis boomers are retiring, those that are 25-54 years old have been slow to return to the job market. The big caveat here is that the 25-54 age bracket has a much larger population than the others. A small move in that age group could really move the needle when it comes to the employment situation.
The disappointment in the employment data caused gold to pop and the S&P500 to drop. Since the open, the S&P has steadily climbed the “wall of worry” while gold has continued to hold onto its gains. As a reminder, the stock market will be closed on Monday for Labor Day. Enjoy your 3-day weekend and I’ll see you back here on Tuesday!