Monday, July 11, 2016

America: jobs, profits and the stock market

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.

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 called Profit stall threatens global expansion, 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

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