The Silver Lining in the Doomsday Narrative Boris Schlossberg | Wednesday, June 8, 2016 at 4:30 pm
Last week’s nonfarm payroll report wasn’t even an hour old, but the financial pundits were already declaring a U.S. recession. The numbers were weak, but they didn’t reflect a disaster. The economy managed to eke out its 100th-straight month of positive job gains, albeit the 38,000 print was far worse than the 175,000 gain expected by market participants.
Still there were many extenuating circumstances surrounding the May data. First and foremost was the Verizon strike, which shaved nearly 40,000 workers off the payroll. And seasonality also played a part.
Last, but perhaps most important, the NFP has a margin of error of 100,000 either way, so the data could have been grossly underestimated. Contrast the NFP report with the ADP number that was released just a day before. Mind you that, unlike the Labor Department, the ADP actually has real payroll data rather than mere surveys and it posted a serviceable number of 173,000.
There was a silver lining to the recent week jobs report.
Perhaps the most important counterpoint to the doomsday narrative comes from the analysts at Convergex, who wrote this week:
“The lousy jobs number on Friday is a good reason to review one of our alternative measures of the U.S. labor market: individual tax and withholding data from the U.S. Treasury.
“May 2016 receipts for wage-earning individuals were fine, up 9.9% after two months of essentially flat growth. Gig economy workers, who submit their taxes on a non-withheld basis, are doing even better with payments there up 31%. Year-to-date receipts for each cohort are similarly strong: up 5.0% for wage earners and 9.7% for gig workers, for a combined gain of 5.9%.
“And while the Federal Reserve may not cite this data directly in policymaking, it does filter through in terms of wage gains (up 2.5% in May) and therefore inflation pressures. Bottom line: The weak May jobs report makes the Fed’s job of communicating policy even more difficult. Inflation pressures are quietly mounting even as job growth stalls.”
“Eventually, all that income will begin to show up in consumer spending figures.”
Indeed, if there was a silver lining in last week’s report it’s that wages continue to grow at respectable pace. Eventually, all that income will begin to show up in consumer spending figures.
Consumer stocks have been beaten up badly over the past year, with the XRT ETF bottoming out below $40/share in March. The ETF has since rebounded to $43/share. And if you presume that U.S. incomes will continue to climb for the rest of the year, the stock could trade back toward $50 as Christmas season approaches. That’s not the conventional view of the doomsday crowd on Wall Street these days, but that’s what makes this idea so compelling as markets go into their summer stall.
Happy trading!
Boris Schlossberg
Poster Comment:
I wish my wages would grow. But i did 1,550 of those welded parts at work today. And that was a good day.