September 1, 2016

Stocks opened lower again this morning (Dow -89 pts; SPX -.46%), and should probably be a lot lower given some surprising economic data (see below). Financials and energy sectors are down the most (over 1%) in early trading, but all 10 sectors are lower. The VIX Index is up to 14.3. The dollar is weaker but commodities are also down on the day. WTI crude is trading down around $44/barrel after a higher than expected US inventory report. Bonds are lower in price, higher in yield. So the post-Brexit trend of gradually rising interest rates continues. The 5- and 10-year Treasury yields are currently at 1.19% and 1.58%, respectively. And by the way, the 2-year Treasury yield at .79% doesn’t suggest the Federal Reserve will be hiking interest rates in the near term. 

The ISM Manufacturing Index slid to 49.4 in August vs. 52.0 expected. What’s more, the new orders component of the index fell to 49.1, suggesting further weakness in coming months for the manufacturing sector. The report also suggesting companies are laying off workers. Any reading below 50.0 signals contraction and this is the first sub-50 report in six months. In stark contrast, we got encouraging manufacturing reports out of the UK (10-month high) and China. China’s official manufacturing PMI rose to 50.4 in August (2-year high), and its non-manufacturing PMI edged lower to 53.5.   

Ford (F) says US auto sales have plateaued and 2017 will be slightly lower than this year for the entire industry. The company no longer sees pent-up demand for vehicles. August auto sales were disappointing across the board (Ford -8.8%, Toyota -5%, GM -5.2%, Nissan -6.5%).   

Second quarter unit labor costs increased much more than expected in the US, while worker productivity continued to fall. On a year-over-year basis, total labor costs are up 2.6% (hourly compensation is up 3.7%!). At the same time, output per worker dropped .4% y/y vs. .5% expected. This is not good news for corporate profits, and presents a real problem for future economic growth and our standard of living. If you read this update regularly, you know some investors and economists are openly questioning the accuracy of government productivity data.  

Dick Bove of Rafferty Capital Markets is the latest high profile investment analyst to question recent economic data. He says consumer spending & inflation data (“PCE” data) are understated. Mr. Bove explains that our economy has transformed so much over the last few decades that our government isn’t measuring things correctly. It’s easy to calculate “stuff” but not electronic signals (i.e. Netflix). He asserts that the Commerce Dept. doesn’t “have the technology to handle the new data that is coming in.” Even they “don’t think they’re capturing everything.” Hi conclusion: the economy is stronger than what the GDP figures are showing. 

Pending home sales (i.e. contracts signed) picked up a bit in July compared with June and that’s modestly encouraging. On a year-over-year basis, however, pending sales fell 2.2% and have been trending lower for over a year. Housing is clearly still healthy and growing, supported by a strong job market, rising home prices and low interest rates. But low for-sale inventory and issues with affordability in some regions are restraining home buying activity. 

The all-important Employment Situation Report is due tomorrow morning. Economists expect roughly 180,000 new jobs for the month of August, along with an unemployment rate of 4.8%. 


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