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posted on 16 June 2016

Mixed Economic Data Means Sizeable Uncertainty For The Fed

by Gene D. Balas

In a speech June 6, Fed Chair Janet Yellen said there were a number of "considerable and unavoidable" uncertainties affecting the economic outlook. Elaborating a bit further, she said:

"The uncertainties are sizable, and progress toward our goals [of full employment and the Fed's 2% inflation target] and, by implication, the appropriate stance of monetary policy will depend on how these uncertainties evolve."

Indeed, interpreting the economic data, such as the recent jobs report, can be especially difficult.

What does the jobs report mean?

On Friday, June 3 we received the jobs report from the Bureau of Labor Statistics. It was a dreadful disappointment, with only 38,000 new jobs created, against expectations for about 160,000 new jobs, according to survey data prior to the report.

This follows a soft payroll report for April. But what is troubling about the latest jobs report is that the weakness was widespread: It was not limited just to industries that typically have a large share of skilled, specialty workers, where shortages of suitable workers might exist. (A dearth of qualified workers could explain softer hiring.) Just 51.3% of private sector industries (there are 262 classifications) reported job growth in May. A year earlier, in May 2015, 62.0% of industries added jobs (and the economy as a whole added 273,000 new positions), according to the BLS.

What about the latest on consumer spending and business investment?

It is difficult to draw conclusions from just one report, so we need to turn to other data and wait for more information, particularly from upcoming jobs reports. It is beyond the scope of this article to discuss every economic indicator, so we'll focus on two: consumer spending, particularly at retail stores and restaurants, and business investment in capital equipment. These give us a good proxy of the health and mood of both consumers and businesses.

For consumers, spending at retail stores and food establishments (including gasoline and auto sales as well), has zig-zagged over the past three years (measuring each month as a year-over-year percent change). Consumer spending may not be exactly robust, but at least it has been sustained (though these data are a bit erratic from month to month).

retail_sales.png

Businesses, on the other hand, seem to be a bit more cautious. In addition to the softer payroll reports in the past two months, we must also consider the lack of business investment in equipment and technology. The Census Bureau measures capex investment in the Durable Goods report in the measure of "non-defense capital goods excluding aircraft", where we see a different pattern emerge. Businesses are investing notably less in their operations, often choosing instead to borrow at low rates to finance share repurchases and dividends, according to numerous anecdotal reports. In fact, new investment in capital projects has dropped sharply year-over-year in each of the past five quarters, something not often seen outside of recessions.

Capex_Spending.png

Why are businesses reluctant to hire or invest, yet consumers willing to spend? The answer pertains specifically to corporations, one that only indirectly affects consumers - and even then with a bit of a lag. And that is corporate profits. Here, we see that profit growth, for a variety of reasons, has fallen for the past two quarters and is in a so-called "profit recession". (The measure in the nearby graph is for all corporations, public and private, small and large.)

Corporate_Profits.png

Factors are varied, but one is weak overseas markets, noting that companies in the S&P 500 derive 46% of their revenue from abroad, according to Standard & Poor's. Why focus on big companies and point to overseas markets? Consider the recent payroll report from ADP, which details hiring by company size. In May, small companies added 76,000 jobs, while mid-sized companies added 63,000 jobs. And large companies? Just 34,000 new positions.

What will happen going forward?

As big companies earn less, they may buy less from smaller suppliers. They may hire fewer people, and they may invest less in their business. They may attempt to boost their share price through dividends and repurchases, given their caution in acquiring either new capital or labor.

And thus these cost-cutting moves and other measures to enhance profits from their current levels trickle down through the entire economy. They are transmitted from global conditions and domestic worries alike, founded or not, about such things as politics and the upcoming election, or a possible exit of Britain from the European Union, or any of a variety of other factors.

Thus, we can see where a source of weakness is derived, stemming from corporate profits as one possible factor. There are others, of course, and economists may have varied opinions about the lack of hiring and investment. But one thing is clear: consumers will not continue to spend ever more, quarter after quarter, if sufficient job and wage growth fail to continue.


Disclosures

Investing involves risk, including possible loss of principal, and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained in this piece is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances.

The information and opinions expressed herein are obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital. Opinions expressed are current as of the date of this publication and are subject to change. Certain statements contained within are forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.


© 2016 United Capital Financial Advisers, LLC. All Rights Reserved

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