posted on 16 June 2016
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:
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).
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.
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.)
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.
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