The economic news last week was mostly positive. First, the Institute of Supply Management (ISM) announced that its manufacturing index rose to 50.9 in January, up sharply from 47.8 in December. This was a massive surprise, since economists were estimating a slight rise to only 48.5. Since any reading above 50 signals an expansion, this news was a welcome relief for the fledging manufacturing sector that had hovered below 50 since August. However, 8 of the 18 surveyed industries saw declines. Commercial aviation, the auto sector, and the oil service industry are all struggling, while the construction sector is improving. Clearly, the manufacturing sector is not hitting on all cylinders and needs to improve further.
On Wednesday, ISM followed up with a report on its non-manufacturing (service) index, which rose to 55.5 in January from 54.9 in December, far better than economists’ consensus estimate of 55. Especially impressive was ISM’s production component, which rose to its highest level since last August. Fully 12 of the 18 industries that ISM surveyed expanded in January. Overall, the ISM service sector remains healthy, which is positive for continued strong GDP growth and payroll growth.
Speaking of payroll growth, on Wednesday, ADP reported that 291,000 private payroll jobs were added in January, substantially more than the economists’ consensus estimate of 154,000. This was the largest monthly increase in private payrolls in nearly five years, since May 2015, likely bolstered by abnormally warm weather. Of the 10 industries ADP surveyed, only mining (which includes energy production) reported a small decline. Mark Zandi, the Chief Economist of Moody’s Analytics, said that warm weather “juiced” the ADP report and added that “Abstracting from the vagaries of the data, underlying job growth is close to 125,000 per month, which is consistent with low and stable unemployment.”
Then, on Friday, the Labor Department announced that payrolls rose by an awesome 225,000 in January, substantially higher than economists’ consensus estimate of 158,000. The unemployment rate rose to 3.6% in January, up from 3.5% in December, but that was due to some more good news – as many more workers, previously not looking for work, entered the workforce. Average hourly earnings rose 0.2% to $28.44 per hour (almost $60,000 a year, annualized) in January and rose 3.1% in the past year.
As a result of more workers entering the labor force, the labor force participation rate rose to 63.4% in January, up from 63.2% in December. The November and December payrolls were also revised up to 261,000 (from 256,000) and 147,000 (from 145,000), respectively. Overall, this was an excellent payroll report that was bolstered by mild January weather, which helped to create 44,000 new construction jobs.
There was also some good news on trade, as 2019 became the first year in six years when the trade deficit actually declined. One big reason is that the U.S. has become energy-independent, to the point that the U.S. has been the largest energy exporter since June. The trade deficit with China also declined due to tariffs and the trade spat with the Trump Administration. Speaking of tariffs, China announced that on February 14, it would slash the tariffs in half on $75 billion of U.S. imported goods. Specifically, some tariffs would be cut to 5% from 10%, while other tariffs on goods would be cut to 2.5% from 5%.
A lower trade deficit naturally boosts U.S. GDP growth. Another factor that helps boost GDP growth is rising productivity. The Labor Department announced on Thursday that productivity rose 1.7% in 2019, the fastest pace in nine years, but annual productivity growth slowed to a 1.4% annual pace in the fourth quarter. Typically, when there is full employment, productivity can slow. Nonetheless, the productivity news is positive for real wage growth as well as future GDP growth during this election year.
Has the Tesla “Bubble” Finally Popped?
Last Tuesday, Tesla’s stock peaked at $969 a share and then lost 23% in the next three days, despite a rising market. There is no doubt that Tesla was propelled higher via a short-covering rally, as it briefly reached a truly ridiculous valuation at almost 20 times sales. Interestingly, the last short-covering catalyst was the news that Panasonic finally made a little bit of money after investing $1.6 billion in Tesla’s Reno Gigafactory, but investors were just reading the headline and not looking at the details, so let me tell you some of the details that you are not hearing from the talking heads on the financial networks.
First, Tesla is now buying lithium batteries in Asia, from CATL (China), LG Chem (South Korea), and Panasonic (Japan). Second, after Panasonic lost its exclusive right to sell lithium batteries to Tesla, Panasonic announced a new venture with Toyota to build lithium batteries at a new plant in Japan. Third, there is an acute battery shortage, which Tesla CEO Elon Musk is clearly worried about, since he said that the Cybertruck “demand is just far more than we could reasonably make in the space of, I don’t know, three or four years, something like that.” Finally, Tesla’s competitors, like Audi, have already had to curtail production due to an LG Chem lithium battery shortage.
In other words, even though European regulators are pushing electric vehicle (EV) sales, there is currently an acute shortage of lithium batteries. Leading EV manufacturers, including Ford, GM, Tesla, and VW Group, are all now relying on lithium batteries from LG Chem for their new plants, but an acute battery shortage is hindering their ability to make EVs. As a result, Tesla’s sales are expected to slow dramatically, unless it can “hog” more batteries from LG Chem and CATL at the expense of its EV competitors.
Finally, if Tesla can put together two more profitable quarters, the stock will likely be added to the S&P 500 later this year, since four profitable quarters is one criterion to be added to this flagship index.
Tesla began making its Model Y at its Fremont plant in January, which should help turn around its weak U.S. sales in the past two quarters. Virtually all of Tesla’s sales growth is due to the big EV push in both China and Europe. If you own Tesla stock, an ideal time to sell it will be when it is added to the S&P 500!
Last Tuesday, Tesla’s stock was worth almost $175 billion, more than Ford ($32 billion), GM ($48 billion), and VW Group ($84 billion) combined, which as a group, will be selling millions more cars per year and almost as many EVs as Tesla in 2021 due to Ford’s Mexican-made Mach E, GM’s Bolt, Audi’s e-tron models, the Porsche Taycan, and VW e-Golf (the top seller in Europe). By 2025, when Tesla’s Cybertruck might finally be produced, it will have to compete with GM’s electric Hummer, the Rivian (backed by Amazon), and some exciting electric lifestyle trucks from VW, like its Buggy and Microbus.
The only way Tesla can possibly survive this upcoming EV onslaught is to hog most of the lithium batteries, which would naturally trigger anti-trust action and extensive litigation. I should also add that since European manufacturers have to reduce their emissions to comply with strict European Union limits, some of them may choose to temporarily sell their EVs at an operating loss to meet fleet emission averages. As a result, I worry about Tesla’s long-term competitiveness against these more experienced manufacturers, many of which are now using the same lithium batteries from LG Chem that Tesla is using at its Shanghai plant. As an American, I wish Tesla well, but I am not sure that its hot-selling Model 3 and Y vehicles can insure its long-term success against less expensive Mach E and other EV competitors.
Navellier & Associates does not own Toyota, GM, VW Group, Ford, or Tesla in managed accounts and or sub-advised mutual fund. Louis Navellier and his family do not own Toyota, GM, VW Group, Ford, or Tesla in personal accounts.