8-6-24: The Jobs Data is Weaker Than Expected

by Louis Navellier

August 6, 2024

When it comes to the payroll reports at the start of each month, ADP reported last Wednesday that only 122,000 private payroll jobs were created in July, which was well below economists’ estimate of 150,000.

Then, the Labor Department reported on Thursday that initial jobless claims rose to 249,000 in the latest week, the highest total in nearly a year – since August 2023. Continuing unemployment claims also rose to 1.877 million, the highest rate since November 2021. Also, due to a weakening job market, wages are rising at their slowest pace since 2021 according to the Stanford Digital Economy Lab. So, as the labor market continues to deteriorate, the pressure on the Fed to cut key interest rates will continue to mount.

Then came the most widely watched jobs report. In Friday’s Labor Department report, we learned that only 114,000 payroll jobs were created in July, substantially below economists’ consensus estimate of 175,000 and remarkably close to the ADP total. The unemployment rate rose to 4.3%, from 4.1% in June.

Average hourly earnings rose only 0.2% in July and 3.6% in the past 12 months. Also, the May and June payroll reports were revised down by a combined 29,000 jobs, so this was a disastrous payroll report.

Below the surface, the jobs situation may be even worse, with near-zero growth in the household survey:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The payroll survey – which the press keeps quoting – reflects a total of 2.5 million new jobs in the last 12 months – an average of over 200,000 per month – but that mainly covers large businesses reporting their payroll data to the Labor Department, but the Household Survey, which covers small businesses, shows almost no growth over the last year – just 57,000 jobs, rising from 161,209,000 jobs to 161,266,00 jobs.

Also, the Institute of Supply Management (ISM) announced on Thursday that its manufacturing index declined sharply to 46.8 in July, down from 48.5 in June. The Biden Administration’s on-shoring efforts have clearly failed. Since any reading under 50 signals a contraction, the ISM Manufacturing survey represented the 20^th contraction in the past 21 months. In fact, 11 of the 16 industries contracted in July, but that report came out too late for the Fed to act on the news. Clearly, the Fed should have started cutting rates last week, but they chose to delay, once again, even though other central banks are acting.

Last Thursday, the Bank of England cut its key interest rate 0.25% for the first time since 2020, joining other central banks – like Canada, and the European Central Bank (ECB) and China that have already cut their key interest rates and are signaling more cuts ahead. The Bank of England vote was 5 to 4, so clearly there was no big consensus to cut. Naturally, the British pound slipped a bit after the rate cut.

The Bank of Japan maintained its key interest rate below zero (-0.1%) for nearly eight years, since 2016, but the BOJ raised its benchmark rate to a range of zero to 0.1% early this year and then raised it again to 0.25% last Wednesday, July 31, while curtailing its quantitative easing by 50%. By finally allowing positive interest rates to re-emerge, the Bank of Japan is trying to attract buying pressure on its government bonds, since Japan is a case study of what happens to a currency when its debt becomes unmanageable – at 257% of GDP – about twice the level of Europe and America. The population of Japan is also declining, which does not help its debt service either, so Japan is a special case, warning Europe and America of what can happen after decades of deflation, high debt and negative population growth.

Last week, I told you that former New York Fed President Bill Dudley came out with a powerful Bloomberg Opinion article entitled, “I Changed My Mind. The Fed Needs to Cut Rates Now.”  Later in the week, another former Fed official, Alan Blinder, had an opinion piece published in The Wall Street Journal entitled, “The Fed Should Cut Interest Rates This Week.” Blinder was the Vice-Chairman of the Fed in 1994 through 1996 and is currently a Professor of Economics and Public Policy at Princeton.

Blinder said that “Money is tight right now. With inflation in the 2.5% to 3% range, depending on how you measure it, the current federal-funds rate of 5.25% to 5.50% leaves the real interest rate—the interest rate adjusted for inflation—around 2.5% to 3%.” Interestingly, Blinder added, “the 12-month PCE inflation rate has been flat or falling every month since last September. Looks like a trend to me.”  Amen!

The Battle for Votes – and for Silicon Valley Support

As the Presidential campaign heats up, more promises are emerging. The Biden Administration is still trying to provide student loan relief, despite the fact that federal courts have squashed student loan relief multiple times. Interestingly, at a rally on Wednesday, Donald Trump promised no federal taxes on Social Security benefits in a move expected to be very popular with senior citizens. I should add that Trump also promised service workers no taxes on tips. Kamala Harris is making similar campaign pitches offering more social benefits. This is why consumer confidence tends to rise heading into a Presidential election.

At the Bitcoin 2024 conference in Nashville, candidate Trump said that he would fire SEC Chairman Gary Gensler (his term expires in 2026) and pick more crypto-friendly regulators. Specifically, Trump said, “This afternoon, I’m laying out my plan to ensure that the United States will be the crypto capital of the planet and the Bitcoin superpower of the world, and we’ll get it done.” Trump added that, “The rules will be written by people who love your industry, not hate your industry.” He also said he would appoint a crypto industry presidential advisory council, create a stable coin framework, and he called for a scaled-back enforcement. There is no doubt that this is all part of candidate Trump’s outreach to Silicon Valley.

Trump’s case is bolstered by Silicon Valley’s seemingly endless litigation with the Biden Administration DOJ and FTC. In fact, FTC Chair Lina Khan is backing open AI models and said, “Open-weight models can liberate startups from the arbitrary whims of closed developers and cloud gate-keepers.”

However, with an open model, cloud crashes would be more common. A Microsoft spokesperson pointed out a 2009 ruling by the European Commission that prevented the company from enhancing its Windows 365 operating security more rigorously. Essentially, Microsoft is blaming these restrictions by the European Union (EU) for preventing Microsoft from fixing the CrowdStrike software upgrade glitch that crashed cloud servers worldwide recently. The EU’s agreement specifies that Microsoft must share its application programing interface (API) for Windows Client and Server operating systems with third-party security software developers, but the CrowdStrike incident highlighted the risks of such openness.

Apple has been restricting developers from access to its operating system API since 2020. Google is also not bound by similar API regulations. So essentially, Microsoft is forced to have an open API, while Apple, Google and other competitors have closed APIs. I think it is safe to conclude that regulators, like the EU and FTC, should not modify software to aid cyber-hackers that can crash cloud computing centers.

One other reason that Silicon Valley is warming to Donald Trump is that Peter Thiel, who was J.D. Vance’s former mentor and employer, pushed for J.D. Vance to be chosen as Vice President. Many in Silicon Valley, like Peter Thiel, are euphoric about J.D. Vance being on the GOP ticket and advising Donald Trump. Based on the Bitcoin 2024 conference, I think it is safe to say that J.D. Vance’s influence is obvious. The Biden Administration and previous administrations have allowed the “Magnificent-7” stocks to operate legal monopolies. Much of the anxiety recently surrounding the Magnificent-7 pertains to whether or not they can maintain their legal monopolies. The truth of the matter is that these legal monopolies will persist, but whenever there are cracks in their foundations, like Google’s disappointing YouTube results, or Tesla’s lackluster guidance, these Magnificent-7 stocks can get hit with profit-taking.

Speaking of disappointing results, McDonald’s announced its first quarterly sales decline since 2020. In the second quarter, McDonald’s same-store sales declined by 1%. This did not come as a huge surprise, since French-fry supplier, Lamb-Weston, also reported disappointing sales to restaurants and consumers. There is also evidence that some of this sales decline may be attributable to resistance to price inflation. The CEO of McDonald’s said that their $5 meal deal is a big hit and will be extended to boost sales.

Burger King and KFC have also introduced $5 meal options. Furthermore, Target, Walmart, and the German chain Aldi have lowered prices on food and some household staples, while Amazon, Walgreens, and Best Buy have announced price cuts on selected items. These price cuts reflect increasing signs of consumer distress, especially for the bottom 20% of consumers that are struggling with inflation and trying to make ends meet. If the Fed ever needed a sign of consumer distress, McDonald’s first sales decline in 13-quarters was a clear signal, so hopefully this will help coax the Fed to cut key interest rates sooner than later.

Even liquor sales were hit. Diageo warned that consumers are facing an “extraordinary environment” and announced its first decline in sales since 2020. Specifically, this manufacturer of Smirnoff Vodka, Tanqueray Gin, Casamigos Tequila and Johnnie Walker Whisky (plus dozens of other name brands) said its annual sales declined by 1.4% and its unit sales dropped 5% as consumers cut back on consumption.

Finally, if you are wondering how the U.S. economy can grow when other indicators are flat, the answer can be traced to productivity. The Labor Department on Thursday reported that U.S. productivity rose at a 2.3% annual pace in the second quarter, compared to a revised 0.4% in the first quarter. This was much better than the economists’ consensus estimate of a 1.8% increase. Unit labor costs only rose at a 0.5% annual pace in the second quarter, down from a 0.9% annual pace in the first quarter. In the past 12 months, unit labor costs have risen 1.2%. In theory, some productivity increases are attributable to AI as well as better inventory management. As long as profits rise faster than labor costs, productivity will rise.

Other Election (and World) News

While we concentrate on America’s Presidential contest, a more violent election took place in Venezuela, in the wake of President Nicolas Maduro’s claim that he won last week’s election. Specifically, the government-controlled National Election Council said that after 73% of ballots were tabulated that Maduro received a narrow victory, with 51.2% of the vote. Opposition candidate Edmundo Gonzalez told reporters, “We’ve won in places where the democratic forces had never won in the last 25 years.” Specifically, Gonzalez’s team said they won 6.3 million votes, while the National Election Council only counted 4.4 million votes for Gonzalez. Furthermore, a 40% sample of votes by independent observers show a 6.2 million votes for Gonzalez (69%) compared to only 2.8 million (31%) for Maduro.

As a result, protests erupted, and a statue of Maduro was knocked down in protest. Opposition leader María Corina Machado, who had been banned from running in the election but rallied mass support behind Gonzalez, said that their network of volunteer election monitors had created a database by scanning and digitizing physical tally sheets that they obtained. Voters will be permitted to use their IDs to see if their votes were truly cast in the way they actually voted. In response, Maduro’s opposition now claims an even wider victory – with 73% of the vote tally, saying its victory is irreversible!  In response, the military has been breaking up at least 115 protests across Venezuela, leaving nine protesters dead.

The Ukraine war now enters its 30^th month, and Russian crude oil shipments have dropped to their lowest level since late August 2023, based on a four-week moving average. Officially, Russia says that these cuts are related to reducing crude oil production according to OPEC+ guidelines. Despite these cuts, Europe remains addicted to Russian LNG exports. Recent heatwaves in Europe have increased the demand for natural gas to generate electricity for air conditioning, so I’d say the sanctions on Russia are ineffective.

In the other major world war, in the wake of Israel’s attack on the Hamas leader at his home in Tehran, as well as the attack on a Hezbollah commander in Beirut, crude oil prices have surged on the news that Iran plans to retaliate. Ironically, the last time Iran sent missiles into Israel a few months ago, virtually all were intercepted by Israel, but shrapnel from missile fragments are dangerous to people on the ground.

The Hezbollah missile that killed 12 school children in the Golan Heights was one of the rare times a missile successfully penetrated Israeli air space. Clearly, the Middle East remains a tinder box and crude oil prices will remain high as long as Iran and its proxies continue to threaten Israel. Iran’s Ayatollah Ali Khamenei said he had a “duty to seek vengeance” and that Israel should prepare for “severe punishment.” Ironically, since Iran was humiliated by Israel’s defense of its last missile attack, Iran may be planning a new way of attacking, so crude oil prices are expected to remain elevated amidst all this uncertainty.

Navellier & Associates owns CrowdStrike Holdings, Inc. Class A (CRWD), Apple Computer (AAPL), Microsoft (MSFT), Alphabet Inc. Class A (GOOGL), Diageo plc Sponsored ADR (DEO), and Amazon (AMZN), in managed accounts. A few accounts own McDonald’s Corporation (MCD), Target Corporation (TGT), Walmart Inc. (WMT), and Tesla (TSLA), per client request only. We do not own Lamb Weston Holdings, Inc. (LW), Walgreens (WBA), and Best Buy Co (BBY). Louis Navellier and his family own CrowdStrike Holdings, Inc. Class A (CRWD), and Microsoft (MSFT), via a Navellier managed account, and Apple Computer (AAPL) and Amazon (AMZN) in a personal account. He does not own Alphabet Inc. Class A (GOOGL), Diageo plc Sponsored ADR (DEO), McDonald’s Corporation (MCD), Target Corporation (TGT), Walmart Inc. (WMT), Tesla (TSLA), Lamb Weston Holdings, Inc. (LW), Walgreens (WBA), or Best Buy Co (BBY), personally.