by Louis Navellier

September 6, 2023

The ADP and Labor Department data came into alignment last week, but all three jobs reports were more subdued than expected, which should confirm that the Federal Reserve is through raising interest rates.

The first jobs-oriented news came out on Tuesday with the Job Openings & Labor Turnover Survey (JOLTS) report, which showed that job openings declined by 3.7% to 8.827 million in July, compared with a revised 9.165 million in June and well below economists’ consensus estimate of 9.465 million in July. As a result of this surprisingly bearish report, Treasury bond yields declined from 4.21% to 4.12%.

The next day, ADP reported that only 177,000 private payroll jobs were created in August, which was substantially below a revised 371,000 in July. The best news is that the manufacturing sector gained 12,000 jobs, after two months of big losses. Treasury rates stayed around 4.1% with this bearish news.

Then, on Friday, the Labor Department reported that 187,000 new payroll jobs were created in August, a bit better than the economists’ consensus estimate of 170,000. However, the June and July payroll reports were revised lower by a cumulative 110,000 jobs, to 105,000 (in June) and 157,000 (July), respectively.

I am happy to see the Labor Department is now much closer to ADP in the past three months, but the real surprise was the unemployment rate surged to 3.8% in August, up from 3.5% in July, due to the fact that over 736,000 people entered the workforce. As a result, the labor participation rate rose to 62.8% in August, up from 62.6% in the past few months. Average hourly earnings rose by only 8 cents, to $33.82 and +4.3% in the past 12 months, so wage inflation appears to be cooling. The Yellow Freight bankruptcy was likely the primary culprit behind a 37,200 drop in transportation and warehousing jobs in August.

In addition to the monthly payroll report, the Labor Department is also expected to dramatically reduce past statistics for overall U.S. payroll growth in the past 12 months, due to the revision of what I have recently called, their bogus seasonal adjustments (like in January), as well as overstated manufacturing jobs (as in June & July) relative to ADP. This is why I have relied on the ADP data more than the monthly payroll reports from the Labor Department, since the Bureau of Labor Statistics (BLS) employs too many seasonal “fudge” factors.

Speaking of manufacturing jobs, the Institute of Supply Management (ISM) on Friday announced that its manufacturing index improved to 47.6 in August, up from 46.4 in July. That was the good news. The bad news is that the ISM manufacturing index has been under 50 for 10 straight months. Since any reading below 50 signals a contraction, it appears that the manufacturing recession will persist, especially if the United Auto Workers (UAW) strikes on September 15th. The new orders component declined to 46.8 in August, down from 47.3 in July. The backlog of orders component rose to 44.1 in August, up from 42.8 in July, and only five of the 18 industries surveyed by ISM reported growth in August, so the manufacturing recession persists.

The manufacturing job situation is likely to get worse soon, due to the UAW strike, since 97% of its workers voted to authorize a strike after September 14th. UAW President Shawn Fain said, in a statement, “Our members’ expectations are high because Big Three profits are so high. The Big Three made a combined $21 billion in profits in just the first six months of this year.” The UAW is also worried about job security, since Ford and GM have moved mass market EV production to Mexico.

In an effort to win back his waning union loyalty, the Biden Administration announced last Thursday that it has provided $12 billion to automakers to convert existing factories to manufacture hybrid and electric vehicles. Specifically, the Energy Department provided $2 billion in grants and $10 billion in loans to automakers. The Biden Administration apparently announced this financial aid to appease UAW workers who are worried that EV manufacturing is increasingly moving to Mexico for mass production EVs, like the Ford Mach-e and Chevrolet Equinox. UAW President Fain responded, “This new policy makes clear to employers that the EV transition must include strong union partnerships with the high pay and safety standards that generations of UAW members have fought for and won.” However, Fain added, “The auto makers have not yet promised job security in our ongoing negotiations. I have traveled across the country, meeting displaced workers who’ve had to pick up and move their families when plants shut down.”

Overall Inflation is Lower, but Energy Inflation Remains Stubbornly High

On Thursday, the Commerce Department reported that the Fed’s favorite inflation indicator, the Personal Consumption Expenditure (PCE) index, rose 0.2% in July and 3.3% in the past 12 months. The core PCE, excluding food and energy, rose 0.2% in July and 4.2% in the past 12 months. The good news is that the PCE has been running at a 2.1% annual pace in the past three months. The Commerce Department also reported that consumer spending rose a healthy 0.8% in July, up from a revised 0.6% in June.

However, I should add that gasoline prices are now at their highest level this year, as are crude oil prices, which rose above $86 per barrel last Friday. The fact that inventories remain low for crude oil and refined products are fueling these high prices at the pump. The Energy Information Administration (EIA) reported that crude oil inventories plunged by 10.6 million barrels in the latest week. Typically, summer demand ebbs after Labor Day, but when many refineries shift from summer fuels to “oxygenated” winter fuels, inventories typically decline and gasoline prices can surge higher, so any price relief may be temporary.

Home prices are rising again, but they have been down over the last year. The S&P Global Case-Shiller median home price in 20 major metro areas rose 0.9% in June compared to May, but prices declined 1.2% over the past 12 months. The Chicago, Cleveland and New York metropolitan areas led the price gains, while home prices declined in the Seattle and San Francisco metro areas over the past 12 months. It will be interesting to see if these declining median home prices in the past 12 months will impact the “Owners’ Equivalent Rent” statistic, which some economists say seems over-inflated, as currently calculated.

Higher credit card debt and fears over higher interest rates, plus high gasoline prices are clearly spooking consumers. As evidence, the Conference Board reported that its consumer confidence index plunged to 106.1 in August, down from a revised 114 in July. The present situation component plunged to 114.7 in August, down from 153 in July. The previous gains in consumer confidence in June and July were erased in August. This reading came as a big shock, as it bodes poorly for continued strong consumer spending.

Despite these dismal statistics, the Atlanta Fed is now forecasting 5.6% annual third-quarter GDP growth, thanks to a shrinking trade deficit, mostly due to rising energy exports. However, in light of the big drop in consumer confidence, I am now expecting a big downward revision in estimated third-quarter GDP growth. I should add that the Commerce Department on Wednesday lowered its second-quarter GDP estimate to a 2.1% annual pace, down from a 2.4% annual pace, previously estimated.

In the U.S., we are blessed to be food and energy independent. However, for much of the rest of the world, many countries have to import food and energy. Russia has successfully disrupted Ukraine’s exports of corn, sunflower oil and wheat, so acute food shortages are anticipated in sub-Saharan Africa and other countries that traditionally import food staples from Ukraine. Last year there was an ideal growing season, so Canada and other nations helped offset Ukraine’s falling agriculture output, but this year, there were droughts in the Midwest, South America and much of Europe, so food costs are rising outside the U.S. Energy prices also remain stubbornly high due to sanctions on Russia as well as a Saudi Arabia production cut, but central bankers know there is little they can do to offset rising energy costs. The bottom line is, the U.S. is in much better shape than the rest of the world and remains an oasis.

Navellier & Associates owns Ford Motor Co (F), in managed accounts. We do not own General Motors (GM), or Yellow Freight (YELLQ). Louis Navellier does not own Ford Motor Co (F), General Motors (GM), or Yellow Freight (YELLQ).

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

Please see important disclosures below.

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Louis Navellier

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