by Louis Navellier

September 8, 2021

Despite the lowball jobs total on Friday, plenty of good news is buried in the small print, like massive revisions to the previous two months. With over two million jobs created in June and July, you can be sure that the initial August estimates will be revised upward in coming months. After all, how can DC bean counters possibly count all jobs added in August just two days after the close of the month?

In addition, Hurricane Ida may have suppressed reporting of August payroll data. There are some more clues in the ADP reported last Wednesday, which counted 374,000 private payroll jobs created in August, far more than the Friday totals. ADP reported 201,000 jobs created in leisure and hospitality in August, despite the Delta variant, while the Labor Department showed no job gains in leisure and hospitality. In fact, they said bars and restaurants lost 42,000 payroll jobs in August and retailers lost 29,000 jobs!

Average hourly earnings rose by 17 cents (0.6%) to $30.73 per hour in August and wages have risen 4.3% in the past 12 months. Cutting through all these numbers, the obvious truth – up and down the pay ladder – is that there is an acute labor shortage in every industry now. Anyone who wants work can find a job.

I should add that the Labor Department reported on Thursday that weekly unemployment claims came in at 340,000, down from a revised 354,000 in the previous week. Such claims are now running at the lowest level since March 2020, just before the pandemic commenced. Continuing unemployment claims declined to 2.748 million, down from a revised 2.908 million in the previous week. Both weekly and continuing unemployment claims were better than the economists’ consensus estimate of 345,000 and 2.808 million.

Overall, in the wake of the apparently disappointing August payroll report, the Fed will have plenty of reasons to delay tapering QE at their next Federal Open Market Committee (FOMC) statement on September 22. One indication of that fact is that Treasury bond yields “spiked” after the Friday payroll report was released. The FOMC may also cite the Covid-19 Delta variant as an excuse to “kick the can down the road” and defer any tapering announcement until December. They can also cite the fact that the economy has been unable to replace the 5.3 million jobs lost since the pandemic commenced.

However, the hawks on the FOMC are alarmed over higher inflation and they know the Fed cannot fight market rates forever. As a result, the upcoming September FOMC statement will be closely scrutinized.

Speaking of inflation, the S&P CoreLogic Case-Shiller home index was announced on Tuesday and the average home rose an amazing 18.6% in the past 12 months through June, up from a 16.8% annual pace in May. The Case-Shiller index of 20 major metropolitan areas was even stronger and is now running at a 19.1% annual appreciation rate through June, up from a 17.1% pace in May. The Phoenix metropolitan area leads the nation with an amazing 29.3% annual home appreciation rate!  In the 20-City Case-Shiller index, home prices are at record highs in 19 of 20 metro areas, all except the Chicago metropolitan area.

Other Key Indicators Point Down, Due Mostly to Covid Outbreaks

Last Tuesday, the Conference Board announced that consumer confidence plunged to 113.8 in August, down from 125.1 in July, reaching its lowest level in six months. This was a massive disappointment, since economists were expecting consumer confidence to dip only slightly, to 124.3. The current conditions component declined to 147.3, the lowest reading since April, while expectations declined to a 7-month low of 91.4. Rising Covid-19 cases due to the Delta variant are impacting consumer confidence as more restrictions are being reimposed. This big drop in consumer confidence does not bode well for third-quarter GDP growth. Currently, the Atlanta Fed is estimating 3.7% annual GDP growth, way down from its previous estimate of 5.3% annual GDP growth. Lynn Franco, senior economist at the Conference Board, said, “Spending intentions for homes, autos and major appliances have all cooled somewhat.”

There is no doubt that Covid-19 is skewing some other economic data, too, such as the fact that only 39% of Americans paid any income taxes in 2020. Another interesting government statistic is that the Social Security Trust Fund’s annual report said that in 2021 benefits are forecasted to exceed income for the first time. Furthermore, the Social Security Trust Fund is expected to be depleted in 2034. Due to inflation, there was a 1.3% cost of living increase in Social Security benefits in 2021 and a much bigger increase is expected in 2022, so the Social Security Trust Fund is likely to struggle more due to the fact that almost six million workers have not been replaced since the pandemic commenced, and some have retired early.

The best economic news last week was that the Institute of Supply Management (ISM) reported that its manufacturing index rose slightly to 59.9 in August, up from 59.5 in July. The new orders component rose to 66.7 in August (from 64.9 in July), while the production component rose to 60 in August (from 58.4 in July). The most impressive component was the backlog of orders, which rose to 68.2 from 65 in July. Due to the semiconductor chip shortage and other supply chain bottlenecks, the order backlog in manufacturing continues to grow, which ensures robust GDP growth once that backlog is resolved.

On Friday, ISM reported that its non-manufacturing (services) index decelerated to 61.7 in August, down from an all-time high of 64.1 in July. The good news is that all 17 industries surveyed expanded, and this was the 15th straight month the ISM service index reported an expansion (above 50). One of reasons that the ISM services index decelerated was that the business activity component decelerated to 60.1, down from 67 in July, so the good news is that the service sector is still growing, but at a slower pace.

The overall weight of the indicators last week should convince the Fed to keep their QE policies intact.

New Realities in China in the Post-Afghanistan Era

The U.S. military left Afghanistan August 30 after evacuating approximately 123,000 people without a second terrorist attack. Although a few hundred Americans were reportedly left behind, there is no doubt that many observers heaved a big sigh of relief. The leadership of the U.S. military now has a lot of soul searching to do, and I would be shocked if the Secretary of Defense as well as the Chairman of the Joint Chiefs do not resign over this. The Biden Administration hurt its relationship with our NATO allies, it will be interesting how much U.S. and European defense spending will decline in the upcoming years.

The good news may be a “peace dividend,” similar to the 1990s, to help the stock market surge forward.

The new wars are now more economic in nature, and China has been winning. We are reminded of the current economic wars every time we deal with Covid-19 and see the impact of port bottlenecks. The Green Agenda also empowers China, since most solar panels are largely made by the captive Uighurs in Western Chinese labor camps. The transition to electric vehicles (EVs) is now slowing down due to the high price of nickel and cobalt for batteries, impeding lithium-ion battery production. In addition, virtually all of the necessary raw materials are processed in China. CATL produces cheaper but less efficient iron-phosphate batteries that Tesla in Shanghai is utilizing, but many legacy auto manufacturers, with the exception of VW Group, are reluctant to follow Tesla and use iron-phosphate batteries.

In the U.S. we do not have central economic planning like China. Instead, the federal government and states pass tax breaks that incentive businesses that all too often then outsource business to China. The belief that the U.S. can compete with China in industries they dominate is a pipe dream, since the U.S. does not have cheap electricity (from coal), labor camps, nor the will to process raw rare earth minerals to beat China in the industries they dominate. As a result, the Biden Administration has its hands full with China, which may explain why it has not rescinded the tariffs that the Trump Administration imposed.

Outsourcing pollution and slave labor to China to make the solar panels that California now mandates on new residential construction is already having profound consequences. Furthermore, the powerwalls that many California residents install to hold their solar electricity before selling it back to the electric grid predominately utilize iron-phosphate batteries from CATL in China. So, if I add up all the industries that China dominates, as far as the Green Agenda is concerned, China has virtually obliterated the U.S.

Speaking of China, the shocking news last week was that the Chinese National Bureau of Statistics announced that its non-manufacturing (service) sector index plunged to 47.5 in August, down from 53.3 in July. The Delta variant of Covid-19 was largely responsible for this massive contraction. I should add that any reading below 50 signals a contraction. Since China’s manufacturing index was at 50.1 in August, down from 50.4 in July, China is now dangerously close to slipping into a recession.

The port bottlenecks are now worse than ever due to China’s woes and they were complicated further by Hurricane Ida, because ports in Louisiana are expected to remain closed for several days until power is restored. There were 44 containerships reported to be off the coast of Southern California waiting for the Ports of Long Beach and Los Angeles to have room for them to unload their containers. The average wait for a container ship to unload its goods is now 7.6 days in Southern California, and the Ports of Long Beach and Los Angeles account for about one-third of U.S. imports. Fortunately, I recommend a logistic company, Expeditors International of Washington (EXPD), and plenty of shipping companies.

Here is a link to Fox Business News from last Tuesday, when I talked about these port bottlenecks:

Navellier & Associates owns Expeditors International Of Washington Inc (EXPD) in managed accounts. Louis Navellier personally own Expeditors International Of Washington Inc (EXPD) via a Navellier managed account.

Not only do these port bottlenecks disrupt business, but they also create inflation. Amazingly, Europe now has a growing inflation problem, since consumer prices in the eurozone rose 3% in August, up from a 2.2% annual pace in July. The European Central Bank (ECB) said that they would not change their interest rate policy until inflation rose above 2%, so it will be interesting to see if the ECB decides to raise its key rate from negative 0.5% to 0%. Interestingly, ever since the ECB boosted its quantitative easing, the euro has weakened, which results in commodity inflation that is now very persistent in the eurozone.

Navellier & Associates does own Tesla (TSLA), for one client, per client request and Expeditors International Of Washington Inc (EXPD) in managed accounts. We do not own VW Group (VWAGY). Louis Navellier does not own Tesla (TSLA), or VW Group (VWAGY) but does personally own Expeditors International Of Washington Inc (EXPD) via a Navellier managed account.

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

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