Data View: Smarter than Your Average Hamster

 

Fellow hamsters, if it felt like you were running faster or maybe smarter on the old exercise wheel in your cage last quarter, you were, according to the U.S. Bureau of Labor Statistics.  The question is how many hamsters survived to enjoy the workout.

 The BLS reported Thursday that nonfarm business sector labor productivity increased a seasonally adjusted annualized 2.4 percent in the second quarter of 2025, as output increased 3.7 percent and hours worked increased 1.3 percent.  That was up from a revised productivity decrease of 1.8 percent in the first quarter.

 And the average hamster was getting somewhere, too. Adjusted for consumer prices, real hourly compensation increased an annualized 2.3 percent in the second quarter.  Real compensation was up 1.4 percent over the last four quarters through 2Q25.

 Meanwhile, unit labor costs, that is, the ratio of hourly compensation to productivity growth rates, increased an annualized 1.6 percent in the second quarter, a slowdown from the four quarters rate of 2.6 percent, good news for businesses that will have to deal with higher costs from other inputs due to Trump’s tariffs.

 Now, productivity growth is hailed as key to how the working stiff like your correspondent and his fellow hamsters get ahead of the game in this vale of tears.  But the problem, as we see it, is that productivity gains from fewer hamsters would be a recipe for social unease and a reason to keep the cork in the champagne.  The sharp downward revisions to May and June payrolls reported last week point to a disconnect in the relationship between rising productivity and a tide lifting all boats.

 We think the second quarter productivity and payroll numbers could reflect the first ripple of the artificial intelligence revolution that is about to reinvent work and likely replace a lot of us.

 Also on the labor front, weekly initial jobless claims increased 7,000 to a seasonally adjusted 226,000, the highest in a month.  More telling, perhaps, was news that continuing claims rose 38,000 to 1.974 million, the highest since November 2021, an indication that finding a new hamster cage is getting tougher.

 

 

From Unicorn to Antlers

 It wasn’t too long ago that the unicorn of a soft landing. i.e., puncture of the post-Covid inflation bubble without a punishing recession, hove into view.  But now that we take a closer look, we espy a different beast, this one with antlers we might call the horns of a dilemma – stagflation.

 That brewing outcome was reinforced this morning with news from the Institute for Supply Management that its services purchasing managers index ticked down to 50.1 in July from 50.8 in June.  A survey of economists polled by Reuters had expected a rise to 51.8.  A reading above 50.0 indicates economic expansion, so the new index reading hints at a U.S. economy close to stall speed.

 The report comes on the heels of the July jobs data from the Bureau of Labor Statistics, showing only 73,000 net jobs creation and sharp downward revisions to May and June numbers.  The orange Florida man fired the BLS director after the release of the news on Friday.  It will be fascinating to see what the bureau releases next month and whether financial markets believe it.

Meanwhile, we’ll be watching next week’s consumer price index for July from the same BLS that the Florida man says is rigging numbers to make him look bad.

Fed View: Freshly Squeezed or Concentrate?

 If the orange Florida man is smart – a dubious proposition that – he’ll take a page from Ronald Reagan’s tenure and leave monetary policy to the sous chefs  at the Fed, who, under chairman Paul Volcker, squeezed the stagflation orange dry, tipping the economy into recession at the beginning of Reagan’s first term and unemployment reached double digits. Your correspondent remembers the increasing appearance of Michigan license plates dotting the roads of the Sunbelt capital he resided in then.

The Volcker grip on the money supply did its job, though. Economic health followed and Reagan reaped the hosannas that prosperity evokes.  So could Trump.

But if this orange isn’t exactly plump with juicy irony (much too generous a description for unintended consequences that follow from obtuseness), it does sit pretty much in the bowl of damned-if-you-squeeze, damned-if-you-don’t after Friday’s employment data dump from the Bureau of Labor Statistics and the dumping of its Cassandra, BLS director Erika McEnrtarfer, who Trump accused of rigging the numbers.

The report surprised analysts with weaker than expected job growth in July and sharp downward revisions to May and June job market descriptions, ostensibly setting up the Federal Open Market Committee to deliver on Trump’s artless demand of Fed Chariman Jay Powell that interest rates be cut.

But hold on.  Trump says the jobs data were cooked to embarrass him and that the real statistics should show a robust labor market, which would, of course, call for the Fed to stick to its current stance. What to make of future employment reports, easily the most closely followed of government economic statistics, if  you can’t trust whoever Trump installs?  How can bond vigilantes punish or reward in real time if the time isn’t real?  For the record, U.S. government securities yields were marginally higher early Monday.

Now, the Fed was already behind the eight ball because inflation, which had declined but leveled off in recent months, could be lurking in the tariff declarations of Mr. Trump accompanied by near stall speed economic growth – the stagflation backdrop that Volcker faced in the 1980s.

We suspect the stock market will care little for now, its participants apparently believing that Trump’s vicissitudes matter little in the real world. But that real world also includes valuations that are exceedingly rich, whether measured by market cap to GDP or forward price-to-earnings ratios.  This more than Trump’s antics could dim enthusiasm.

 

(Note to our readers:  We have been silent for far too long and though the pleas for the return of The Donovan Report have been less than deafening, we intend to weigh in on a more less frequent basis in these interesting times.)

Nasty, Brutish, and Not so Short

First published March 20, 2020, at TalkMarkets.com

Once I built a railroad, I made it run
Made it race against time
Once I built a railroad, now it's done
Brother, can you spare a dime?…

(lyricist E. Y. "Yip" Harburg,and composer Jay Gorney, 1930 )

Get ready, gentle reader, for numbers “like you’ve never seen them before,” in the favored phraseology of our supreme idiot, er, leader. 

Something tells us we are about to enter the 1930s in the 2020s. We used to wonder how our parents, grandparents and great-grandparents survived the Great Depression. You know who we’re talking about, the greatest generation. Walter Cronkite (look him up), our nation turns its lonely eyes to you.

Goo goo g’joob.

No more “OK, Boomer,” all right?  We’re all gonna get a dose of it.

Nine-eleven left your correspondent with memories of neckties and skirts flapping in the wind, trying to escape from an attack by members of their own species descended from the same Abrahamic source of God’s revelation. We don’t mean to be flip, but we’re inclined to agree with the Episcopal bishop in “Caddyshack” who exclaimed to Judge Smails the day after what would have been his record-setting putt popped out, “There is no God!”

Of course, there is. (We can discuss this later; His ways are mysterious).  In the meantime, prepare for that mysterious thing called uncertainty, which what all the market pundits (we among them) say plague investment decisions from cash to snake oil.

The equity and credit markets decide how to toggle between assets on real numbers from a central government that they assume is competent.  Can we trust a government that won’t nationalize the continent’s resources to whip it now? (apologies to Devo - look it up, generations x,y,z, et al.).

As we discussed in “Two Ex-Wives and Several Bartenders”, stocks are only for insiders at this point.  Either you sold like Sen. Richard Burr, (R-NC) did, or, like most of us, you scampered along as if all would all go according to plan. Talk about rigged. Oh, Doctor Evil, why didn’t you listen to Scott!

No one should be in stocks unless he/she knows something the world doesn’t. The lows are not in. Welcome to the Hobbesian world of buying the dips: nasty, brutish and short.

We Irishmen know life is not fair, but at some point, our brave forbearer stopped digging rotten potatoes and got to the USA.  Level the playing field while you can.  Await the $1,200-whatever check that won’t pay a month’s rent in Brooklyn, and tip your bartender if you can still see her again face to face.

Welcome to the Hobbesian world of buying the dips: nasty, brutish and short. 

Two Ex-Wives and Several Bartenders

(Originally published at Talkmarkets.com on March 18, 2020)

As we compose this, gentle reader, we are coughing and achy, but no fever or foreign travel, so the public authorities here in Dixie waved us on and didn’t swab our bodily fluids because, we suspect, they don’t have enough tests to waste on, let’s say, senior sorta guys who look like they can limp along for a little while longer. Or, more depressing, they harbor the unspoken thought that guys like us – and we have to glumly agree – are no big loss. No worries.  Still taking in plenty of oxygen between Marlboros.

In any event, as we warned in “The Great Fires of 2020”, “the world is due for something to blow up.” And so it has. Much has been made of the overused “black swan” to explain the equity market meltdown, which is true as far as it goes.

A worldwide recession, if not depression, is certainly baked in the COVID-19 cake.  Indeed, this is one of the easiest episodes for the financial reporter to tell her readers why the market soufflé has collapsed.  But there’s another ingredient in this not-so-secret recipe: stocks were just too damn rich.  Getting into our way-back machine, the ratio of market capitalization to gross domestic product was about 152% at the end of 2019.  At the close March 16, the ratio was 110%, suggesting stocks are near fair value.  Of course, the denominator in this fraction will be getting smaller as well; thus, stocks may still not be a bargain measured by the resized economic pie.

So don’t be satisfied it’s safe to buy stocks. Get out now: We’re doomed. As we heard some expert or another characterize the pandemic’s ultimate outcome, we’ll either get immunity or die. So we have that going for us. After all, the 10-year Treasury note yield at this writing is at 1.038%. It began the day at 0.78%. What a world! Still, one would have netted about 190% in price gain if she had followed our advice to buy at 3%, not to mention the raise she could get by refinancing that big old mortgage.

We anticipate your riposte: A stopped clock is right twice a day. And that’s a fair criticism of equity perma bears like us. Yet we still insist stocks are only for those willing to believe they are smarter than Mother Nature. (And, to be fair again, there are those among us who can see what we cannot see. The rich are different than you and us).

But if you are not one of the one-percent, we are reminded of Cary Grant’s character in “North by Northwest” telling government agents: “I've got a job, a secretary, a mother, two ex-wives and several bartenders that depend upon me, and I don't intend to disappoint them all by getting myself ‘slightly’ killed.”  We don’t either, gentle reader.

What to expect? 

• The Federal Reserve Board’s ability to keep financial markets liquid remains formidable. At the first sign credit markets were seizing up, as fixed-income and equity sectors fell in tandem, the Fed stepped in and righted the bond-stock relationship. It can succeed in this respect, but cannot defeat the lack of ventilators or the coronavirus grapes of wrath.
• The unemployment rate will reach double digits in next month’s employment report in March.
• The United States will not shut down like Italy. Americans are too restless, too diverse.
• If you must buy stocks, we recommend Amazon, which will rule the world once the dust settles. And pick an airline. The industry will be bailed out.
• Budget a $1,000 or more check in the mail in the next 30 days. Don’t spend it all in one place.

Data Briefing: How 'Real' Are Retail Sales?

Merrily, we roll along.

Data released this morning support the sense that the U.S. economy remains buoyant.  We wonder though.

Let’s get to the headline: the U.S. Census Bureau reported that retail sales rose 0.3% in December and up 5.8% from December 2018. 

It is curious to us, though, that the headline figure from the Census Bureau is adjusted for seasonal variation but not inflation.  Using the consumer price index as a deflator, the St. Louis Fed figures show just a 0.1% increase in retail sales in December from the previous month and up just 3.5% year over year.

Some details from the retail sales data worthy of note:

• Nonstore retailers (read on-line) garnered the highest sales figure of all categories excluding autos, posting $66.765 billion in seasonally adjusted sales, compared with $66.635 billion in November, an increase of about 2%.  For the year, nonstore retailers had sales of $778.374 billion, up 13.1%.
• Department stores continued to lag, with seasonally adjusted sales of  $10.936 billion vs. $11.019 billion in November, down about 0.8%.  For the year, department stores saw a 5.5% decline in sales.

Meanwhile, the Department of Labor said initial claims for jobless benefits fell 10,000 to 204,000, the fifth straight week of declines and reinforcing the sense that if you want a job you can get one.

The Great Fires of 2020

First published at TalkMarkets.com Jan. 15, 2020

We know, gentle reader, you have been mystified and concerned that our voice had been stilled by the deep state or that Ukrainian interlopers had taken control of our server.  Fear not, friends.  We are in fine trim and back to prognosticating as the teens of the 21st century give way to what we hope (we’re always ready for a good time) will be the roaring ’20s.

Without the benefit of Big Data (we consider it cheating), here’s what’s coming up, in no particular order because all are of importance.

• We “called” Donald John Trump’s election four years ago (see https://seekingalpha.com/article/3782936-happy-of-2016) but see all sorts of reasons why he should lose this time around.  Yet, as excruciatingly painful as it may be, we find it hard to believe a man — even an out-of-his-depth, Philistine man-child — enjoying the longest expansion in U.S. history with unemployment below 4% could possibly lose.  This depends, of course, on the likely outcome the president is not removed from office.  Despite what they say, Democrats must root for financial panic.

• Infamously, we have been perma bears on the stock market and extollers of the virtues of bonds.  It wasn’t a horrible call.  We advised buying the 10-year note at a 3% yield, and debt has done nicely since.  But we whiffed on the stock market, which appreciated 25% or so in 2019, depending on your index of choice.  Calling a top is futile, but we note that total market capitalization over gross domestic product is well over 150%, a level that historically signals significant overvaluation.  Either it’s different this time (for instance, the idea that the supranational nature of enterprise requires a more global perspective than U.S. GDP), or equity returns are destined to be negative this year.  Sell bonds (see inflation discussion below). Pare equity positions, but own Amazon (AMZN), the only retailer we see benefiting from either higher or lower consumer prices.

• Here’s a no-brainer: We’re doomed!  The most underreported story of 2019 was a continent on fire.  If charred koala corpses don’t do it, nothing will.  Climate change-fueled disasters will increase in frequency and intensity, but nothing will be done.  A wise confidante of ours says that any problem that calls for collective action will be opposed immediately by the Trumpist know-nothings who, like Huck Finn’s pap, blame “guvment” for any and all miseries.  Or, as another Huck Finn character, the Dauphin, says: H’aint we got all the fools in town on our side? And ain’t that a big enough majority in any town? Oh, the humanity!

• The Federal Reserve System’s Open Market Committee won’t raise rates in 2020.  When they do, it’ll be too late.  It will only do so if bond market vigilantism comes back in vogue. We know monetarism is out of fashion, last employed by the late Paul Volcker to conquer inflation in the 1980s.  The linkage between money supply and inflation appears to be severed, but only because the velocity of money has been on a downward trend since the great recession and has kept sliding during this long recovery.  Data from the Federal Reserve Bank of St. Louis show the M2 money stock increasing about 85% in the decade ending Dec. 31, while velocity has decreased 25%.  This is puzzling, but suggests to us inflation could return if velocity returns to a more “normal” level and lazy people like us don’t boost our productivity growth.  In any event, the Fed won’t risk the political fallout of raising rates, especially in Trump’s re-election year, unless the consumer price index itself turns decisively higher. 

• Unless we return to “a world lit only by fire” (William Manchester’s term for the middle ages), gold will become more of a barbaric relic, owned only by scolds who, like the puritans, are worried somebody, somewhere is having a good time.  Then again, the world may very well be on fire by the end of the decade.

• Some bubble will burst in 2020.  We can’t tell you if it will be housing again or corporate debt or student debt, but the world is due for something to blow up.  Take the corporate sector.  According to MacroMavens’ Stephanie Pomboy, the top three companies in the S&P 500 have more cash than the bottom 450 combined, leaving one to wonder how the nearly $10 trillion in corporate debt can be serviced if the world gets wobbly.

• On the sporting front, which, after all, is where the real money is, the rich get richer.  The New York Yankees with the signing of starting pitcher Gerrit Cole will be world champions this year, and the Dallas Cowboys, under new coach Mike McCarthy, will win the Super Bowl next year.  Matthew Wolff, the young golfer with the unorthodox baseball swing, will win two major tournaments this year.

Which reminds us that if we remember to keep our head down, turn not sway, and keep the left arm pinned to our chest, breaking 90 in the sporting life ahead is within our grasp.  If not, there’s always next year.  So we have that going for us.