With energy investment now in decline due to the Saudi price cuts look for this component of GDP to head south, as yet another ‘borrowing to spend’ generator fails to sustain its growth rate and odds of negative Q4 GDP growth increase dramatically.
By Lynn Doan
Nov 7 (Bloomberg) — The shale-oil drilling boom in the U.S. is showing early signs of cracking.
Rigs targeting oil sank by 14 to 1,568 this week, the lowest since Aug. 22, Baker Hughes Inc. (BHI) said yesterday. The Eagle Ford shale formation in south Texas lost the most, dropping nine to 197. The nation’s oil rig count is down from a peak of 1,609 on Oct. 10.
For the economy to grow more this year than last year, on average the ‘pieces’ need to grow at higher rates, which isn’t happening as previously discussed.
And underneath it all, for every agent that spends less than his income (demand leakages) another has to spend more than his income, or the output doesn’t get sold.
For all practical purposes, ‘spending more than income’ comes down to ‘borrowing to spend’ rather than depleting ‘savings accounts’ to spend.
And with the largest agent that spends more than its income- government deficit spending- on the decline, we need ‘borrowing to spend’ to increase that much more to sustain positive GDP growth.
Unfortunately the growth rate of credit expansion looks to be going the wrong way.
Gone up about 500,000 since benefits expired at year end for 1.2 million
Seems universally agreed the labor market is ‘improving’ even as the jobs chart has been downward sloping since the peak in April, wage growth has softened from relatively low levels, and the work week fell back some.
It’s all screaming ‘lack of aggregate demand’ in no uncertain terms. That is, the deficit is too small. And the new Congress is heck bent on deficit reduction and the majority supports the balanced budget amendment to the constitution that needs only a few more states to pass.
So the recent data shows export growth fading, credit expansion fading, housing soft and housing prices in decline, car sales past their peak, retail sales fading, and even industrial production fading.
Not to mention the Saudi price cutting that could easily wipe out the energy related investment component of GDP.
The October employment situation was mixed. Payroll jobs advanced but below expectations. The unemployment rate ticked down again. But wages remained soft. The data will let the Fed remain loose.
Nonfarm payroll jobs advanced 214,000 in October after gaining 256,000 September and 203,000 in August. Net revisions for August and September were up 31,000. The median market forecast for October was for a 240,000 boost.
The unemployment rate dipped to 5.8 percent in October from 5.9 percent in September. Expectations were for 5.9 percent.
Going back to the payroll report, private payrolls grew 209,000 after advancing 244,000 in September. Analysts projected 235,000.
Average hourly earnings edged up 0.1 percent after no change in September. Market forecasts were for 0.2 percent. Average weekly hours ticked up to 34.6 hours versus 34.5 hours in September. Projections were for 34.6 hours.
Essentially, the labor market is improving but slowly and remains soft. Based on today’s data and unless the numbers strengthen faster the Fed likely will not rush increases in policy rates.
Finally up a bit for the week!
But now down some 13% vs last year.
Construction, exports, factory orders, all in retreat, and energy investment now on the edge of collapse as oil prices fall.
Q3 already revised down some, with more likely. And odds continue to increase for a negative Q4.
All of which now seems likely to draw spending cuts/proactive deficit reduction from the new Congress?
MBA Purchase Applications
This is a decent jobs number, but a while back this ADP release switched from being a report of their payroll numbers to a forecast the BLS employment report, released on Friday. What they do is take their internal payroll numbers for the actual accounts they service and then use that information along with various surveys and other related data, including seasonal adjustments, to forecast Friday’s release. This is pretty much what the other professional forecasters do, which makes this report ‘just another forecast’ and not a ‘hard number’ report:
The ADP national employment report is computed from a subset of ADP records that represent approximately 400,000 U.S. business clients and approximately 23 million U.S. employees working in all private industrial sectors. ADP contracted with Moody’s Analytics to compute a monthly report that would ultimately help to predict monthly nonfarm payrolls from the Bureau of Labor Statistic’s employment situation. The ADP report only covers private (excluding government) payrolls.
ADP Employment Report
A lesser indicator but might be indicative at the moment:
ICSC-Goldman Store Sales
Both ICSC-Goldman and Redbook report slowing in the November 1 store-sales week with Redbook’s year-on-year same-store rate down 5 tenths to plus 3.9 percent. Redbook notes that this year’s late week Halloween, which fell on a Friday, may have backfired, having on the one hand boosted sales at those stores focusing on Halloween items but reducing sales at other retailers. Still, Redbook’s month-to-month comparison is plus 0.2 percent which offers a marginally positive indication for the ex-auto ex-gas reading of the government’s October retail sales report. Individual stores will post their October results on Thursday.
Trade a bit less then expected is also a downward revision to q3 GDP as exports fell.
Recall a prior post indicating the trade contribution to GDP looked suspect to the high side.
This is a partial adjustment.
Lower oil prices will help, but that also means less oil income for foreign producers who also buy our exports.
Slower global growth may have worsened the U.S. trade deficit in September. The trade gap in September expanded to $43.0 billion from $40.0 billion in August,
Exports declined 1.5 percent in September, following a rise of 0.3 percent in August. Imports were unchanged, following a 0.1 percent uptick the month before.
The petroleum gap grew to $14.0 billion from $13.1 billion in August. The goods excluding petroleum gap increased to $47.2 billion from $45.5 billion in August. The services surplus slipped to $19.6 billion from $20.2 billion.
Overall, slower global growth is nudging down growth in the U.S. But recently lower oil prices likely will result in a favorable number for October.
First construction spending was revised down/less than expected which lowered Q3 GDP forecasts, and then car sales were less than expected as well.
Together they are a large factor in consumer ‘borrowing to spend’ which is necessary to offset the demand leakages- those agents spending less than their incomes.
This doesn’t bode well for Q4, which is already at risk for little or no growth as previously discussed.
Again, this all happens when the deficit gets too small to ‘offset’ the unspent income in the economy:
Update on non-financial profits:
Another setback for construction, which a ‘borrowing to spend’ item:
Construction outlays unexpectedly declined in September on public outlays and somewhat on the private nonresidential component. Private residential spending was a positive for the month. . Construction spending declined 0.4 percent in September after a 0.5 percent decrease in August. Market expectations were for a 0.6 percent boost.
Meanwhile, manufacturing is chugging along as it usually is:
ISM Mfg Index
The ISM report stands out starkly from the net result of other anecdotal surveys on October’s manufacturing sector, showing outstanding growth at a composite index of 59.0 vs 56.6 in September. This level matches August’s level with the two the strongest since February 2011.
New orders, the most important reading in the report, rose a strong 5.8 points to a blistering 65.8. This points to rising activity across the supply chain in the months ahead. Export orders slowed in the month, as they did for Markit’s sample released earlier this morning, which implies that domestic demand is especially strong. In two signs of strength, total backlog orders rose while supplier deliveries, reflecting ongoing congestion in the supply chain, slowed.
Production, at 64.8, is strong and in line with orders. Inventories show slight accumulation. Price pressures moderated as they have in most reports for October, the result of lower oil prices.
This report may be just a bit too strong, given that ISM’s data have not been tracking well this year with hard data on the manufacturing sector where growth has been flat.