Slightly Disappointing Wage Growth

Within September’s employment report, hourly wages were up 0.1% from last month which missed estimates for 0.2% growth. Plus, August’s reading as revised down a tick. The exact same was true for yearly growth as hourly wages were up 4.7% instead of 4.8% and August’s reading went down from 4.7% to 4.6%. 

Even still, that’s strong wage growth. The main problem is job creation. It's surprising that there was that much wage growth since leisure and hospitality dominated seasonally adjusted job creation.

The length of the average workweek was 34.7 hours which rose from 34.6 hours which was also the consensus. Because of that uptick in the workweek length, weekly private earnings growth rose from 5.2% to 5.6% which is the highest growth since May. This wage growth is much more important than May’s because so many more people have jobs. In February, weekly earnings growth was 3%, but that was more impressive because we had full employment.

It will be interesting to see if we start to see higher inflation because of an uptick in the cost of labor. The only way for inflation to rise is if we see higher services inflation because commodities have been stuck in the mud. By the 2^nd half of next year, we will likely see higher commodities inflation. But until then, it will be all about services in rate of change and absolute terms.

September ISM PMI Rises (Above 50 Employment)

September services ISM PMI rose from 56.9 to 57.8 which beat estimates for 56.3 and the highest estimate which was 57.4. This looks much better than the manufacturing report on a rate of change basis. Remember, the manufacturing new orders index fell 2.3 points. Services new orders index was up 4.7 points to 61.5. 

As you can see from the chart below, the services PMI rose slightly more than manufacturing fell, so the composite increased slightly.

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A most important change in the services report was that the employment index rose above 50 which means improvement. It was up from 47.9 to 51.8. I’m surprised it took this long because the labor market has created millions of jobs in this recovery already. Now that it’s above 50, the labor market improvement has slowed. 

Although the September BLS report had great private sector job creation even if you exclude the 66,000 manufacturing jobs added. Interestingly, the prices index was down 5.2 points to 59. That’s still fairly high when you consider how low CPI and PCE inflation are. The biggest change was in supplier deliveries which fell 5.6 points to 54.9 which is a more normalized level.

This PMI is consistent with 3.2% GDP growth. It was the 2^nd highest PMI of the year as only July’s 58.1 beat it. Atlanta Fed’s GDP Nowcast calls for 34.6% quarter over quarter annualized GDP growth. That’s all about the crazy easy comp. We will get back to focusing on the Nowcast GDP estimates in Q4 when the comp is more normalized.

Positive Comments

Let’s look at the comments from this report now. A wholesale trade company stated, “Very good sales trend in home-improvement product sales, but challenges on market conditions exist like limited ocean capacity from Asia to the U.S., delays in port and rails as a result of COVID-19 pandemic impact.” 

The home improvement industry has been the hottest part of the economy. It combines the spending on projects by new homeowners, as the housing market is on fire, with the projects existing owners made to fix up their houses since they spent more time in them during the lockdowns.

Art, entertainment, and recreation firm stated, “Our industry is facing a bleak outlook, as the Hollywood studios have pulled back almost all of their content from October and November and moved it into next year. Coupled with the state health mandates restricting our attendance, we expect to operate at a loss in 2020 and 2021.” 

The latest James Bond movie was delayed until next year which is killing movie theaters. Since NY state isn’t open, companies don’t want to release blockbusters to a limited audience. Obviously, Broadway is in trouble as well.  

Spending On Dining

Spending on dining is making a comeback which is great news for casual dining firms. As you can see from the chart below, casual dining spending growth according to the BAC internal data is down about 30% from last year which is up from the trough of -60%. Initially, companies like Darden will be in good shape because they won’t have to compete with independent restaurants. However, they will return in due time.

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Demand for more diverse options will always exist. Either new owners will take the place of old restaurants or places will reopen. The chart also shows quick service growth has been strong for the past few months because it took share from sit down dining which has more COVID-19 risk. 

The worst area for dining is NYC where indoor capacity is limited to 25%. Based on demand for fast food because people are tired of eating their own cooking, Bank of America raised their price target on McDonald’s to $250 (closed at $226.07 on Monday).

China Trade War To Keep Going?

Some bulls believe that if Biden wins the election, the trade war with China will be over. Others think some tariffs will be gone, but don’t think the conflict with China will end. This is a long term battle that will last many presidencies. As you can see from the chart below, about 70% of Americans have an unfavorable opinion of China. Plenty of Biden voters also don’t like China. That’s why Biden has been seemingly talking tough on China, yet in the past, he has been extremely complimentary of China.

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Bulls believe that even if Biden raises taxes on corporations, the elimination of tariffs will counter that negative. Firstly, he might not raise taxes because the GOP could win the Senate. However, he had said repeatedly that he does intend ot raise taxes, then backpedaled on those statements. Secondly, it won’t be smooth sailing for America-China relations over the next 4 years and probably longer.