Stocks closed the day little-changed for the second-straight session ahead of Friday’s big jobs report, the final piece of major economic data in what has been a hectic week for the US economy.
First, the scoreboard:
- Dow: 16,940, +41, (+0.2%)
- S&P 500: 1,993, +7, (+0.4%)
- Nasdaq: 4,706, +3, (+0.1%)
- WTI crude oil: $34.70 (+0.1%)
The services sector — which accounts for about 85% of GDP — gave us some bad news on Thursday morning.
Markit’s reading on services activity slipped to 49.7, indicating contraction in the sector and missing expectations for a reading of 50.0, the breakeven point for contraction/expansion in the reading. In the release, Markit’s Chris Williamson said, “Business activity stagnated in February as malaise spread from the manufacturing sector to services. The Markit PMIs are signalling a stagnation of the economy in February, suggesting growth has deteriorated further since late last year.”
So that’s not great, especially considering the whole bullish narrative on the US economy has been predicated on strength in the services sector not getting dragged down by manufacturing declines but in fact picking up the slack and then some.
The Institute for Supply Management also put out its February reading on non-manufacturing activity in the US, with this measure rising slightly to 53.4 and respondents to this survey expresses positivity about overall business conditions in the US.
Elsewhere in economic data the latest weekly report on initial jobless claims showed claims rose slightly to 278,000 last week — up from 272,000 and missing expectations for a total of 270,000.
Claims haven’t totaled more than 300,000 for any week in a year, which Jefferies’ Thomas Simons thinks shows a labour market that is continuing to move towards full employment. Simons added in a note Thursday that, “The claims data also suggests that nothing fundamental has changed in the labour market, despite the negative tone to global markets and economies at the start of the year.”
Speaking of the labour market, the big February jobs report is due out tomorrow morning.
Via Bloomberg, here’s a quick look at what Wall Street expects:
- Nonfarm payrolls: +195,000
- Unemployment rate: 4.9%
- Average hourly earnings month-on-month: +0.2%
- Average hourly earnings year-on-year: +2.5%
- Average weekly hours worked: 34.6
In January, nonfarm payrolls grew by 158,000, less than expected as the unemployment rate fell and a number of economists noted that as we get closer to a labour market that is at “full employment” the absolute total of payroll gains each much must necessarily slow.
This suggests a downside risk to Friday’s consensus payroll growth forecast, with Neil Dutta at Renaissance Macro writing on Thursday that he’d take the “under” on this number in the wake of the employment readings out of Thursday’s ISM reading.
The most closely-watched part of the employment numbers out over the last year or so has been wage growth, which grew 2.5% over last year in January.
Expectations are for wages to continue growing apace, and corporate news out Thursday that Costco will raise wages adds to the case that while data may ebb and flow, there is no doubt wage growth is very much coming to America.
Wage growth, we’d add, is basically what’s required for inflation to begin perking up as you’re not going to get inflation in the economy until you have too much money trying to buy too few goods. And if you don’t have more money in the pockets of consumers (read: workers) then you’re not going to get upwards price pressure.
If you do? Well, here we are.
Bill Gross’ latest investment outlook was released on Thursday.
This time, he contemplates the end of the world. Or the end of capitalism. Not like they’re the same thing, per se, but it’s not clear that given the short lifespans we enjoy relative to the amount of time the solar system is expected to be in existence, these are definitely not not the same thing.
Gross (emphasis mine):
Our Sun — a rather tiny star in the galaxial scheme of things — seems inexhaustible. But 5 billion years from now, it will swallow, instead of nurture the Earth as it burns itself out — first contracting, then expanding like a flaming candle turned firecracker. Not to worry though. We won’t be around. It’s not that we are beyond worrying; it’s that our lives are much shorter and we needn’t think much about it …Capitalistic initiative married to an ever expanding supply of available credit has facilitated economic prosperity much like the Sun has been the supply center for energy/ food and life’s sustenance. But now with quantitative easing and negative interest rates, the concept of nurturing credit seems to have morphed into something destructive as opposed to growth enhancing. Our global, credit based economic system appears to be in the process of devolving from a production oriented model to one which recycles finance for the benefit of financiers. Making money on money seems to be the system’s flickering objective. Our global financed-based economy is becoming increasingly dormant, not because people don’t want to work or technology isn’t producing better things, but because finance itself is burning out like our future Sun.
The answer for investors is to borrow money and buy short duration paper.
Here’s a fun one from UBS’ Paul Donovan, via Business Insider’s Elena Holodny:
The importance of rule of law increases in the fourth industrial revolution because the economy is likely to become more virtual, and trade is likely to become more about trade in intellectual property rather than trade in physical product. In this situation protection of intellectual property becomes increasingly important, as this is where the value is likely to lie in the supply chain. Being able to rely on the rule of law to defend intellectual property is likely to encourage innovation, because the innovator has some certainty about being rewarded for their efforts. There is nothing new in this, save that the value of the idea may increase relative to the value of the physical product.
So, the fourth industrial revolution is usually about robots and stuff. You know, they are going to take our jobs, our money, our prosperity, etc. (But not at Mercedes, where humans have replaced robots because really nice cars need the kind of customisation a robot can’t do. Yet. Maybe.)
Robots are the enemy, then, even though they are made by humans. So, we’re the enemy? Either way.
But so this view, then, from Donovan that an economy increasingly built on intellectual property will require more legal firepower is a way to say that the services sector going to be of ever-more importance.
Now, this view isn’t exactly new as one theory of economic growth would argue that part of the first Industrial Revolution’s success can be attributed to the fact that intellectual property rights were finally taken seriously.
The idea is that if the law backs up your invention — or, your right to make money from your invention — then other people will be incentivized to invent other things, too.
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