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October 7, 2022

Economic Update



Steve Scranton

SVP, Chief Investment Officer and Economist

When it comes to the US economy, the best description is to steal from a classic children’s favorite book. The jobs component is the “little engine that could”. The Bureau of Labor Statistics (BLS) reported another solid month of jobs growth. The pace of jobs growth is slowing but still solid. The nation added 263,000 jobs in September after adding 315,000 jobs in August. The BLS also revised the past two month’s data with a net revision upward of 11,000 more jobs. The BLS also said that Hurricane Ian had no discernable effect since the survey period was before the hurricane hit.

Summary

 

September

August

Growth in non-farm payrolls

263,000

315,000

Average hourly earnings growth (year-over-year)

5.0%

5.2%

Labor force participation rate

62.3%

62.4%

Unemployment rate

3.5%

3.7%

Underemployment rate

6.7%

7.0%

Change in labor force

+172,000

+786,000

 

Establishment Survey

Three industries showed job losses while the remaining eleven industries showed gains. Once again, it was the service industry that had the industries with strongest jobs growth. Education & Health Services, Leisure & Hospitality and Professional & Business Services accounted for 83% of the total job growth.

Top Four Industries for Jobs Growth

Industry

Jobs Gain/(Loss)

Education & Health Services

+90,000

Leisure & Hospitality

+83,000

Professional & Business Services

+46,000

Manufacturing

+22,000

 

Bottom Five Industry Sectors For Jobs Growth

The government sector showed the biggest job losses followed by Financial Activities and Transportation & Warehousing.

Industry

Jobs Gain/(Loss)

Government

-25,000

Financial Activities

-8,000

Transportation & Warehousing

-7,900

Retail Trade

-1,000

 

The pace of wage increases slowed from 5.2% year-over-year growth to 5.0%. Good news for employers, not so good news for employees. Employees did not see any additional income via longer hours worked or increased overtime. The average work week was unchanged at 34.5 hours and overtime was unchanged at 3.2 hours. Average weekly earnings rose 4.1%.

Household Survey

The Household Survey showed slightly weaker results than the Establishment Survey. The Household Survey showed a 205,000 increase in the number of people who said they became employed. The labor force grew by 172,000. As a result, the unemployment rate fell from 3.7% to 3.5%. The number of people not in the labor force (i.e. not employed or not looking for work) rose by 229,000.

The number of people working part-time for economic reasons fell by 306,000. This was primarily due to a decline in the number of people working part-time due to slack work or business conditions. This category declined by 192,000. Unfortunately, the continued high level of expenses appears to be forcing more people to work multiple jobs. The number of people working multiple jobs increased by 484,000. The number of people who decided to become their own boss increased as the number of self-employed workers increased by 229,000.

For those already unemployed, the data improved. The average length of unemployment fell from 22.3 weeks to 20.2 weeks. This is most likely the explanation for why the number of people not in the labor force increased. If you have been unemployed for a long time and you give up looking for work, that decreases the average length of unemployment. The percent of the unemployed who have been unemployed for 27 weeks or longer fell from 18.8% in August to 18.5 % in September.

Conclusions

  • September’s employment report is good news for employers and employees but probably bad news for the financial markets.
  • September’s employment report does nothing to cause the Federal Reserve to change their strategy for raising interest rates. If anything, it may convince Federal Reserve board members to continue with the 0.75% interest rate increases. The Federal Reserve wants to see slack starting to develop in the labor market in order to relieve wage pressures. A 3.5% unemployment rate will not give the Federal Reserve any confidence that labor slack is developing.
  • My recession warning remains in place. I believe that, due to the aggressive and rapid increases in interest rates, the economy is being pushed towards a recession by the end of 2023. Consumes are coming under increasing financial stress as evidenced by the large increase in the number of people now working multiple jobs.
  • Now is the time to stay focused on your business or job and not on media headlines. Those who stay focused and prepare for a potential recession will be those who continue to succeed during a recession and be able to look for opportunities that develop.

Patrick Dawson

MASTER CHEF

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Fixed Income Update



Brian Brill

Vice President
Senior Portfolio Manager

Interest rates took a wild ride as vaccine euphoria versus winter is coming might be the best title to describe this week for fixed income investors.

The week started off with positive news but in the world of bonds, good news is generally bad for bond prices as yields rise. For the first three hours on Monday morning, financial markets moved in a single straight line frenzy with long-term yields reaching their highest levels since March. The catalyst for this move was an announcement from Pfizer/BioNTech that they have  produced a vaccine that is showing promising results in preliminary testing, preventing greater than 90% of COVID-19 infections. This was great news and markets got wrapped up in the possibility of getting our society and economy back to normal. But euphoria is giving way to reality as these benefits may be more of a 2021 story. As the week ends, focus has pivoted from optimism over COVID-19 vaccine efficacy to increased infection rates. The national infection rate has trended toward 1.5%, the largest daily increase since late July, New York City has threatened to shut down in-person learning at public schools, and Chicago issued a stay-at-home advisory effective Monday.

Acknowledging the rising cases and the diminished chances for a fiscal package this year, Federal Reserve officials have turned dovish. Just last week, Fed Chair Jerome Powell said “We think that this very large effective (asset purchase) program is delivering about the right amount of accommodation and support for the markets,” but this week he indicated that the Fed may need to do more to combat near-term downside risks to the economy. Powell said this week, “We do see the economy continuing on a solid path of recovery, but the main risk we see to that is clearly the further spread of the disease here in the United States. A COVID-19 vaccine is certainly good and welcome news for the medium term. The next few months could be challenging. It's just too soon to assess with any confidence the implications of the news for the path of the economy, especially in the near term. The path forward is going to be challenging for a number of reasons, my sense is that we will need to do more, and that Congress may need to do more as well on fiscal policy."

The Fed has few options for further accommodation as rates are floored at the lower band and forward guidance indicates rates will remain at current levels through 2023. This leaves the possibility that they may revise Operation Twist which means buying more long-term securities.

Time will tell if this policy option becomes more of a possibility and market participants will be focused on the December Federal Open Market Committee (FOMC) meeting for guidance.

For the week, Treasury yields traded in a much wider range but still increased between 3 and 8 basis points. 


Company Spotlight

APPLE INC

Apple is in impressive financial health. We remain comfortable purchasing debt issued by the firm.

AMERICAN EXPRESS CO

American Express is in good financial health, evidenced by strong capital levels and exceptional credit quality. We remain comfortable purchasing debt issued by AXP.

BOEING CO/THE

Boeing's decision to shutter MAX production and the opacity surrounding a return-to-service timeline have put pressure on the firm’s credit metrics. We remain comfortable with our holdings of Boeing at this time.

COLGATE-PALMOLIVE CO

Colgate filed its 10-Q this week. We don’t anticipate the firm will have any problems meeting it’s near term debt obligations and remain comfortable purchasing debt issued by the firm.

COSTCO WHOLESALE CORP

Costco submitted its financial statements this week. They reflect a very strong company with little risk of default. We continue to remain comfortable purchasing debt issued by Costco.

EBAY INC

EBay’s financial statements reflect a company in healthy financial shape. We remain comfortable purchasing debt issued by the firm.

GENERAL ELECTRIC CO

GE's financial statements show a company that is navigating a transitionary period. We continue our wait-and-see approach to GE's massive corporate transformation.

CORNING INC

Corning released its 10-Q this week. The firm continues to maintain a strong balance sheet and consistent, healthy free cash flow. We remain comfortable with Corning's ability to meet debt obligations.

ALPHABET INC-CL C

Alphabet's financial statements, filed this week, show an impressively solid balance sheet and substantial free cash flow generation. We remain comfortable purchasing debt issued by the firm.

HONEYWELL INTERNATIONAL INC

Honeywell is an industry leader in both products and financial strength, we are comfortable purchasing debt issued by the firm.

INTL BUSINESS MACHINES CORP

IBM filed financial statements this week. The firm continues to generate adequate cash from operations to cover debt obligations. We remain comfortable purchasing debt issued by IBM.

INTEL CORP

Intel's financial statements show a company with manageable debt levels and meaningful cash flows. We believe Intel has no foreseeable problem meeting its future debt obligations.

3M CO

3M filed its 10-Q this week. The firm continues to report a strong balance sheet, ample liquidity and substantial free cash flow. We remain comfortable purchasing debt issued by the firm.

MICROSOFT CORP

Microsoft's financial statements continue to show consistently significant revenue generation and a strong balance sheet. We remain comfortable purchasing debt issued by the firm.

NIKE INC -CL B

With strong financial statements and the ability to allocate capital as management sees fit, Nike is in impressive financial health. We remain comfortable purchasing debt issued by Nike.

ORACLE CORP

Oracle submitted financial statements this week. The firm continues generate remarkably consistent free cash flow, sufficient enough to fund its generous capital return program and service its debt obligations. We remain comfortable purchasing debt issued by Oracle.

PROCTER & GAMBLE CO/THE

P&G reported a very nice quarter and the financial statements continue to reflect the benefits of scale. We remain comfortable with the firm's ability to service its debt obligations.

TJX COMPANIES INC

TJX's financial statements, filed this week, reflect a company in sound financial health. We remain comfortable purchasing debt issued by TJX.

 

November 13, 2020
Index
Current
Last Week
Wk Chg
Last Year
Yr Chg
Tax-exempt MMF
.05%
.05%
.00%
1.01%
-.96%
Taxable MMF
.07%
.07%
.00%
1.74%
-1.67%
2-Year Treasury
.18%
.15%
.03%
1.59%
-1.41%
5-Year Treasury
.41%
.36%
.04%
1.63%
-1.22%
10-Year Treasury
.90%
.82%
.08%
1.82%
-.92%
30-Year Treasury
1.65%
1.60%
.05%
2.30%
-.65%
5-Year Exp. Inflation
1.65%
1.55%
.09%
1.54%
.11%
2-Year Corporate*
.41%
.38%
.03%
1.90%
-1.49%
5-Year Corporate*
.89%
.85%
.04%
2.17%
-1.28%
10-Year Corporate*
1.71%
1.67%
.04%
2.70%
-.98%
30-Year Corporate*
2.73%
2.74%
.00%
3.38%
-.65%
2-Year Municipal**
.31%
.28%
.04%
1.17%
-.86%
5-Year Municipal**
.43%
.41%
.02%
1.31%
-.88%
10-Year Municipal**
.99%
.97%
.02%
1.76%
-.77%
30-Year Municipal**
1.78%
1.74%
.04%
2.41%
-.63%
10-Year German Govt Bond
-.55%
-.62%
.07%
-.36%
-.19%
10-Year U.K. Govt Bond
.34%
.27%
.06%
.71%
-.37%
10-Year Japanese Govt Bond
.02%
.01%
.01%
-.09%
.10%
10-Year Spanish Govt Bond
.11%
.09%
.01%
.45%
-.34%
10-Year Italian Govt Bond
.66%
.64%
.02%
1.32%
-.66%
Fed Funds
.25%
.25%
.00%
1.75%
-1.50%
Prime Rate
3.25%
3.25%
.00%
4.75%
-1.50%
Dollar***
$92.75
$92.23
$0.52
$98.16
-$5.41
CRB
$151.86
$147.70
$4.16
$180.09
-$28.23
Gold
$1,886.10
$1,951.70
-$65.60
$1,473.40
$412.70
Crude Oil
$40.15
$37.14
$3.01
$56.77
-$16.62
Unleaded Gasoline****
$1.13
$1.08
$0.04
$1.49
-$0.37
Note:  Municipal yields are as of the previous business day.
* Composite A
** General Obligation AA+
*** Int'l value of the U.S. dollar (Avg. exchange rate between the dollar and 6 major world 
    currencies).
**** Futures price per gallon