It's damn ugly out there, folks.
The ugliness goes beyond the stock market, though. Labor conditions in the U.S. are rather dreadful for a simple reason: wage gains are atrocious. While we have added about 211,000 jobs on average a month this year, it hasn't been enough to quicken the pace of wages to the point where consumers have extra cash to spend more freely. The new paycheck is covering daily needs and bills, with little leftover to actually live life a bit.
Certainly many households have greater confidence as they now have a job, which is leading to more purchases on credit. However, the actual cash in their pocket just isn't expanding as it should be in this point in the recovery. That partially explains why Best Buy (BBY) and Home Depot (HD) are having continued success selling big-ticket goods such as high-definition TVs and washing machines, whereas the likes of Macy's (M), Kohl's (KSS) and Dollar General (DG) are seeing pressure on their average tickets. I strongly encourage you to read the earnings call transcripts from each of the major dollar stores this week -- they offer very telling evidence that all is not well in the U.S. economy.
According to the Economic Policy Institute, from 2013 to 2014 real (inflation-adjusted) hourly wages stagnated or fell for most American workers, including for those workers with the most education and the highest wages. Real wages at the top of the wage distribution totem pole fell by 0.7% at the 90th percentile and 1.0% at the 95th percentile. So disturbing, but unsurprising if you listen to tons of earnings calls.
Companies across many different industries continue to lack the pricing power the stock market priced into them months ago. Perhaps that explains why the market is so freaked out over the Fed's first rate increase -- it will raise the cost of capital, companies can't overcome that higher cost with price increases, and profits gets hit.
In contrast, the ECI notes, at the 10th percentile wages actually increased slightly due to state-level minimum-wage increases. Among education categories, the greatest real wage losses from 2013 to 2014 were among those with a college or advanced degree. Workers with a four-year college degree saw their hourly wages fall 1.3% from 2013 to 2014, while those with an advanced degree saw an hourly wage decline of 2.2%. Good luck servicing that college debt.
So while you and the rest of the dart-throwing trading community pray for an August employment number above expectations as it would delay the Fed liftoff, you might want to rethink what you wish for. What you should be hoping for is a 400,000-job increase in non-farm payrolls for August, September and the rest of the year.
First off, those types of job gains would remove the daily Fed watching that is causing serious volatility in all sorts of asset classes. Second, very robust job growth would actually get companies earning consistently strong profits; it could be argued that stocks have risen in recent years more so on liquidity sloshing around the system than old-school hearty profit growth.
Will we get a 400,000 jobs number? Well, it's unlikely despite encouraging economic signs that developed pre-stock market rout.
Orders for U.S. capital goods rose in July by the most in a year. U.S. second-quarter GDP growth was revised sharply higher to 3.7% versus 2.3% earlier, prodded by stronger consumer spending. It's possible we finally bust through the 300,000 barrier, which to me would be wonderful as it likely would mark the start of Fed rate increases at the September meeting. Let's get this going already.
I would add this on the employment market, however. In my talks with restaurant and retail executives, things are becoming quite tight out there in the search for labor. Job applicants per open position for these types of lower-skilled workers are dwindling, which is triggering the need to raise hourly wages to attract bodies.
This could mean one of two things. First, people are staying in their jobs longer after finally securing a gig, a sign that companies are making it through the rough patch in global trade well. Second, the economy is finally picking up real steam that will support increases in inflation, which the Fed badly needs in order to support its gradual rate increases.
