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Today's October ADP private sector payroll report didn't change the economic outlook, but I still think the economic fundamentals are gradually improving. Job growth, as estimated by ADP, was marginally higher than expected (+230K vs. +220K), but as the chart above shows, that's within the range of what we have seen for the past several years. We would need to see numbers of +250-300K or more before getting really excited about a stronger economy.
The October ISM service sector report (first chart above) was OK, but the employment subindex (second above) was the highlight: a significant gain, of the sort we rarely see. This speaks to an improving level of confidence in the future, and that is one ingredient that has been sorely lacking in this recovery. As the third chart shows, the U.S. service sector continues to outpace that of the Eurozone, but neither one shows any meaningful deterioration.
Nevertheless, even relatively lackluster numbers like these carry an important measure for investors who are uneasy about holding cash: as long as the economy avoids recession and continues to grow, risk assets are likely to outperform cash since they carry yields which are significantly better than the zero yield on cash.
At the very least, a Congress at odds with the President means that federal spending is likely to remain subdued; taxes are highly unlikely to rise (the current burden of taxation is intolerable, but it surely is not going to get worse); there is a decent chance of some reductions in tax rates (especially for businesses) accompanied by some simplification of the tax code; and some growth-oriented measures (e.g., Keystone pipeline approval, market-based reforms of healthcare, reductions in employer mandates) have a good chance of passing. Any or all of these would act to convert headwinds into tailwinds, restore confidence, and boost optimism. A Republican Congress could be the best thing to happen to Obama's otherwise failed presidency.
Speaking of confidence, the ongoing decline in the price of gold confirms that the world is becoming less risk averse and gradually more confident. The declining price of 5-yr TIPS (using the inverse of their real yield as a proxy for their price) also reflects less risk aversion. These are very important indicators to watch. Further declines in gold and TIPS prices would bolster the bull case for markets and the economy.
8 comments:
I am happy to see the Donks become a minority party. I only wish the 'Phants would join them in obscurity.
Nixon speechwriter Pat Buchanan put it best; "What starts out as a cause or movement becomes a politics. Then it becomes business, and then finally a racket."
Our two parties long ago devolved into the racket stage.
Optimism? Based on the GOP successes of 2000-2008? A financial collapse, two unending and unwinnable wars in craphole nations, big deficits, Medicare Part D, and an economy contracting at a 10% annual rate?
Egads, I want another party to vote for.
Bipartisan? Key Republicans met in Washington on the day that Obama was first elected with one goal: to deny him a second term.
Since then they have obstructed rather than compromised.
Case in point: In 2012, right after the election, Boehner wanted a second chance at the entitlement reform bill he rejected in 2011. He was a fool not to take the deal the first time, and truth be told, my sense is that he would have if he hadn't been constrained by members of his caucus who have no interest in any compromise.
I'm all for bipartisanship, especially reforming the corporate tax rate so money trapped overseas can be repatriated, but some of the funds gained need to be allocated toward rebuilding our infrastructure, which has become a dangerous joke.
And let's not overgeneralize the results of an election in which only 38% of the electorate voted. (Note that I am not excusing the consequences of failing to vote, you snooze, you lose.)
Let's also note that initiatives like raising the minimum wage and marijuana reform passed even in "red" states. So the message of this election is more complicated than some might want to believe, although clearly it was a rebuke of Obama, but perhaps it was more his neoliberal centrism (Obamacare is, afterall, based on Republican plan), since the Dems that won were some of the most liberal, like Franken, Udall of NM, and Merkley, while the Dem centrists, like Pryor, lost.
I say that as a person who is more neo than liberal, although I think any label is often too simplistic, but I am merely interpreting the facts as I see them.
So I am all for bipartisan compromise, but that requires both intellectual honesty and movement from both sides.
Re: raising the minimum wage.
Anyone who has taken a basic Econ class should know that raising the minimum wage is foolish. Some people may end up making more, but others will be locked out because their labor will be overpriced.
Some facts: fewer than 3% of all workers in the U.S. make minimum wage or less. About two-thirds of those work in restaurant-related jobs. The vast, vast majority of people make more than minimum wage.
Raising the minimum wage would hurt many of the people it is intended to help, mainly the young, the poor, and the poorly educated. It is better for them to get any job, at whatever salary, and to start learning and progressing, than it is to mandate that their first entry-level job pay a "living wage."
The basic laws of economics say that artificially raising the price of anything will reduce the demand for that thing, in this case unskilled labor.
Politicians who push for higher minimum wages are pandering to the economically illiterate in the worst way.
Re: raising the minimum wage.
Anyone who has taken a basic Econ class should know that raising the minimum wage is foolish. Some people may end up making more, but others will be locked out because their labor will be overpriced.
Some facts: fewer than 3% of all workers in the U.S. make minimum wage or less. About two-thirds of those work in restaurant-related jobs. The vast, vast majority of people make more than minimum wage.
Raising the minimum wage would hurt many of the people it is intended to help, mainly the young, the poor, and the poorly educated. It is better for them to get any job, at whatever salary, and to start learning and progressing, than it is to mandate that their first entry-level job pay a "living wage."
The basic laws of economics say that artificially raising the price of anything will reduce the demand for that thing, in this case unskilled labor.
Politicians who push for higher minimum wages are pandering to the economically illiterate in the worst way.
Re: raising the minimum wage.
Anyone who has taken a basic Econ class should know that raising the minimum wage is foolish. Some people may end up making more, but others will be locked out because their labor will be overpriced.
Some facts: fewer than 3% of all workers in the U.S. make minimum wage or less. About two-thirds of those work in restaurant-related jobs. The vast, vast majority of people make more than minimum wage.
Raising the minimum wage would hurt many of the people it is intended to help, mainly the young, the poor, and the poorly educated. It is better for them to get any job, at whatever salary, and to start learning and progressing, than it is to mandate that their first entry-level job pay a "living wage."
The basic laws of economics say that artificially raising the price of anything will reduce the demand for that thing, in this case unskilled labor.
Politicians who push for higher minimum wages are pandering to the economically illiterate in the worst way.
"Politicians who push for higher minimum wages are pandering to the economically illiterate in the worst way."
Assuming arguendo that is true, the electorate in a democracy has a right to facilitate policies that reflect their judgment of what is in their best interests, and that is what we have just seen, again, even in red sates.
The reason I raised the issue was not about the policy itself, or it's benefits or detriments, but about the apparent contradiction between the policies of the party that won the most votes and the people who supplied those votes.
Far better than raising the minimum wage would be to eliminate FICA taxes on all people making less than $10 an hour. The lost revenue could be made up by having the Fed conduct QE and transferring the Treasury notes to the Social Security trust fund.
Don't worry, over the next 24 months nothing much will happen in Washington. First. because the GOP will not want anything to happen during "Obama's watch" and second because the GOP agrees on very little -- Healthcare? Immigration, Foreign wars???
The truth is that the US government (is stuck in neutral -- and likes it there) because if you make no laws, sign no bills and make no changes, no one can accuse you of signing new laws, making changes or even worse -- cooperating with the enemy.
I am certain that the GOP will say, we are ready to compromise as long as you do what we say... no so much because they are stupid but because they simply don't have the room to manoeuvre
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