Last week two of my favorite data points came out: Payrolls & Trade.
Payrolls were a huge miss. Expectations were for 180,000+, but came in almost 50% lower (at 98,000). Automatic Data Processing (ADP) – a global leader in payroll processing – predicted 263,000.
(This is a huge egg on their face. And it should tell you to be wary of mainstream “experts.”)
Trade data was also bad.
The background to trade data has been that U.S. fracking reduced oil imports and boosted exports.
That also trickled into oil derivative products like plastics and chemicals. But when oil prices plunged, the value of all these plunged with it. When oil rose back up, so did the value.
To escape the distortion, it’s good to focus on the non-petroleum aspects of trade.
First of all, U.S. exports are dominated by two things: agriculture and autos.
But autos aren’t really exports: they are auto sub-assemblies that we ship to Mexico and Canada, where they become finished cars and get re-imported.
Drill-down into imports and you’ll see they were flat with two exceptions: a massive (~$2B) drop in smartphone imports and a massive drop in autos.
The smartphone import drop is one I’ve been predicting for a while. That’s just the tail-end of the wave that follows a new iPhone release.
The auto drop is extremely important though. Autos represent a lot of what’s wrong with the U.S. economy.
- End of the cycle: we hit peak auto demand last year. In fact, the auto makers over-built and are carrying massive excess inventory. So much that GM and Ford recently shuttered some factories as they bleed down the excess. That’s why auto imports dropped: sub-assembly production dropped.
- End of student loan turbo-charged debt: student loans have grown $1 trillion since the recession ended, from a base of ~$200 billion. That money had nothing to do with school and was just a way to get credit into the market. Most of that money went to vacations and cars. Only a fraction went to schools. This is why forgiving student debt is B.S. and should not be allowed. But the real point is that the $1 trillion isn’t growing. So the extra fuel for the economy – and particularly car buying – has stopped.
- “Unnatural acts” have returned (a la 2007): when sales start to flag, salesmen resort to their bag of tricks. One is to extend easy financing. Instead of 4 year loans, almost 50% of new car loans are 6~7 years in duration. (Very easy to do when interest rates were 0%. Less easy at 1%.) Another trick of easy financing is to lend to unqualified borrowers. And that’s happening and the payback is obvious: delinquency rates are higher than they were in 2007.
The fact that sales depend on unnatural acts is a clear sign that normal consumer spending has been exhausted. Growth now depends on picking through the bottom of the barrel.
Worse, the entire house of cards depends on massive debt that is set to get more expensive.
But the message from the trade data was that there is no growth going on. Consumers are spending less (autos) and businesses aren’t buying more capital and industrial equipment.
Beyond “Payrolls and Trade,” other macroeconomic data have also been weaker than expected.
All in all, the data is supporting my narrative that companies cut costs too much last year and so they replenished supplies at the end of the year. But beyond that replenishment, there hasn’t been much actual growth.
That means there will contradictory signals. On the one hand, earnings reports will likely be positive (my theory of margin expansion thanks to slightly expanding top-lines and flat operational costs). On the other hand, companies are likely to be even more frugal heading into the third quarter.
KEY TAKEAWAY: Major economic data points like payrolls and trade were very weak. Auto debt and student debt are out of control. And my narrative that consumers are almost tapped out is continuing to play out. This will lead to companies becoming more frugal heading into the third quarter.
Editor of Moneyball Economics
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