Government Pushes Hiring Up In June

Government Helped June Labor Report

The private sector drives jobs growth in America, so most economists view public sector growth as bad because it’s unsustainable. The worst case would be a growing public sector and a shrinking private sector since the public sector needs private sector money to survive. As you can see in the chart below, the government added 35,000 new jobs, with 22,000 coming from local governments. That’s unlikely to continue as you can see the blue bars are mostly higher than the grey bars which represent the 12-month average. Like I said, even if you take away all the government jobs, it was still a great report, but it’s still worth noting the breakdown between public and private.

Restaurants Crater

The graphic below is interesting because restaurant sales have previously gone negative prior to recessions. There has been a slight improvement in the year over year numbers, but that’s only because of weak comparisons. A 1.0% decline in sales and a 3.0% decline in traffic are still disasters which imply that the consumer sentiment numbers, which have been good, aren’t translating into spending at restaurants. Restaurants are supposed to be great for millennials who like experiences over goods. Restaurants are now anchoring malls. If restaurants go down, malls will have nothing left to replace them with and they will fold. Even with these putrid results, yearly industry job growth was up 1.0% year over year in May which was a sharp deceleration from the 1.9% growth in April. It’s tough to use this stat to come up with employment estimates because it’s behind by a month, but what is fairly certain is the longer declines continue, the more likely negative impacts on the labor market will be felt.

John McCain Has Surgery

As I mentioned in a previous post, the Republicans were planning on getting a vote on the healthcare plan this week. I have been expecting something to be passed by the end of August. With Rand Paul and Susan Collins ‘hard’ no’s, and many other moderates possibly against the plan, I wasn’t expecting anything to be done this week. The chances of anything getting done this week were dashed when the news was released that John McCain had a blood clot by his eye which he needed surgery on. Without McCain, the GOP doesn’t have a majority to file a motion to proceed with the vote. McCain will stay in Arizona in the next few days. It’s not as if this plan had a great shot at passing, but McCain’s absence nixed it. The obvious response would be for McConnell to alter the bill to make it more popular. Unfortunately, that’s not as easy as it sounds because members of the GOP disagree with each other on the fundamentals of healthcare. There are very wide disagreements among the extremely moderate and extremely conservative flanks. Given Mitch McConnell’s vast experience in Washington and the need to get something done, I still think there will be movement by August. Time is on their side.

As I predicted a few months ago, many of the constituents and businesses are getting angry and disappointed by the hold up in Washington. Sentiment is waning as the public wants tax reform and is unhappy with the healthcare plan. My argument is that the unpopularity of the healthcare plan will force the GOP to pass a large tax cut to gain credence before the 2018 mid-term elections. Obviously, that would be great for stocks. I don’t think that is priced in as many investors are beginning to give up on Washington offering them any help. Certainly, Jamie Dimon has given hope as he cursed about the situation on the JP Morgan conference call.

Trump A Non-Factor

Speaking of conference calls, the President’s name wasn’t mentioned nearly as much in Q1 as in Q4 as you can see in the chart below. This chart is slightly misleading because only 25 firms reported earnings by July 12th when this was made. Technically, that means the S&P 500 is on pace for 40 mentions of Trump in Q2, but that’s probably a faulty calculation because there’s not enough data. The point this chart makes is that the market has moved on from the concept that Trump will help business. That’s good news for the bulls because it means there’s low expectations.

If healthcare reform passes, the stock market might selloff initially because it’s unpopular, but the chatter will switch to how great tax reform will be which should give the stock market some momentum to push higher. It could be a self-fulling prophesy where the talk of tax reform gets business going. That’s what happened after the election, so there could easily be a second wave. Tax reform would also allow the Fed to keep going with the unwind of its balance sheet which doesn’t look that promising right now as inflation is waning and so are the hopes for Q2 GDP growth. There are only 2 more updates for the Atlanta Fed’s GDP Now estimate before July 28th. At 2.4% annualized growth, the hopes have been dashed for a large bounce back from Q1.

Conclusion

Restaurant sales have been weak for a while, so clearly this time the indicator didn’t work in predicting a recession. That being said, the economy isn’t exactly rolling on all cylinders as GDP growth for Q2 looks to be at about 2%. What is rolling on all cylinders is the stock market as Netflix stock soared today on a subscriber growth beat. If my expectation that tax reform has a higher than consensus chance of passing, stocks could rally further once the chatter heats up after this healthcare plan is passed and is out of the way. The Democrats will try to stall the tax cuts, using the unpopular healthcare plan as their main political ammo.

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