Job Cuts Spike, But Jobless Claims Fall

Solid MBA Applications

MBA applications composite index was up 5% weekly which was on top of 7.2% growth. This report was in the week of January 31st. Purchase index was down 10% after rising 5%. However, on a yearly basis, growth was 11%. The past 3 weeks have averaged 12% yearly growth. This has been a great start to the year for housing. 

Refinance index was up 15% weekly after rising 5%. That’s because rates are very low. In the week of February 6th, the average 30 year fixed mortgage rate fell to 3.45% which is below its low in September 2019. Lowest rate ever was 4 basis points lower in July 2018.

As you can see from the chart below, the difference between current mortgage rates and the effective rate on debt outstanding implies refinancing will increase like the MBA refinance index shows is happening. As homeowners refinance, they gain extra spending power which explains why they are confident. Once they refinance, it doesn’t even matter if rate rise; that only impacts new borrowers.

Solid Markit PMI

Just like the ISM non-manufacturing PMI, the Markit services PMI increased. The economy has momentum. Final Markit services PMI for January was 53.4 which was up 0.6 from December and was a 10 month high. It was 0.2 higher than the flash reading. This helped push the composite PMI up from 52.7 to 53.3. 

Because of this solid reading, the comment section of the report stated, "The PMI data indicate that the US economy is ticking along at a steady but unspectacular annualized rate of growth of approximately 2% at the start of 2020. Growth has gained some momentum from the lows seen in the fall as the service sector enjoys stronger growth and manufacturing has also shown signs of the trade-led downturn easing.”

Within the service sector, new business growth was moderate as it was unchanged from December. Client demand has been up for 3 straight months as firms are adding new customers. Similar to the weakness in the export index in the ISM report, except worse, new foreign business fell for the 5th time in 6 months. 

Just like the pickup in job creation in the ADP report, the Markit employment index rose, although not by as much. It was the highest since last July, even though the workforce only increased marginally. Similarly, backlogs increased to the strongest level in 6 months as they were above their long run average.

Weakest part of this report was that 1 year expectations were subdued again. This is the opposite of the Markit manufacturing report. It appears demand is coming from increased marketing, but firms are uncertain about its longevity. Interestingly, unlike the ISM report, the prices index was above 50 for the 4th straight month and was the highest since July. That’s even though the Bloomberg Commodities total return index is down 8.1% year to date. 

Higher prices came from wage inflation and supplier prices. Price index was still below the long run and 2019 averages though. Finally, output inflation was modest because even though costs increased, the pass through to clients was only partial.

Job Cuts Increase

Just like the beginning of last year, job cuts spiked in January. They increased from 32,843 to 67,735 which was the highest reading since last February. Monthly growth was 106% and yearly growth was 27.8%. This was a bad report. Tech caused the sequential weakness as cuts increased from 719 to 13,869. 2019 was a weak year for tech as it cut 64,166 jobs which was up from 14,320 in 2018. 

If you annualize the January total, cuts would increase to 166,428 in 2020. The sector likely won’t have that many cuts though as this report works in fits and starts. Overall number of cuts in the economy could easily swing lower in the second half of the year just like last year.  

Among the 67,735 announced job cuts, 22,424 were for restructuring, 18,943 were for closing, and 5,407 had no reason provided. Second to tech, retail had 10,444 cut announcements. Of the 3,852 cuts due to bankruptcy, 2,631 were in retail. 6,924 of the retail cuts were because of store closings. Industrial goods manufacturing firms had 6,098 cuts. 

Challenger stated, “Industrial Manufacturing continues to be in recession. This industry has been hit hard by slowing orders, lower corporate investments, and trade concerns over the last 12 months.” I disagree with this assessment of manufacturing as the PMI improved and ADP showed it added 10,000 jobs. And I don’t think the BLS report will show as many jobs created. But it seems like the manufacturing sector is exiting its recession.  

Finally, there were 23,229 hiring announcements which fell from 26,313 in December and 74,040 in January 2019. This was the lowest total since November and the lowest for a January since 2016.

Jobless Claims Fall

Jobless claims report was the opposite of the Challenger report. It showed 202,000 claims which fell from 217,000. This was below the consensus of 215,000. 4 week average fell 3,000 to 211,750. The chart below makes the scenario look much worse than it is, but I find it interesting. 

Just make sure you know that initial claims show there is no chance of a recession coming soon. With that understood, there hasn’t been a new cycle low in claims in 42 weeks.

Personally, I don’t see a new low occurring ever again. But I also don’t see a recession in the next 2 years. The longest streak without a new low ended in 2014 as it lasted 44 weeks. Currently, claims are the 3rd lowest ever. They need to fall by 9,000 to match the cycle low and 10,000 to make a new low. 

To be clear, the reasoning behind ignoring this streak is because claims can only get so low. The limit is above zero. Claims are very close to their record low adjusted for the size of the population. Don’t try to be a penny wise and a pound foolish. There is no weakness here.

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