Last Friday, the Labor Department revised both their December and January payroll reports by a total of 34,000 jobs, from 260,000 down to 239,000 in December, and from 517,000 down to 504,000 in January. Even though the January decline isn’t as much as I had expected, I stand by my previous statements that I believe the Labor Department likely grossly exaggerated the January payroll report due to extraordinary seasonal adjustments. The inflated number likely came from January’s unseasonably warm weather, keeping some holiday workers on the job, the resolution to a California job strike, and other unusual events last January.
In previous job-related news, ADP announced on Wednesday that February private payrolls rose 242,000, substantially higher than economists’ consensus estimates of 205,000. The January private payroll was revised up to 119,000, from 106,000 previously reported. Clearly, ADP cannot find the 504,000 jobs that the Labor Department reported in January, which still looks grossly distorted by seasonal adjustments.
The February payroll report came in at 311,000 new jobs, substantially better than the economists’ consensus expectation of 225,000. However, despite this robust payroll job growth, the unemployment rate rose to 3.6%, up from 3.4% in January due to a growing workforce as well as seasonal adjustment distortions. The labor force participation rate rose one tick to 62.5% in February, from 62.4% in January.
The biggest shock in the report is that average hourly earnings rose by just 0.2% in February to a 4.6% annual pace, down from a 4.8% annual pace in January. Lower wage growth will keep the Fed happy and may cause them to raise key interest rates by just 0.25%, less than previously anticipated, next week.
To understand these seasonal adjustments, The Wall Street Journal had an excellent article discussing this mystery last Tuesday. Specifically, they explained why widespread layoffs by technology companies and other firms were masked by the January seasonal adjustments. The Journal pointed out that companies usually “let go of holiday workers” in January, so January has the largest seasonal adjustments each year.
The other big economic report that may have also been exaggerated by January seasonal adjustments is the retail sales report. February’s retail sales, along with any January revision, will be announced tomorrow, Wednesday, March 15th. The bottom line is that the stronger-than-anticipated January payroll and retail sales reports caused markets and interest rates to soar, followed by a drop and more investor anxiety. The fact that these two blowout economic reports may have been grossly distorted by January seasonal adjustments implies that interest rates might have surged too high for bogus economic reasons.
To close out the labor news, the Labor Department on Thursday announced that weekly unemployment claims rose to 211,000 in the latest week, up from 190,000 the previous week. Continuing unemployment claims rose to 1.718 million, up from a revised 1.649 million in the previous week. The four-week moving averages of weekly and continuing unemployment claims are now rising. Although rising unemployment statistics are not yet high enough to influence Fed policy, if the weekly moving averages continue to rise, it may cause the Fed to pause its rate hikes after the next FOMC meeting.
The Yield Curve Inversion Reached A 41-Year High
So far, the Fed has been remarkably quiet about surging Treasury yields and the fact that the yield curve is the most inverted it has been in over 41 years (since September 18, 1981). The 2-year Treasury yield surged to over 5% on Thursday for the first time since 2007, which is indicative that credit markets were expecting the Fed to raise the Fed funds rate by 0.5% on March 22nd. However, on Friday, the 2-year yield declined substantially in the wake of the crash in SVB Financial Group (SIVB) after proposing a $2.25 billion secondary offering to shore up a significant loss in its portfolio. There was a run on SVB’s assets after Peter Thiel’s Founders Fund advised startups to withdraw their money from SVB.
Banking regulators acted swiftly and took over SVB Financial Group on Friday. This is the first major bank failure since Washington Mutual back in 2008. The Federal Deposit Insurance Corporation (FDIC) will retain all of the deposits in SVB Financial Group and is expected to merge it with a larger financial institution, so all depositors are protected, regardless of FDIC insurance limits. This banking crisis has hurt shares of other banks and may cause the Fed to hit the brakes on raising key interest rates sooner than later since the Federal Reserve is in charge of protecting the integrity of the U.S. banking system.
During his two-day Congressional testimony before a sometimes-hostile Senate (Tuesday) and House (on Wednesday), Fed Chairman Powell refused to go off script. Last week, it appeared that the Fed wanted to raise rates by either 0.25% to 0.5% at its upcoming Federal Open Market Committee (FOMC) meeting on March 22nd. Also, the Fed’s influential “dot plot” (a survey of FOMC members’ rate forecasts) will be updated.
In his prepared Congressional testimony, Chairman Powell said that the Fed is likely to hike key interest rates higher than expected, but again that will ultimately be reconfirmed (or not) by the dot plot on March 22nd. Specifically, Powell told the Senate Banking Committee, “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.” Powell added, “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
The Fed is also sticking to its 2% inflation target. Ironically, China is the first major nation to get inflation under control. Specifically, China’s National Bureau of Statistics (NBS) on Thursday announced that consumer price inflation in February decelerated to a 1% annual pace, down from a 2.1% annual pace in January. An NBS senior statistician, Doug Lijuan, said, “A pullback in demand after the holiday as well as ample market supply” caused consumer inflation to slow. The whole world is waiting for China’s growth to perk up, post-Covid, but so far China’s economic recovery appears to be lagging the Western world.
One indication of this is that China announced last Tuesday that its exports have fallen 6.8% in the first two months of 2023. Higher interest rates in Western countries were blamed for falling Chinese exports.
And finally, the U.S. Commerce Department announced that the U.S. trade deficit rose 1.6% in January to $68.3 billion as imports rose 3% to $325.8 billion and exports rose 3.4% to $257.5 billion. The fact that both exports and imports rose shows that post-COVID trade is reviving, and the supply logjam is being reduced. Furthermore, Europe’s economic activity has picked up and has helped to offset China’s slowing economic activity. Overall, the trade deficit data is indicative of healthy global GDP growth.
Speaking of GDP growth, the Atlanta Fed now sees +2.6% annual GDP growth for the first quarter.
Update on the Energy Sector
“Stagnation in Shale” was the big topic at the premier annual energy summit, CERAWeek, in Houston last week, and The Wall Street Journal featured an article last Wednesday about how crude oil production in the Permian Basin may be waning, due to the fact that ‘frackers’ are discovering fewer big new wells.
ConocoPhillips (COP) CEO Ryan Lance said on a panel that we’re “going back to a world that we had in the ’70s and the ’80s,” meaning a world where OPEC would supply more of the world’s crude oil. The Top 10% of the most productive wells in the Permian Basin in 2022 were 15% less productive than in 2017.
Overall, the average well in the Permian Basin produced 6% less crude oil in 2022 than 2021. Chevron (CVX) and Devon Energy (DVN) confirmed that their well output in the Permian Basin is waning, but both companies are continuing to drill for new production. The average new well that Devon Energy drills produces 342,000 barrels over 9 months in the first year, but in the second year, production declines by over 50% to 167,000 barrels over the 9 months. The drilling ban on federal land is also exacerbating this decline.
So, between the Permian Basin peaking and Russian crude oil dropping due to increasing sanctions, the world’s supply/demand imbalance remains fragile. New fields in Guyana are now becoming increasingly important to North America, and Exxon Mobil’s (XOM) goal for Guyana is to produce 1.2 million barrels a day of crude oil by 2027. Regardless, crude oil prices are expected to continue to meander higher due to peak oil production (near term) from the Permian Basin and peaking as well in Russian production facilities.
As more auto manufacturers make electric vehicles (EVs), Tesla (TSLA) is facing more competition, but at least Tesla is striving to boost its market share with price cuts. Tesla cut the prices of its expensive Model S & X vehicles by 5% and 9%, respectively, last week to stimulate demand. I should add that the Model S & X do not receive the $7,500 federal tax credit, so they appeal to luxury EV buyers. It will be interesting to see if the inventory of luxury EVs keeps expanding, since higher interest rates may be curtailing sales.
Navellier & Associates Inc. owns ConocoPhillips (COP), Exxon Mobil Corp. (XOM), and Devon Energy Corp. (DVN) in managed accounts. A few accounts own Tesla (TSLA) by client request only. We do not own Silicon Valley Bank (SVB), or Chevron Corp (CHV) in managed accounts. Louis Navellier and his family own ConocoPhillips (COP), Exxon Mobil Corp. (XOM), and Devon Energy Corp. (DVN), via a Navellier managed account. They do not personally own Tesla (TSLA), Silicon Valley Bank (SVB), or Chevron Corp (CHV).
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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