Records Across the Board
…..Dow, S&P and Nasdaq close at record highs. ISM manufacturing ticks up. Construction spending down. ADP private jobs strong. Fed Beige Book points to tight labor market. Trump pulls out of Paris Accord. Illinois cut.
Financial Review by Sinclair Noe for 06-01-2017
DOW + 135 = 21,144
SPX + 18 = 2430
NAS + 48 = 6246
RUT + 25 = 1396
10Y + .02 = 2.22%
OIL – .30 = 48.02
GOLD – 3.20 = 1266.40
A record high close for the Dow Industrial average, taking out the last high from March 1st. Also records for the S&P 500 and the Nasdaq Composite. In many ways, the Dow is just playing catch-up with the other indexes that were already in record territory. While the Nasdaq is up 16% this year and the S&P 500 has rallied 8.5%, the Dow is up a more modest 7%.
The Institute for Supply Management’s manufacturing index inched slightly higher, hitting 54.9. This implies the overall manufacturing economy grew for the 96th consecutive month.
The Commerce Department announced that spending in the construction sector fell 1.4 percent for the month, the biggest drop since a 2.9 percent fall a year ago. Construction spending was forecast to have grown 0.5 percentage points in April, after falling 0.2 percentage points in March. The drop reflects significant weaknesses in home building, non-residential construction and government projects.
The number of Americans filing for unemployment benefits increased more than expected last week, but the rise probably does not signal a material shift in labor market conditions as claims for several states, including California, were estimated. Initial claims for state unemployment benefits jumped 13,000 to a seasonally adjusted 248,000 for the week ended May 27.
The ADP private sector employment report showed that 253,000 jobs were added in May. The report could signal a strong government payrolls report on Friday that includes hiring in both public and private sectors. Forecasts are for 185,000 non-farm payrolls created in May. Mark Zandi, chief economist at Moody’s Analytics said, “The current pace of job growth is nearly three times the rate necessary to absorb growth in the labor force. Increasingly, businesses’ number one challenge will be a shortage of labor.” The Federal Reserve’s latest Beige Book report, a collection of economic anecdotes from businesses across the country, indicated that employers everywhere are under pressure to both hire workers and pay them more. Economists in the Cleveland Fed’s district report, “Staffing firms noted an increase in the number of job openings and placements during the past two months, a situation which they attributed to an improving business climate.” These comments were echoed across the country.
Forecasts from Fed officials suggest that a median of two more hikes are planned before the end of the year – for a total of three. However, San Francisco Federal Reserve Bank President John Williams said that while he sees three interest rate hikes this year as his baseline scenario, four rate increases would also be appropriate if the economy got an unexpected boost. Perhaps even more important than rate hikes, is what the Fed will say about trimming its $4.5 trillion balance sheet. which expanded sharply in response to the Great Recession. The bank massively expanded that balance sheet by buying mortgage and Treasury bonds, as a way of helping keep interest rates low. Jerome Powell, a Fed board governor, said on CNBC the impact of the Fed’s pullback from bond buying would be minimal. The Fed seems to be trying to have its cake and eat it too, arguing that its bond purchases, also known as quantitative easing or QE, were highly powerful when implemented but will make little difference when withdrawn.
President Trump announced the US will withdraw from the Paris climate agreement and will seek to renegotiate the pact in a way that treats American workers better. Trump is kicking off a withdrawal process that will take until November 2020 to unfold. While the decision wasn’t exactly unexpected (it was a campaign promise, after all), in today’s announcement Trump said it will bring back clean coal jobs. It won’t. The vast majority of America’s coal gets shipped to a fast-shrinking fleet of power plants that burn the fuel, and there’s no easy path to boosting demand from the sector. The country’s use of natural gas and renewable energy to produce electricity is meanwhile gathering speed — and creating new generations of energy jobs. Low natural gas prices, at the end of the day, have decimated most of the U.S. coal production. Coal plants have closed down and you’re not reopening them.
In a Rose Garden ceremony at the White House today, Trump said, “The bottom line is the Paris accord is very unfair,” citing the deal’s “draconian” financial and economic burdens and a litany of economic projections backing up his case. But the estimates at the heart of the debate varied so widely, some analysts viewed them as unreliable. Supporting the pro-pullout side was one estimate saying $3 trillion in gross domestic product and 6.5 million in jobs will be lost over the next quarter century — numbers Trump cited without pointing out the timeline. Another view puts the GDP hit at more than $8 trillion through 2100 — but that’s the damage estimated if the U.S. exits the deal. More worrisome than the long-term guesses could be the expected tariffs on U.S. carbon emitters slapped on by other countries. Twenty-five US companies signed on to a letter running today as a full-page advertisement in the New York Times and Wall Street Journal arguing in favor of the climate pact, and warning of potential “retaliatory measures” by other nations. Trump said he would like to re-negotiate the Paris accord but today France, Germany, and Italy said they would not enter into discussions to change the deal.
While there are still a large number of workers in the traditional fossil-fuel industries according to the Department of Energy, the number of Americans employed in energy-efficient and renewable-energy jobs is also huge.
For instance, 1.1 million Americans work in electric-power generation through traditional fossil fuels, but renewables follow closely with 880,000 employees. Additionally, from a long-term economic perspective, shifting toward renewable energy would likely be more beneficial for job growth. The Department of Energy said the renewable sector is booming with solar employment growing by 25% and wind-generation employment growing by 32% in 2016. Add on the fact that 2.2 million people are employed in the “the design, installation, and manufacture of Energy Efficiency products and services,” and it’s clear that combatting climate change is a big employment driver for the US.
Illinois paid the price for its ongoing budget impasse, with both S&P Global Ratings and Moody’s Investors Service dropping the state’s general obligation credit ratings to one step above junk. The rating downgrades came a day after Illinois’ spring legislative session ended without a budget deal. S&P cut its rating on $26.3 billion of bonds one notch to BBB-minus, the lowest it has rated any state, and warned that Illinois could sink to the junk level unless it passes a budget that addresses a gaping structural deficit. Moody’s downgraded Illinois to Baa3 from Baa2, citing the prolonged political impasse that has impeded progress in dealing with a nearly $130 billion unfunded pension liability and fueled growth in unpaid bills now approaching $15 billion, equal to 40 percent of the state’s operating budget.
The boards of Linde Group and Praxair voted to merge, creating a $73 billion global industrial gases leader. Linde’s shareholders will not vote on the deal but 75 percent must tender their shares to the new company for the deal to go through. The deal is expected to close in the second half of 2018.
Deere & Co said it would buy privately held German company Wirtgen Group for about $4.88 billion to expand its road construction operations as it looks to cut down its dependence on its slowing farm business. Deere makes equipment for part of the road-building process – loaders and dump trucks to load rocks into crushers from quarries, earthmoving tools at construction sites, and dozers and motorgraders that help grade roads. Wirtgen makes crushers that break down large rocks, milling machines, plants to supply hot asphalt for road projects, and pavers and rollers. It has a network of company-owned and independent dealers in about 100 countries.