Two “Data” items today:
#1: S&P 500 corporate earnings guidance as we kick off Q4 earnings season this week. Every quarter for the last 5 years about one-fifth of the companies (100 or so) in the index have provided and updated earnings guidance about their current quarter financial results. On average, these announcements have been bad news; 60 percent are below analysts’ expectations (aka “negative guidance”). The other 40 percent are above estimates (“positive guidance”).
Earnings guidance for Q4 2021 is running exactly at that long-run 60/40 positive/negative guidance ratio. According to FactSet’s latest Earnings Insight report, 93 companies have provided guidance, with 56 (60.2 pct) missing Wall Street expectations and 37 (39.8 pct) exceeding them.
The FactSet chart below shows the number of companies providing positive (green bars) and negative (red bars) guidance over the last 5 years. Note that prior to the pandemic, many more companies issued negative rather than positive guidance. It was only starting in Q3 2020 that the ratio flipped (green bars higher than red bars). And, as you can see from the rightmost set of bars, we are now back to the old pre-pandemic pattern.
Now, let’s just focus on the middle part of this graph, where the red bars peak and the green bars trough (Q1, Q2 and Q3 2019). You’d think that S&P 500 earnings would have been down quite a bit in 2019 versus 2018 with all those disappointing preleases. In fact, they were slightly higher: 2019 S&P earnings were $163/share versus 2018’s $162/share. Why is there no correlation? Because only 20 percent of the S&P 500 updates their quarterly earnings guidance.
Takeaway: we still expect the companies of the S&P 500 to beat Wall Street earnings expectations as they report Q4 2021 in the coming weeks. The return to pre-pandemic patterns of disappointing prereleases outnumbering positive ones may not be great news, but it’s hardly surprising after so many quarters of stellar results.
#2: Given all the complexities surrounding the US labor market at present it would be easy to overthink Friday’s Jobs Report. How many people are out of the workforce due to health concerns or child/elder care commitments? How should we factor in higher turnover (i.e., quits)? How much of the disappointment in job creation (199,000 added, +400,000 expected) was due to urban labor market dynamics? You could write 5,000 words on this one report and not get to all those topics.
We will keep things simple, however, and focus on just 3 headline facts with supporting historical data in graph form.
#1: December’s US unemployment rate of 3.9 percent is, historically speaking, a very low level of joblessness. The data in the chart below goes back to 1960 and shows:
- During a good piece of the Vietnam War era (1965 – 1969) unemployment was extremely low, running 3-4 percent.
- Over the next three economic cycles, however, the low points for unemployment were higher, at 4.9 pct (1973), 5.6 pct (1979), and 5.0 pct (1989).
- The dot com bubble economy managed to print a 3.8 pct low for unemployment (2000), but the next cycle’s best level was 4.4 pct (2007). The last cycle, which ran very long, did see joblessness trough at 3.5 pct (2020).
Takeaway: by any objective reading of long run history the US labor market is close to or at full employment. It may not be quite to where we were just before the pandemic, but that was a very unusual period of low unemployment in peacetime.
#2: Labor force participation among prime-aged workers (25-54 years old) is back to levels we only saw at the beginning of the end of the last economic expansion. December’s reading was 81.9 percent, and the chart below shows LFP for this cohort was below 82 pct from 2011 to 2017. It was only the last stages of the prior expansion that saw prime-aged LFP get to 83 percent. That occurred under ideal economic conditions; we do not have that sort of environment just now.
Takeaway: if inflation were not an issue, the Federal Reserve could certainly keep rates low in the hopes of recreating the late 2010s economy where prime aged LFP got to 83 percent. However, since rising prices are an important feature of the current environment, the FOMC must recognize that LFP is “good enough” – better, in fact, than most of the last decade.
#3: Wage growth has been difficult to measure over the last 2 years given labor market turnover, but December’s reading was +4.7 percent year over year and the 2021 average was +4.0 percent. The chart here shows US annual wage growth for all employees since 2007. Average 2021 monthly gains were 4.0 percent, stronger than 2019’s average of 3.3 pct and well above 2010 – 2015’s 2.0 pct.
Takeaway: US wage growth is structurally higher than any point in the last decade, and by a wide margin. We attribute that to strong demand for labor (point #1, above) and less supply than pre-pandemic (point #2). Over the next 3-6 months neither issue is likely to change very much. That means further wage inflation. While that is positive for consumer spending, it also adds some urgency for the Federal Reserve to do what it can to tamp down demand until supply chains can catch up.
FactSet Earnings Insight report: https://www.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_010722A.pdf