It is finally election day and hopefully results will come quickly, and it will not take days, or weeks, to get final tallies of votes. (It does not make sense to us that in this era of technology we cannot have results in less than a 24-hour timeframe.)
As we noted last week, results for Congress may be more significant than who wins the White House, but that does not mean there are no differences between the two presidential candidates. The rally in recent sessions has been called a “Trump Rally” by traders and we think we know why. To Wall Street, former President Trump represents less regulation, lower taxes, more energy production, and this means lowers energy and transportation expenses and higher margins. Vice President Harris has indicated she wants to raise the corporate tax rate, promises voters she will investigate corporations for price gouging, and is part of an administration that has increased regulation and initiated anti-trust cases against most US large technology companies. Wall Street tends to focus less on campaign rhetoric, promises, and threats of tariffs, and more on numbers and actions.
Still, the stock market should be able to handle any election result. In our view, a Republican sweep could trigger a short-term rally since this is more supportive of earnings growth. The more likely result would be a divided Congress which is something Wall Street has typically favored and historically it means little gets passed or done in Congress. If this materializes, politics will take a back seat to earnings results. A Democratic sweep is unlikely in our opinion but would not be ideal for stocks since it would mean more regulation and taxes on Corporate America. However, it would be good for companies involved in green technology.
This is also Fed week, and the Fed’s announcement could come before election results are finalized, which would be interesting. Nevertheless, the market has priced in a 25-basis point cut and we do not think the Fed will disappoint. What we see in the employment data suggests another cut or two may be in store in coming months.
Recent Economic Releases
In the third quarter GDP grew 2.8% on a seasonally-adjusted-annualized basis, just shy of the 3.0% seen in the second quarter and not much below the long-term average of 3.2%. Driving third quarter growth was personal consumption. However, services have usually been the main driver of personal consumption, but in the third quarter growth came primarily from durable goods, or more specifically vehicles. Government spending was also a significant positive in the third quarter, along with inventories. The major negative in the quarter was international trade, with imports exceeding exports. See page 3.
October’s employment report showed payroll growth was surprisingly low at 12,000 jobs, plus August and September were revised lower, reducing total employment by 112,000 jobs. While October’s weakness was attributed to hurricanes and the Boeing strike, it does not explain the weakness seen in earlier months. Keep in mind that earlier this year the BLS announced that there will be an annual revision for January 2025’s employment report and this could lower employment statistics by as much as 818,000 jobs, or more than 86,000 jobs per month, representing a 0.5% benchmark revision. This would be the largest benchmark revision on record in terms of the number of jobs and the percentage of the revision. In our view, this lowers the confidence one can have in these statistics, but it explains the massive divergence we have been pointing out all year between the establishment and household surveys. Headline job growth looked stellar in 2024 while the household survey showed zero growth. It appears that the household survey may prove to be more accurate in the long run. Weak job growth could become a very important topic in 2025 because year-over-year declines in the level of employment have been a reliable predictor of a US recession. See page 4.
The unemployment rate for October was unchanged at 4.1%, but the household survey reveals there are differences in unemployment according to age, sex, education, and citizenship. The unemployment rate for those 65 and older was the lowest at 2.7%; whereas the unemployment rate for women 16 to 64 was relatively high at 3.8%. The unemployment rate appears to be inversely correlated to level of education. The unemployment rate for those with a bachelor’s degree or higher was up but still low at 2.5%, for those with some college education it was 3.4%, for high school graduates it was 4.0%, and for those with less than a high school degree the rate was down, but still high the highest at 6.6%. The native-born unemployment rate was 3.9% in October and the non-native unemployment rate was 4.1%. See page 5.
The Bureau of Labor Statistics did a study of foreign-born workers based on 2023 data and it shows foreign-born workers were concentrated on both coasts and represented 23.9% of the labor force in the West and 22.6% in the Northeast. In both cases, this was above the US average of 18.6%. Native-born workers earn more than the foreign-born workers at most educational attainment levels. Among high school graduates, full-time foreign-born workers earned 88% as much as their native-born counterparts. However, among those with a bachelor’s degree and higher, the earnings of foreign-born workers were just slightly higher than the earnings of native-born workers. As of the latest data for September, there were 130.8 million native-born workers and 31.1 million foreign-born workers in the US, but on a year-over-year basis, native-born employment fell by 825,000 and foreign-born employment grew by 1.2 million workers. The foreign-born population includes legally admitted immigrants, refugees, temporary residents such as students and temporary workers, and undocumented immigrants. The survey data, however, do not separately identify the number of people in these categories. See page 6.
Average hourly earnings for production and non-supervisory workers rose 4.1% YOY in October, but average weekly earnings only rose 3.8% YOY due to a slowdown in hours worked. Looking at average hours, it is clear that manufacturing hours peaked at 42.3 in April 2018, and this represented a post-WWII record high. After a pandemic decline and a post-pandemic recovery, manufacturing weekly hours slowly declined to the 40.6 seen in October. This decline in manufacturing hours is in line with the weak data seen in the ISM manufacturing surveys. See page 7. The ISM manufacturing survey indicated that this sector of the economy was contracting at a faster pace in October. The headline number fell from 47.2 to 46.5 and business activity fell from 49.8 to 46.2. The biggest increase was in prices which jumped from 48.3 to 54.8. In October, the ISM service survey was up 1.1 point to 56 and it marked the eighth time this year that the composite index has been in expansion territory. October was driven by gains of more than 4 points in both employment and supplier deliveries; however, business activity and new orders both dropped by at least 2 points. In short, the ISM manufacturing survey remains anemic, and the service survey was mixed. We believe these releases fully support another 25-basis point cut in the fed funds rate this week. See page 9.
Gail Dudack
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