CWS Market Review – August 8, 2023

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The Age of Decoupling

One of the important changes impacting the U.S. economy is that American companies are altering their businesses so they’re not as dependent on China.

The buzzword is “decoupling,” and it’s been happening quickly. Through May, imports from China are down 24%. Some of it is politics, but a lot of it comes down to simple economics.

Thanks to decoupling, America’s top trading partner is now Mexico. Adjusted for inflation, the value of imports from China are down 12% over the last five years. Meanwhile, imports from Mexico are up about $10 billion compared with the same period last year.

Decoupling shows little sign of slowing down. On Tuesday, China said that exports fell by 14.5% in July from a year ago and imports dropped by 12.4%. That was much worse than expected. Exports to the U.S. fell by 23.1%. Exports from China have fallen for three months while imports are down for five months in a row.

After growing quickly for several years, the Chinese economy is in a bad state. Domestic demand has slowed to a crawl. Even after Covid restrictions were lifting, the economy didn’t see a rebound.

American companies have come to realize that it’s risky to have so much of their supply lines dependent on China. We’re also seeing that retailers like Target and Walmart are ordering fewer Chinese goods. For example, China’s share of personal computers fell from 61% in 2016 to 45% last year. For printers, China’s share fell from 48% to 23%.

For many years, China was incredibly important to global manufacturing, but that position is being challenged. It’s still important but countries like Mexico, Vietnam and Thailand are gaining market share. The interesting part of this change is that it’s happening not from governments but from businesses.

When Donald Trump was president, the U.S. government placed tariffs on several Chinese-made goods. Also, Chinese workers have been getting higher pay, and that cuts into the country’s former strength as being the low-cost producer.

It’s not just the U.S., but it’s been happening in Japan as well. Companies are opening fewer manufacturing facilities in China.

We’re also seeing Chinese firms trying to bypass the tariffs. For example, companies will build nearly everything in China and then send it to Mexico for final assembly. The products are really made in China but are stamped as being made somewhere else.

This is important because in the U.S., the Federal Reserve has been fighting inflation by hitting demand. In response, consumers are shifting their spending from goods to services. That leaves Chinese-made goods on the outs. This change may last a long time. We’re now living in the Age of Decoupling.

The July Jobs Report: OK But Not Great

Despite many predictions of its imminent demise, the U.S. labor market continues to churn out more jobs, albeit at a slower rate. On Friday, the government released the jobs report for July. According to the Bureau of Labor Statistics, the U.S. economy created 187,000 net new jobs last month.

To be frank, that’s an okay number but not a great one. Wall Street had been expecting a gain of 200,000. July was the slowest month for job gains since December 2020 when the economy shed 268,000 jobs.

In this chart, you can really see the drop in job gains:

The year-over-year percentage of jobs gained has declined 16 times in the last 17 months. In other words, the economy is still creating new jobs but at a progressively slower rate.

Some of the details are encouraging. Private payrolls increased by 172,000. We’re also seeing better numbers for wages. Last month, average hourly earnings rose by 0.4%. That was 0.1% better than expected. Over the past year, average hourly earnings are up 4.4%. The problem is that inflation has taken a big bite out of workers’ paychecks.

Here are some more details:

Health care led job creation by industry, adding 63,000 jobs for the month. Other sectors contributing included social assistance (24,000), financial activities (19,000) and wholesale trade (18,000). The other services category contributed 20,000 to the total, which included 11,000 from personal and laundry services.

Leisure and hospitality, which has been a leading sector for most of the recovery in the Covid pandemic era, added just 17,000 jobs, consistent with a slowing trend after averaging gains of 67,000 a month in the first three months of 2023.

Previous months’ totals were revised lower — the June count dropped to185,000, a downward revision of 24,000, while May was cut to 281,000, down 25,000 from the previous estimate.

Economists like to look at the broader U-6 rate which is often referred to as the underemployment rate. For July, that was 6.7%. That’s not far from the cyclical low of 6.5%.

The unemployment rate ticked down to 3.5%. On Twitter (or X), I noted that “The unemployment rate is lower today than *at any point* in the 1970s, 80s, 90s, 00s and 10s.”

This prompted several responses telling me to look at the labor force participation rate. Here’s a sample:

Well, let’s go for it. The labor force participation rate (LFPR) measures the percentage of people who are employed or are actively looking for work.

There seems to be a widespread belief that the only reason that the unemployment rate is low is because the government doesn’t count the people who have stopped looking for work.

This is simply incorrect. For July, the LFPR rate held at 62.6% for the fourth month in a row. That’s the highest it’s been this cycle.

In an interview with the New York Times, John C. Williams, the president of the New York Fed, said “we’ve seen the labor force participation, labor force growth improve quite significantly.”

It’s true that during Covid, many folks left the work force, but they’ve come back. At its low, the labor force participation rate got to 60.1 in April 2020. The current LFPR is below its pre-Covid high, but it’s not that far from it. The fact is that the workforce has largely returned to normal.

Here’s the catch. That LFPR can be influenced by demographic factors such as the growing number of retirees. It’s not that bummed out young people have stopped looking for work. Instead, it’s that grandma and grandpa have retired and moved to Florida.

That’s why I prefer to watch the labor force participation rate for people from ages 25 to 54. That helps us skirt the age issue. For July, that was 83.4% which is close to its highest level of the last 20 years. June’s rate was 83.5% which is the highest since May 2002.

There are plenty of criticisms for the economy. The pace of jobs growth is rapidly slowing, and wages lagged inflation for several months, but we absolutely have not seen a mass exodus from the jobs market.

The next big econ report will be this Thursday when the CPI report for July is out. The inflation numbers have improved over the past year, but tackling the last bit may prove difficult.

For the 12 months through June, consumer prices increased by 3%. The core rate, which excludes food and energy, increased by 4.8%. For Thursday, Wall Street expects the 12-month headline rate to rise to 3.3% and the core rate to drop to 4.7%.

Currently, the futures market expects the Fed to pause again at its meeting on September 19-20. In fact, the futures don’t see the Fed making any changes until March 2024, and that first move is expected to be a rate cut. Until then, don’t let scary headlines make you flee the market.

The FTC Finally Gives In

One of our favorite Buy List stocks is Intercontinental Exchange (ICE). The company owns the New York Stock Exchange, plus a few other financial exchanges. Last week, the company released another solid earnings report ($1.43 vs $1.37 est.). What I like about the business is that ICE’s operating margin often runs around 60%. ICE has grown by using a series of aggressive but shrewd acquisitions.

More recently, ICE started moving into mortgage technology. In 2020, ICE bought Ellie Mae, a mortgage technology business, for $11 billion. This strategy took a very big leap last year when ICE said it was buying Black Knight (BKI), a mortgage data vendor, for $11.7 billion.

That got the attention of the U.S. Federal Trade Commission. They didn’t like the deal at all. The government felt that an ICE/Black Knight deal would put too much power in too few hands. The key to understanding the deal is that it’s all about data.

The FTC contends that such a deal would stifle innovation and raise prices for consumers. Lina Khan, the head of the FTC, has gotten a lot of attention for her aggressive policies against corporate mergers. The problem for the FTC is that it hasn’t been doing well when its battles go to court. The FTC failed in its attempt to block Microsoft’s $70 billion acquisition of Activision. Leaving that aside, the FTC has been doing everything it can to scuttle the Black Knight deal.

ICE and Black Knight struck back by selling off different units to appease the FTC. For example, Black Knight said it would sell its Optimal Blue business for $700 million. The company also said it would sell its Empower loan origination system business.

The strategy finally worked, and the government threw in the towel. Yesterday, the FTC told a federal court that it will drop its lawsuit trying to stop the deal from going through. The trial had been set to start on Monday, August 14.

Not that long ago, the merger deal was viewed as hopeless. The deal price was for $75 per each share of BKI. Less than a month ago, shares of BKI were trading for around $58. That’s changed. Yesterday, BKI rallied 4% to close at $74.36 per share. This is a big victory for Intercontinental Exchange.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Posted by on August 8th, 2023 at 7:06 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.