Financial Review with Sinclair Noe 09-05-2014
SPX + 10 = 2007.71 (record)
NAS + 20 = 4582
10 YR YLD + .01 = 2.46%
OIL – 1.00 = 93.45
GOLD + 7.50 = 1269.40
SILV + .13 = 19.29
The S&P 500 index closed at a record high; the Dow Industrials closed just short of a record high. The S&P 500 and the Dow recorded their fifth consecutive weekly gains. For the week, the Dow and the S&P each gained 0.2% and the Nasdaq rose 0.06%.
Today is a jobs report Friday. In August, the economy added 142,000 net new jobs and the unemployment rate dropped to 6.1%. This was a weaker than expected report.
The economy had been averaging more than 200,000 new jobs a month for the past 6 months. Economists expected somewhere around 220,000 to 230,000 new jobs.
Employment gains for July and June were lowered by a combined 28,000; June was revised from 298,000 to 267,000, and the change for July was revised from 209,000 to 212,000. The August report will likely be revised as well. Each job report starts with an initial estimate on the first Friday of the month, followed by two revisions. The month of August is prone to sharp revisions; over the past 5 years, the difference between the first and third estimates have averaged more than 70,000 per month; and each of the past 5 August revisions were higher, but revisions can go either way.
Last month, the economy added 212,000 jobs and the unemployment rate went from 6.1% to 6.2%. This month the economy added 142,000 jobs and the unemployment rate dropped back down to 6.1%, matching a six year low; but in this case, a lower unemployment rate is not good, it means more people stopped looking for work. The Labor Force Participation Rate decreased in August to 62.8% from 62.9% in July. This is the percentage of the working age population in the labor force. Labor force participation is now at a 36 year low.
The population can be divided into three categories: Working, looking, outside the labor force. The share of adults who are working fell sharply during the Great Recession and has recovered only slightly. The category of those looking, which is what the unemployment rate measures, has fallen steadily, but mostly because people stopped looking, not because they started working. The question then is how many people may start looking for work again? It is possible that the economy could improve, more people could look for jobs and actually get jobs, only to see the unemployment rate move higher. Last month, Federal Reserve Chair Janet Yellen said, “the decline in the unemployment rate over this period somewhat overstates the improvement in overall labor market conditions.”
Part of the decline in labor force participation is demographics, as the population ages, more people move to retirement, whether they want to or not. There might be some small amount attributable to workers returning to school. So, for better focus we can look at the participation rate for people age 25 to 54, the prime working years; for this group, the participation rate increased in August from 80.8% to 81.1%.
Employment is now up 2.48 million year-over-year. Total employment is now 753 thousand above the pre-recession peak. Total employment is up 9.46 million from the lows of the recession in March 2010. Employers outside the government have added jobs for 54 straight months–the longest such streak on records back to 1939. However, the average number of jobs added each month of the recovery remains weak by historical standards. In the first 8 months of this year, the economy has added 1.72 million jobs, or an average of about 215,000 per month. At the current pace, the economy will add 2.58 million jobs this year, with 2.52 million of those jobs coming from the private sector; that means 2014 could be the best year for job growth since 1999.
There are about 7.3 million people working part-time for economic reasons; that’s down slightly from 7.5 million in July. These workers are included in an alternate measure of unemployment known as the U-6, which includes unemployed and underutilized workers; U-6 dropped from 12.2% to 12.0%, the lowest level since October 2008.
There is a strange gap in the U-6 rate, and that is freelance workers. A new survey from the Freelance Union shows there are about 53 million people, or 34% of the workforce, that freelance. In 2006, the Government Accountability Office (GAO) put the number of freelancers at 42 million, though it’d be difficult to make a direct comparison between the two figures because of differences in methodology. The survey finds freelancers include 21 million independent contractors, 14 million moonlighters, 9 million who combine traditional work with freelance, 5.5 million temporary workers, and 2.8 freelance business owners; although I’m not sure temp workers always consider themselves freelancers.
The survey paints a generally sunny picture of what it’s like to be a freelancer, with 77% reporting that they make as much, if not more, than they did with a steady job. More than 40% said they even expected to make more in this coming year.
There are still more than 2.9 million workers who have been unemployed more than half a year; that’s down from more than 3.1 million in July. This number has been trending lower but in a healthier economic environment we might expect the number to be between 1 and 2 million. It is estimated that there were 4.7 million job openings in June, the most since 2001, but employers are taking longer to fill those vacancies; it’s taking 25 working days on average to fill vacancies, a 13-year high, and for companies with 5,000 employees or more, it’s taking more than twice that long, or about 58 working days.
So, there is still plenty of slack in the labor market and that is reflected in wages. Average hourly earnings for all employees on private nonfarm payrolls rose by 6 cents in August to $24.53; that followed no change in July. The workweek was 34.5 hours for the sixth month in a row. Over the year, average hourly earnings have risen by 2.1%. Low wage industries account for 44% of employment growth over the past four years but only 22% of job losses during the recession. Which is another way of saying good paying jobs have been replaced with bad paying jobs. The economy can’t grow much unless wages rise substantially.
Productivity since the mid-1960s has more than doubled while wages overall are essentially flat. Firms have been able to squeeze more profit and more revenue out of their employees. If companies continue to see that they can increase revenues and profits efficiently using their current work force, the incentive to hire may be less evident, as each new hire represents an additional overhead cost. So, I guess the message is that if you want to see more people get more jobs, you need to take a longer break for lunch.
In August 2014, private payrolls added 134,000 jobs; state and local governments added 5,000 jobs. State and local government employment is now up 123,000 from the bottom, but still 621,000 below the peak. And federal government employment is still down 19,000 for the year.
The best industry for job seekers in August was in professional and business services, which added 47,000 jobs. The top area for hiring within the industry was management of companies and enterprises. Other areas of strength included administrative and support services, architectural and engineering services and in management and technical consulting services.
The health care sector was a standout, adding nearly 43,000 positions. Bars and restaurants hired more workers once again last month. Employment in food services and drinking places rose by 21,500 in August. Construction employment also improved last month, as payrolls expanded by 20,000. Areas of strength included specialty trade contractors and construction of buildings.
On the other side of the August jobs report, there were pockets of labor-market weakness in several major industry subsectors. The factory sector, which added more than 50,000 positions in May, June and July, was unchanged in August. Retail employment shrank by 8,400 last month, following a gain of 85,000 jobs in the prior three months. Some of the moves may be temporary; thousands of employees at a supermarket chain in New England called Market Basket had their hours cut or they walked off the job to protest the firing of a well-liked chief executive. Auto makers laid off fewer workers in July, so they recalled fewer employees than usual in August.
If you have at least a bachelor’s degree, the unemployment rate is 3.2%, compared with 9.1% for high-school dropouts. And workers with four-year college degrees made 98% more an hour on average in 2013 than people without a degree. That’s up from 89% five years earlier, 85% a decade earlier and 64% in the early 1980s. It would seem the American workforce has never been better educated despite claims of a skills gap; the number of people with 4 or more years of college outweighs those who have only a high school degree, 63.3 million to 62.1 million.
A report from the New York Fed finds more and more college graduates have been finding work but that they are often underemployed. The unemployment rate for recent college graduates is around 5%, which is higher than historical standards, but the report finds nearly half of all recent grads are in positions that don’t necessarily require college degrees; most of the jobs offer decent wages, only 15% are working in low wage jobs.
So, today’s jobs report was not good. Maybe the revisions will make it better. For investors, it was not a bad report. Nothing in the numbers would give the Federal Reserve reason to raise interest rates sooner rather than later. The Fed will raise rates; that is a very, very high probability move. Today’s weak number was just one month, and one month does not reverse a trend, rather it reinforces the slow steady progress.