FINANCIAL REVIEW

November Jobs Report – Progress Not Perfection

Sinclair Noe — December 5, 2014

Podcast: Play in new window | Download (Duration: 13:19 — 6.1MB)

DOW + 58 = 17,985
SPX + 3 = 2075
NAS + 11 = 4780
10 YR YLD + .05 = 2.31%
OIL – 1.12 = 65.69
GOLD – 15.50 = 1192.00
SILV – .20 = 16.39

Record highs for the Dow and the S&P 500.

For the past week I’ve been telling you we could see a wild number on the jobs report. We did. The economy added 321,000 net new jobs in November. The unemployment rate held steady at 5.8%. Job gains for September and October were revised higher. September was revised from 256,000 to 271,000, and the change for October was revised from 214,000 to 243,000. With these revisions, employment gains in September and October combined were 44,000 more than previously reported. And that pushes the 3 month average up to about 277,000 jobs per month. November marked the biggest monthly jobs gain since January 2012. So far in 2014 the economy has gained an average of 241,000 jobs a month.

This was the tenth consecutive month of job gains greater than 200,000, and an all-time record 50th consecutive month of job gains. Total employment is now 1.7 million above the previous peak. Total employment is up 10.4 million from the employment recession low. So far this year, the United States has added some 2.65 million jobs, putting the country on track for its best year of job growth since a 3.2 million gain in 1999.

Private payroll employment increased 314,000 from October to November, and private employment is now 2.1 million above the previous peak. Private employment is up 10.9 million from the recession low. In November, state and local governments added 2,000 jobs. State and local government employment is now up 157,000 from the bottom, but still 587,000 below the peak. Federal payrolls increased by 5,000 last month but is still down 17,000 for the year. This is one of the unique things about this recovery, it has not included government jobs, unlike past recoveries.

All in all this was a very good jobs report, but it helps to dig into the details to get a better understanding. First, this is the national report and conditions vary from state to state and town to town. We don’t get a breakdown by state for a couple more weeks, but we know that the October state unemployment report showed Arizona in the bottom 10, with an unemployment rate of 6.8%.

The BLS also counts workers who have had to settle for part-time work because they couldn’t find a full-time gig or because their hours were cut back. They’re employed, sure, but not as employed as they’d like to be. The number of persons working part time for economic reasons decreased in November to 6.85 million from 7.02 million in October. These workers are included in an alternate measure of unemployment which includes underutilized workers, known as U-6. The U-6 unemployment rate dropped from 11.5% in October to 11.4% in November, and is now at the lowest level since 2008.

And the unemployment rate excludes people who would like a job but are not actively looking for one. The participation rate refers to the number of people who are either employed or are actively looking for work. The number of people who are no longer actively searching for work would not be included in the participation rate. There are many reasons why someone would not be actively searching for work: many people have retired in the wake of the downturn, so there are demographic reasons; many younger workers have gone back to school to improve their chances; many people have just become discouraged. Now, if the economy was really doing great, it would probably attract discouraged workers to try to find a job, but that didn’t really happen last month. The Labor Force Participation Rate was unchanged in November at 62.8%. And the participation rate for the 25 year old to 54 year old age group, which represents the prime working years, was unchanged in November at 80.8%. This indicates that there is still slack in the labor market.

There are 2.8 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 2.9 million in October. This is trending down, but is still very high. This is the lowest level for long term unemployed since January 2009.

In one sign of labor market confidence, workers have grown more likely to quit their jobs, meaning they’ve either received new employment offers or feel confident they will. According to the Federal Reserve Bank of St. Louis, the “quit rate,” as it is known, now stands at 2.2 percent among private workers. From July 2008 to July 2014 the rate never surpassed 2 percent.

A sustained increase in hourly earnings are necessary to propel the economy onto a higher plane of growth. Wages, are still a problem but there was some improvement in November. Private nominal hourly earnings grew at a 2.1 percent annualized rate in November, rising to $24.66, compared with $24.15 one year ago. Adjusted for inflation, wage growth remains essentially flat. But for the month of November wages were up 0.4%. Americans are taking home more pay, but mainly because they are working longer hours. The average length of the workweek stood at a post-recession high of 34.6 hours in November, up from 34.5. When you combine the extra time with the increase in wages, it means weekly payrolls rose by 0.9%, which is a huge increase. The best we’ve seen in a very long time.

Breaking down the job gains by sector: professional and business services added 86,000 jobs, the retail trade gained 50,000, education and health services added 38,000, Leisure and hospitality gained 32,000, manufacturing gained 28,000, financial activities added 20,000, and construction added 20,000, with transportation and warehousing up nearly 17,000.

Now, I started out by telling you that the November jobs report included some wild numbers, and one reason for this is that the numbers are seasonally adjusted. Each month the Bureau of Labor Statistics adjusts the raw employment numbers to compensate for seasonal hiring and firing, such as when retail workers are hired for the holiday crunch, only to be laid off in January. So, by looking at the raw numbers we can get a better idea if this is just a seasonal variation and if the November numbers look better than they really are. Turns out that retail employment was actually down in November from November of last year. There were more temporary workers hired; also more delivery related jobs. So, this probably made the jobs number look a little better than the labor market really is, but not much; there was broad-based hiring in many industry sectors, and as more people get jobs, it is a good reason for retailers to add extra staff. Yes, the numbers might be slightly off, and they will be revised in months ahead, but the momentum is certainly strong.

Now, we wait and see if the economy really is getting stronger; unless GDP growth accelerates, the mirror image of stronger jobs will be lower productivity. The good news there is that global oil prices have plummeted in what amounts to a de facto raise for American consumers, who are now spending far less at the pump. A couple of reports earlier in the week, the ISM reports on services and manufacturing, showed growth indicative of 5% GDP.

And if the economy really is picking up, there are ramifications for both monetary and fiscal policy. On the monetary side, the Federal Reserve is more likely to raise interest rates. The Fed may want to see further signs of wage growth picking up before hiking, but that could well happen sooner than many expect if the current momentum in hiring is maintained and the underemployment rate continues to fall. Fed fund futures are pricing in interest rates of 1.6% at the end of 2016.

On the fiscal side, stronger economic growth holds the promise of continuing the steep, downward slope of the budget deficit, and that could pave the way to fiscal agreements in the coming year that become far easier as political and financial pressures are eased. The Republican-controlled Congress will again want to balance the budget and cut taxes, and with a stronger economy and more revenues it might just happen. Meanwhile, President Obama has a wish list of social programs which also includes a much delayed and much needed surge in infrastructure spending, which would in turn would create even more jobs and further strengthen the economy. Of course, it is probably crazy to think the politicians can actually accomplish something positive, but if it could happen, now would be a good time.

That is if this holds up. One month does not make a trend. The numbers could be revised lower. The seasonal adjustment could prove to be an aberration. Or the strong hiring combined with wage gains could be an indicator of a stronger economy. Next, we’ll look to see if the trends can be maintained, and if we start to see people coming back into the workforce and wringing out the slack in the labor market. I know it is a little hard to believe but things seem to be headed in the right direction. Consider: one year ago gas prices were $3.26 a gallon, today the nationwide average is $2.77; third quarter GDP growth was 3.9%; the stock market continues to hit record highs; November of last year, the unemployment rate was 7%; five years ago the unemployment rate was 9.9%, and today it stands at 5.8%.

Progress not perfection.