FINANCIAL REVIEW

Job Seekers Find Their Place Again

Sinclair Noe — February 6, 2015

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

DOW – 60 = 17,824
SPX – 7 = 2055
NAS – 20 = 4744
10 YR YLD + .12 = 1.94%
OIL + 1.60 = 52.08
GOLD – 31.20 = 1234.30
SILV – .54 = 16.79

The U.S. added 257,000 new jobs in January. The unemployment rate edged up to 5.7% from 5.6%, but that’s because more people looked for jobs. The January report topped expectations of 230,000 to 245,000 new jobs.

The Labor Force Participation Rate increased 0.2% to 62.9%. The Labor Department’s survey of households, used to derive the unemployment rate, showed about 1.05 million people entered the labor force and 759,000 found work. These numbers also reflect new estimates on the size of the population. Even as the labor-force participation rate rose last month, it’s held to roughly the same level for the past year and a half. The hope is that there is a trend developing of more people looking for work. Consumers believe job prospects have improved. That perception was evident in last week’s confidence report that showed a jump in the number of consumers who think jobs were “plentiful” last month.  Better confidence in job availability should lead to a jump in the number of people quitting. That’s one data series the Fed tracks as a sign of labor-market tightening beyond what the jobless rate says.

The economy has now added at least 200,000 jobs for 12 straight months, a feat last accomplished in 1994-1995, and averaged 260,000 jobs for the course of the year. November’s jobs gain was revised higher to 423,000 from 353,000; that was the best month of 2014, and one of the strongest monthly numbers since May 2010. December was revised up to 329,000 from 252,000. Total employment gains in November and December of last year were therefore 147,000 higher than previously reported. The U.S. has added an average of 336,000 jobs in the past three months, or right at 1 million jobs in 3 months, the best 3 months for job gains since 1997. The economy has added 3.21 million jobs in the last 12 months. Total employment is up 11.2 million from the employment recession low, and up 2.5 million above the previous peak.

Average hourly wages jumped 0.5% in January to $24.75 after declining in December. That’s the biggest monthly gain in six years, but wages were up only 2.2 percent from a year earlier, a historically slow pace. The current pace of growth in salaries is far from the rates seen before the 2007-09 recession of 3-4 percent a year. In January, factory workers earned 1.2 percent an hour more than a year earlier, while construction workers got 2.3 percent more. The length of the workweek was unchanged from December at 34.6 hours; the workweek is hovering at its longest in six years.

More than two million workers received raises last month, thanks to minimum-wage increases in 20 states. Minimum-wage increases, ranging from a $1.25 jump in South Dakota to a 12-cent bump in Florida, went into effect starting with the first paycheck of the year. About half the increases reflect new pay floors established last year by lawmakers or voters, while the others are annual increases tied to inflation. Minimum wage increases only had a very small effect on wage gains.

The wages gains did push incomes above the inflation rate; this means we should see workers saving or spending a few extra dollars from each paycheck. The Consumer Price Index, a measure of inflation at the retail level, increased by 0.8% in December, and the core rate, excluding food and energy rose at a 1.6% annualized pace. Part of the reason for the tame inflation numbers is lower oil prices, but wage increases might, in time, put pressure on inflation. For now, there is still plenty of slack in the labor market and wage push inflation doesn’t look like a significant factor.

On Thursday, the Labor Department reported nonfarm productivity fell at a 1.8% annual rate in the fourth quarter, a poorer showing than economists had expected.  The upward revisions to November and December payrolls suggest the economy used more labor last quarter and so productivity was weaker than the initial numbers suggest. Productivity revisions will be reported March 5. The tightening of the labor market and the weak productivity growth are likely to put downward pressure on corporate profits that are already taking a hit from the strengthening of the dollar.

When you combine the increase in wages with the longer workweek and lower inflation you come up with something called the inflation adjusted aggregate payrolls for all US workers; it’s up 5.8 percent in the 12 months through January, the best performance in records dating back to 2007.

The number of unemployed private sector workers for every job opening more than tripled during the recession, topping out above six in late 2009, and has fallen steadily in the recovery. In October and November it averaged 1.5, just a tenth of a point higher than its average in the year prior to the recession, indicating a tighter job market is in the offing.

For all the progress in the labor market, though, millions of Americans are still left out. Some 18 million people who want a full-time job still can’t find one, including 6.8 million workers who have been forced to work part-time instead. The U-6 unemployment rate rose to 11.3% from 11.2% in December; this is a measure of unemployed plus underutilized workers, and this number is still higher than might be expected at this point in a recovery. There are 2.80 million workers who have been unemployed for more than 26 weeks and still want a job. This was up from 2.78 million in December.

Most industries added jobs. Health services added 38,000 jobs and education added 12,000; retail trade added 45,900; construction companies hired 39,000 employees; professional and business services gained 39,000; leisure and hospitality, 37,000; financial activities accounted for 26,000 jobs; manufacturers added 22,000 workers; and wholesale trades added 12,000. Mining and transportation both lost jobs for the month. Private payrolls increased 267,000, which means government lost 10,000 jobs.

Those are the major factors in this month’s jobs report, now let’s break it down for the meaning. And by the way, the reason we analyze this report is simply because jobs are probably the most important part of the economy; more important than stock or bond prices, even though you might not see it today. You can’t take the jobs report and use it to reliably pick stocks any given month, but you can use this information to determine macro-trends in the economy, and over time that should help you determine the direction of not just the economy but also the markets. Understand that there can be a lag; for example, in 2008 and 2009, the economy was hemorrhaging jobs, but the stock market bottomed in the spring of 2009 and took off.

And the jobs being created aren’t government jobs, they are private sector jobs. Indeed, one of the reasons this job recovery has been long and slow is because we have not seen government jobs. We actually lost 10,000 government jobs last month, and we have lost 688,000 government jobs since the start of 2009 

We are starting to see the first hints of rising wages; and when that is combined with low inflation it means people have cash in their pockets. We will likely see continued deleveraging as people pay down debt, but if this trend can continue, it will result in spending. We may be seeing some of this already, for example in auto sales. When better wages eventually turn into spending, we will see a pick-up in demand; which will push businesses to create more jobs. 

We have seen regular upward revisions to jobs numbers. This says the labor market is stronger than it looks; much better than downward revisions, which might indicate undetected problems. And the labor pool has been growing; more people are looking for work. You have to have a positive attitude to get back into the labor pool; you have to think that there is a job for you where none previously existed, or a better job than where you currently work. While the labor force participation rate has been low for some time, part of the reason is because the boomer generation is retiring; now maybe some are un-retiring; and younger workers are gaining the confidence to jump in the pool. Bottom line, more people are working, fewer people are just scraping by, and fewer are requiring assistance. Millions of people were displaced by the downturn, now they are starting to find their place again. 

Today, Charles Plosser, the president of the Philadelphia Fed, said it’s hard to justify not hiking interest rates. Atlanta Fed President Dennis Lockhart said he didn’t have sufficient confidence yet to vote to raise rates. The Fed funds futures contract now implies a rate between 1.23-1.5% in December 2016. Investors have now fully priced in the first rate increase by October, which was not the case before the January job report. The baseline thinking remains a mid-year move, in June or possibly September. 

Let’s hope the Fed is in no hurry. Earlier this week, Warren Buffett said it would not be feasible for the Federal Reserve to increase rates. “If Europe’s got them at zero, and you get higher rates in the United States, that would exacerbate a problem with the stronger dollar and funds flow.” There are plenty of things that could derail the jobs train: the Fed, the government, geopolitical events – take your pick; but maybe we are about to see something close to full employment and genuine, sustained economic prosperity. At least I hope that’s what the light is at the end of the tunnel.