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Rainbows over Canyonlands - Dave Stoker

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Saturday, January 09, 2016

Financial Review

The Last Jobs Report of 2015

DOW – 167 = 16,346
SPX – 21 = 1922
NAS – 45 = 4643
10 Y – .02 = 2.13%
OIL – .34 = 32.93
GOLD – 4.60 = 1105.60

The economy added 292,000 new jobs in December, much higher than estimates of 205,000 to 215,000. The unemployment rate was unchanged at 5.0%. The October and November reports were revised higher to show an additional 50,000 new jobs. In the final three months of 2015, the U.S. added an average of 284,000 jobs. That’s the fastest pace in almost a year.

For the past year the economy added 2.7 million jobs. In 2014 the economy added 3.1 million jobs; that’s the best 2 years for job growth since the late 1990s. The economy has added jobs for 70 consecutive months; right at 14 million jobs during that time.  Over the past year the unemployment rate has dropped from 5.7% to the current 5%.

Hiring in December was led by professional firms. They added 73,000 jobs, though almost half were temporary. Construction companies added 45,000 new workers (but that might be more a sign of mild winter weather across much of the country in December, rather than a big upsurge in construction).

Over the year, construction added 263,000 jobs, compared with a gain of 338,000 jobs in 2014.
Health care employment rose by 39,000, with most of the increase occurring in ambulatory health care services (+23,000) and hospitals (+12,000). Job growth in health care averaged 40,000 per month in 2015, compared with 26,000 per month in 2014.

Food services and drinking places added 37,000 jobs in December. In 2015, the industry added 357,000 jobs.

Employment in transportation and warehousing rose by 23,000 in December, with a gain of 15,000 in couriers and messengers.

Manufacturing employment changed little in December, though its nondurable goods component added 14,000 jobs. In 2015, manufacturing employment was little changed (+30,000), following strong growth in 2014 (+215,000).

Employment in mining continued to decline in December (-8,000). After adding 41,000 jobs in 2014, mining lost 129,000 jobs in 2015, with most of the loss in support activities for mining. When we say mining, what we are really talking about is jobs in oil exploration and development as well as oilfield support services.

Speaking of oil, Goldman Sachs’ chief equity strategist David Kostin joins analysts who are now seeing the impacts from the drop in oil prices as more negative for the overall stock market than previously thought. Kostin cut his earnings outlook for the S&P 500, citing a nearly $2 negative impact from energy stocks with that sector likely to see negative twelve-month earnings for the first time since the firm’s data begins in 1967. Overall, Goldman now thinks earnings will fall 7% in 2015. Which also does not bode well for mining jobs.

State and local governments added 13,000 jobs in December and the federal government added 4,000 jobs in the month, and only 17,000 federal jobs were added for the year. This has been a notable distinction of the current job recovery – it has been private employment, and public employment is still down 549,000 from the peak.

Worker pay fell a penny to $25.24, marking the first decline in a year. For the year wage growth was 2.5%. In a stronger job market, we would expect wage growth around 3% to 4%, which is clearly what the Federal Reserve is expecting as the year goes on. The average workweek for all employees on private nonfarm payrolls was unchanged at 34.5 hours in December.

Nearly half a million people rejoined the labor force, a sign that more jobs were available. The Labor Force Participation Rate was up slightly, (just 0.1%) to 62.6%. In the key demographic of 25 to 54, or the prime working years, the participation rate is 80.8%. Looking at other demographic markers, the unemployment rate for men over the age of 20 is at 4.7%, and for women age 20-plus the unemployment rate is 4.4%.

The unemployment rate for workers with less than a high school diploma is declining; it’s still higher than for skilled, educated workers, but it is coming down, and this may be one of the signs that some of the slack in the market is starting to ooze out. These workers, who on paper are among the least-qualified in the workforce, are vulnerable when the economy is soft and have made huge gains over the last 18 months or so.

And so thinking about the idea that there is no wage growth (or at least not much) the force keeping wages down, in the broadest sense, is remaining slack in the market. But data showing the least-qualified workers find their way back into the workforce the balance of power clearly tipping towards workers and away from employers. This is the slack being taken up. Part of that leverage once-held by employers allowing them to keep wages down, appears to be falling away.

The U6 measure of unemployment was unchanged at 9.9%. The U6 includes unemployed and underutilized workers, or people working part-time even though they would like a full-time job. In December, there were 6 million people part-time for economic reason, down by almost 750,000 for the year. So the economy is trending to more full-time jobs.

There are still 2.08 million workers who have been unemployed for 6 months or more but are still looking for a job; that’s up slightly from 2.05 million in November. This is an important number to watch. When this number goes down substantially, it will be a good indication that the economy is actually getting closer to full employment. That in turn should finally start to push wages higher, another important number to watch.

Another factor that could affect wages is a change in the minimum wage. The country has gone more than 6 years without an increase in the federal minimum wage of $7.25 per hour, but as of January 1, 14 states and several cities are moving forward with their own increases. California and Massachusetts are highest among the states, both increasing from $9 to $10 an hour. At the low end is Arkansas, where the minimum wage is increasing from $7.50 to $8. The smallest increase, a nickel, comes in South Dakota, where the hourly minimum is now $8.55.

The increases come in the wake of a series of “living wage” protests across the country, including a November campaign in which thousands of protesters in 270 cities marched in support of a $15-an-hour minimum wage and union rights for fast food workers. Food service workers make up the largest group of minimum-wage earners. With the increases, the new average minimum wage across the 14 affected states rises from $8.50 an hour to just over $9.

Several cities are going even higher. Seattle is setting a sliding hourly minimum between $10.50 and $13 on Jan. 1, and Los Angeles and San Francisco are enacting similar increases in July, en route to $15 an hour phased in over six years.

Backers say a higher minimum wage helps combat poverty, but opponents worry about the potential impact on employment and company profits. Part of the answer is in the speed of increase; slow, incremental increase seem to have less impact on employment. Soon we’ll have actual data to apply to those theories.

So, with another strong jobs report providing momentum to the labor market, the question is whether that momentum can carry into the broader economy and the markets. The Federal Reserve certainly anticipates job growth will eventually lead to wage push inflation, and keeps the Fed on track for more rate hikes.

Traders who bet on rate hikes using fed funds futures contracts now project greater-than-even odds of a March rate hike, according to CME FedWatch. Odds of a rate hike in March had slipped below 50% chance earlier this week as stock markets plunged on concerns that economic weakness in China could spill over into the US.

Another concern has been fourth-quarter US GDP growth, which have been trending down to a 1% annual rate, down from a 2% rate in the third quarter. The first reading on fourth-quarter gross domestic product is due Jan. 29. The jobs report indicates that fourth quarter GDP won’t drop too much.

With economy activity appearing to have leaked modestly lower in recent months, expect some of this positive momentum to be surrendered in the coming months, though the economy is expected to continue creating jobs in a manner sufficient to absorb excess labor market slack. The Fed is unlikely to raise rates at its Jan. 26-27 meeting, but is probably on track to move again at its March 15-16 meeting.

And then there is the problem of the rest of the world. Or at least the emerging markets and China. It was another wild day in China. China’s Shanghai Composite surged to a gain of 3% before plunging to a loss of 2% within the first 15 minutes of trading. The bottom was put in amid speculation the country’s so-called national team came in to support stocks, and the Shanghai Composite finished up 2%.

And fear of volatility spilled over to Wall Street; most of the day Wall Street was slightly positive, on the back off the strong jobs report, but as we headed into the final couple of hours, discretion was the better part of valor and traders decided the best defense was to exit positions before the weekend, and what might be a wild Monday morning of trading in Shanghai.

Both the Dow and S&P 500 had their worst five-day starts to a New Year in history, with the Dow falling 6.2% for the week and S&P 500 sliding 6%. The Nasdaq was down 7.3% this week.

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