Not Fixed Yet
DOW – 211 = 16204
SPX – 35 = 1880
NAS – 146 = 4363
10 Y – .02 = 1.85%
OIL – .73 = 30.99
GOLD + 18.40 = 1174.50
The S&P 500 extended its loss for the week to 3%. The index is now down more than 8 percent in 2016. The Nasdaq closed at its lowest since October 2014.
Today is a jobs report Friday. If you are a regular listener, you know that I go into quite a bit of detail. The reason is simple. The jobs report is the single most important economic data we can look at each month. So, here are the numbers:
The economy added 151,000 nonfarm jobs in January; that’s below the consensus estimate of 185,000. The unemployment rate dropped from 5% to 4.9%, the lowest reading since 2008; and an indicator the economy is still creating more than enough jobs to keep up with increases in the size of the labor force. The December jobs report was revised down from 292,000 jobs to 262,000. November’s gain was raised to 280,000 from 252,000.
In the past three months, job growth averaged 231,000 jobs per month. In the past 12 months the economy added 2.67 million jobs. Since the beginning of 2010, the American economy has gained nearly 14 million jobs. Total employment is now 4.9 million above the previous peak.
The average wage paid to U.S. workers jumped 0.5% in January, or an increase of 12-cents an hour, to $25.39 an hour. Though there’s an important caveat here: one-time minimum wage hikes may make some of this a temporary bump. This means we probably won’t see a similar jump next month, but the good news is that wages are higher. Wage growth accelerated toward the end of 2015 and it has climbed 2.5% in the past 12 months, just a hair below the post-recession high set in December.
And with inflation, as measured by the CPI at a little under 2%, that means real wage gains for workers; it also explains why the savings rate has been creeping higher. What’s more, the average amount of time workers spent on the job edged up to 34.6 hours in January. That also matches a post-recession high.
Job gains occurred in several industries, led by retail trade, food services and drinking places, health care, and manufacturing. Employment declined in private educational services, transportation and warehousing, and mining.
Here’s a breakdown of the different sectors: Retail trade added 58,000 jobs in January, following essentially no change in December. Employment in food services and drinking places rose in January (+47,000). Over the year, the industry has added 384,000 jobs. Health care continued to add jobs in January (+37,000). Manufacturing added 29,000 jobs in January, following little employment change in 2015. Financial activities rose in January (+18,000). Employment in professional and business services changed little in January (+9,000), after increasing by 60,000 in December.
Private educational services lost 39,000 jobs in January due to larger than normal seasonal layoffs. Employment in transportation and warehousing decreased by 20,000 in January. Most of the loss occurred among couriers and messengers (-14,000), and that can be considered a seasonal adjustment. Government, on both the federal and local level, lost 7,000 jobs, meaning private payrolls actually gained 158,000 jobs for the month. Employment in temporary help services edged down in January (-25,000), after edging up by the same amount in December.
There are still about 6 million workers working part-time for economic reasons; that means they would like a full-time job but they can’t find it. When you add these marginally utilized workers to the 4.9% headline unemployment rate (which is known as the U-3), you get a different measure of unemployment called the U-6, which was unchanged at 9.9%. There are 2.1 million workers who have been unemployed for a half-year or longer (the long-term unemployed). These individuals accounted for about 27 percent of the unemployed.
Among the major worker groups, the unemployment rates for adult men (4.5 percent) and Whites (4.3 percent) declined in January. There was little change in jobless rates for adult women (4.5 percent), teenagers (16.0 percent), Blacks (8.8 percent), Asians (3.7 percent), and Hispanics (5.9 percent).
The labor force participation rate inched up slightly to 62.7%. The participation rate for workers aged 25 to 54 (the prime working years) increased in January to 81.1%, from 80.8% in December. We have seen meaningful improvements in the participation rate over the past six months which suggests that more sidelined workers are being brought back into the labor pool.
So, was this a good report or a bad report? Well, the numbers were down from last month and they were short of estimates, but that doesn’t mean the numbers were bad. The unemployment rate at 4.9% is very good. The November and December reports were very strong, and probably unsustainable at this point in the recovery. Any job gains above 100,000 per month means that the economy is absorbing population growth. It isn’t realistic to think the economy will add 2.67 million jobs in 2016. At some point we reach full employment. The problem is that we don’t know exactly where that point is.
You can’t measure full employment with a single metric. The Federal Reserve has combined some metrics into something they call ZPOP, which looks at the labor participation rate and workers in prime working years and under-utilization. But that doesn’t tell the whole story. We have seen the unemployment rate down around 4.4% for a brief period about 10 years ago. And several states and cities have experienced unemployment under 4% with no apparent adverse effects.
And even if the unemployment rate drops to 4.5% (to pick a number out of the hat), does that mean we have full employment? Not necessarily. We could still have plenty of slack in the labor market at 4.5%. Just because a worker is employed doesn’t mean he or she is doing what they’re best at or employed in their most productive occupation. If an unemployed engineer takes a job waiting tables to feed the family, that worker will be defined as fully employed, but that worker’s potential is hardly fully utilized.
And then you can look at full employment as the point where we start seeing wage push inflation. And even though we saw a nice bump in wages this month, probably because of the new minimum wages, remember that wages declined slightly a month ago. We really see very little inflation from a tight labor market. And even if we did see wage push inflation, we are in a low inflation environment right now, some might say deflationary, which means we might have even further to go before inflation becomes problematic.
If inflation remains below the Fed’s target for an extended period of time and the unemployment rate continues to decline, the Fed might just reduce its estimate of what the full employment rate really is. In the end, the Fed will always have to make its monetary policy decisions based on incomplete information about the economy. So maybe it is more important to look to wages, than it is to look to the net number of new jobs added each month.
Further, this is not the kind of jobs report that would indicate the economy is headed for a recession. And while the financial markets could drag the economy into recession or an incident in the international credit markets could drag the economy into recession or a geopolitical event could make a mess of everything, the simple truth is that the economy is not on the precipice of a recession with 4.9% unemployment.
Get real folks. That is not a recession number. The fact that unemployment is still falling is a big giveaway that we’re not in a recession yet. Granted the recovery is long in the tooth, but from these levels we are still more than a year away from a recession, maybe a bit longer, absent some black swan event.
Following the release of the jobs data the dollar rose against a basket of currencies on the data as traders saw more rate hikes this year. The yield on Treasury debt fell and stocks extended losses. Mohamed el-Erian, chief economic advisor at Allianz said today’s jobs report “serves as a caution to markets that it is too early to take a Federal Reserve March hike completely off the table.” The financial markets are clearly afraid of another rate hike.
The Fed’s December rate hike was a mistake, but that is not going to cause a recession; unless the FOMC is crazy enough to raise rates further in a weak economy with no inflation. A question that should be asked is if a rationale for quantitative easing was to increase investment asset prices and spur the economy through the wealth effect, what is the effect going to be when after a year of minimal returns on investment assets those assets begin to decline significantly in price as has been the case since the beginning of this year? That might be a false premise but it will surely play into the Fed’s equation.
So, now the Fed has a very difficult and complicated decision to make. The financial markets have been looking lousy but the labor market is looking fairly solid. And Fed chair Janet Yellen has said she doesn’t want to wait for full employment and signs of inflation before tightening policy. That explains, or at least justifies, the December rate hike.
And while the markets bet on the odds of a rate hike, let’s not forget that the Fed is not out of ammunition. And don’t forget the long-forgotten concept of fiscal policy to stimulate the economy. But the reality is that the jobs recovery still has a long way to go. Too many people fell out of the labor pool, and were just considered as collateral damage explained away as demographics; too many people ended up with the wrong jobs that provide a paycheck but don’t fully utilize their skills.
The economy is growing. It just isn’t fixed yet.