Financial Review

Jobs Report Friday: meh

Sinclair Noe — October 2, 2015

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW + 200 = 16,472
SPX + 27 = 1951
NAS + 80 = 4707
10 YR YLD – .05 = 1.99%
OIL + .92 = 45.66
GOLD + 24.90 = 1139.40
SILV + .74 = 15.37

The economy added a seasonally adjusted 142,000 jobs in September, missing estimates by about 60,000. The unemployment rate was unchanged at 5.1%. More people dropped out of the labor force.

The Department of Labor revised the August employment numbers from 173,000, down to just 136,000.  The disappointing back-to-back employment reports were the worst pair in three years. Employment gains for July were also revised down from 245,000 to 223,000. The combined revisions for July and August lopped off 59,000 jobs from previous reports.

Normally, the August jobs number is revised higher, not lower. Because of education related jobs and other variables, the August report has been notorious for upward revisions; typically at least 35,000 positions are added to the initial count. Not today. Six of the past eight reports have been revised lower in subsequent months.

Taken together, the three months averaged 167,000, a total that, while representing expansion, also signifies a major slowdown from the 260,000 per month clip for all of 2014. Moreover, at the beginning of the year, the three-month average was 312,000. Overall in 2015, job creation is now below the 200,000 milestone, sitting at 198,000 and drifting lower.

The average hourly wage paid to American workers fell a penny in September, once again confounding expectations that pay will rise because of the rapid decline in the unemployment rate over the past few years. The typical worker earned $25.09 an hour last month. Average hourly earnings of private-sector production and nonsupervisory employees were unchanged at $21.08 in September. The amount of time people worked each week fell a tick to 34.5 hours in September.

Nominal wage growth was unchanged at 2.2% year-over-year.  In September, the Labor Department’s report on job openings noted a 14-year high – 5.8 million – leading some to worry that the labor pool does not currently have the skills that employers require. The flip side is that employers may need to pay more to attract qualified, skilled workers, but for now it doesn’t look like that is happening.

Among the few bright spots in the September employment report, an alternative measure of unemployment known as the U6 rate fell to 10%, the lowest level since June 2008. OK, I admit that’s not much of a bright spot. The U6 includes anyone who wants a full-time job but can’t find one, including part-time workers. The number of persons working part time for economic reasons decreased in September to 6.04 million from 6.48 million in August.

Over the past 12 months, the number of persons employed part time for economic reasons declined by 1.0 million. The number of persons unemployed for less than 5 weeks increased by 268,000 to 2.4 million in September, partially offsetting a decline in August. The number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 2.1 million in September and accounted for 26.6 percent of the unemployed.

The percentage of Americans in the labor force fell to the lowest level since October 1977. The labor force participation rate fell to 62.4% from 62.6%. If people had not dropped out of the labor force, the unemployment rate would have been higher. Much of the lower participation rate can be explained by demographics; younger people are continuing their education and many older people are retiring. To get a better understanding of this, the 25 to 54 year old labor participation rate, which is the prime working years, declined to 80.6% in September, and the 25 to 54 employment population ratio was unchanged at 77.2%.

It may be hard to find a silver lining in this month’s jobs report, but it doesn’t mean the labor market has collapsed, more like a dip than a stumble. Total employment is now 4.0 million above the previous peak.  Total employment is up 12.7 million from the employment recession low. Private employment is now 4.4 million above the previous peak. Private employment is up 13.2 million from the recession low. In September, the year-over-year change was 2.75 million jobs.

Private payroll employment increased 118,000 from August to September, meaning state and local governments added a combined 26,000 jobs in September, however the federal government lost about 2,000 jobs. The rebound in government jobs squares with other data, such as the recently released final US GDP numbers for the second quarter.

Those numbers showed government spending making the largest contribution to economic growth in years. Only 118 thousand public sector jobs have been added during the first thirty one months of Obama’s 2nd term (following a record loss of 702 thousand public sector jobs during Obama’s 1st term). This is one of the anomalies of this jobs recovery; it has not had support from government jobs.

The manufacturing sector remains soft, with factory payrolls falling by 9,000 when they were expected to show no change. With dollar appreciation and sluggish overseas growth providing headwinds, it was the biggest back-to-back decline since 2010. Mining/logging, a category that includes oil exploration and drilling, posted a loss of 12,000 jobs; wholesale trade also dropped over 4,000 jobs. Leisure and hospitality services gained 35,000 jobs. Health care added 34,000 jobs in September. Employment in professional and business services gained 31,000 jobs. Retail trade employment trended up in September (+24,000).

Earlier this morning, futures indicated a triple digit gain for the Dow Industrials, but following the release of the jobs report futures fell and Wall Street opened down, the Dow Industrials were down 258 points in the first hour of trading. The 10-year yield hit 1.92 percent, falling below 2 percent for the first time since Aug. 24. The 2-year yield also hit its lowest level since August 24, holding near 0.55 percent in morning trade. The Dow and S&P 500 closed up more than 1 percent for their biggest intraday upside reversal since Oct. 4, 2011.

The U.S. dollar fell nearly 1 percent against major world currencies, with the euro briefly topping $1.13 for its highest level against the dollar in more than a week. The yen strengthened to 119.03 against the dollar. The dollar bounced back as trading continued, but still closed lower against a basket of currencies. Crude oil started lower but surged back to a one-week high after a report showing the number of working U.S. oil rigs fell to a five-year low.

The initial reaction was the markets acknowledging that bad news is bad news, after that the bad news was interpreted as good news because it likely means no Federal Reserve rate hike in the immediate future.

With weaker-than-expected payroll expansion, the jobs report for September suggests the U.S. economy isn’t immune to the global economic slowdown. The disappointing performance reduces the probability the Federal Reserve will raise interest rates in October. Fed fund futures now indicate the Federal Reserve will delay a rate hike until March of 2016. October now stands just a 2 percent chance as being the month for the U.S. central bank to hike for the first time in more than nine years, according to the CME Group. December is at just 29 percent, January is at 39 percent and March is priced in as the most likely month, just barely, with a 51 percent probability.

Yet the continued stimulative monetary policy of close-to-zero rates is, by itself, unlikely to do much to resolve what ails the U.S. and the rest of the world. Eric Rosengren, the president of the Boston Fed, in a TV interview this morning said a rate hike is not off the table for 2015. Rosengren said he supported the Fed decision not to hike rates in September, but he is not a voting member of the FOMC.

Stanley Fischer, vice chair of the Fed, in a speech in Boston today did not address the economic or interest rate outlook in his remarks at a conference on “macroprudential monetary policy.” Fischer did say he doesn’t see immediate risks of financial bubbles in the U.S., while raising concerns that the central bank’s policy tool kit to deal with such occurrences is limited and untested.

Third-quarter economic growth is slowing rapidly. The Atlanta Fed’s GDPNow tracker is expecting gross domestic product to advance just 0.9 percent, a number that has been taken down nearly a full percentage point from its most recent target and does not include Friday’s dismal jobs reading.

The Fed’s decision to leave interest rates unchanged at their September FOMC meeting looks like a smart call in hindsight. Had the Fed gone ahead and tried to raise interest rates, despite collapsing global commodity prices and surging market volatility brought on by a sharp Chinese slowdown, soft job market data would have been far more alarming. Such a delay might not be a bad thing. After all, the global economy is in the midst of a big shift, from a China-centric, emerging-market-oriented commodities boom, toward …, whatever it is the future brings.

Having avoided a government shutdown this week after negotiating a stop-gap measure to extend federal funding until December, Congress has until around November 5 to raise the $18.1 trillion debt cap and avert a default. Treasury Secretary Jack Lew says that is when the country is due to run out of cash sooner than thought. President Obama held a press conference today and said that he would not sign another stopgap spending bill to prevent a government shutdown, warning that gridlock on a full-year spending plan threatens U.S. economic growth.

The recent data suggests government could be a more meaningful contributor to growth over the near-term. If that’s true, and it’s a big if because there are signs of another debt fight brewing, the Fed’s easy money policies will likely be more effective than they have been. In other words, the Fed will no longer be working at cross-purposes with the government.

Financial Review

Good Jobs Report, Not Liftoff

Sinclair Noe — June 5, 2015

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW – 56 = 17,849
SPX – 3 = 2092
NAS + 9 = 5068
10 YR YLD + .10 = 2.40%
OIL + .96 = 58.96
GOLD – 4.10 = 1173.30
SILV + .05 = 16.23

The economy added 280,000 jobs in May. The unemployment rate increased to 5.5% as more people entered the labor force. Average hourly earnings rose by 8 cents to $24.96. Over the year, average hourly earnings have risen by 2.3 percent. March and April were revised up by a combined 32,000 jobs.

The headline of 280,000 jobs added in May is the strongest number since December. April’s numbers were revised down by 2,000 to 221,000, and March was revised up from 85,000 to 119,000 (so it went from very bad to just a little bad). The economy has added an average of 217,000 jobs a month so far this year. Still, job creation has also slowed from the second half of 2014, when the economy added an average of 281,000 jobs a month. The US economy has recorded 63 straight months of private sector jobs growth. Previous record was 51 months from 1996-2000. Total employment is now up 12 million from the employment recession low and up 3.3 million from the previous peak. Private employment is up 12.6 million from the employment recession low and up 3.8 million from the previous peak. Typically, government will increase jobs in a downturn but that did not happen over the past few years – just the opposite.

Perhaps the best news was in the survey of American households that determines the unemployment rate. The number of people in the labor force rose by almost 400,000, although not all of those people found a job. Still, it was enough to push the unemployment rate higher. The Labor Force Participation Rate increased in May to 62.9%. This is the percentage of the working age population in the labor force.   A large portion of the recent decline in the participation rate is due to demographics. And there are 2.5 million long-term unemployed workers who still want a job.

High-tech firms, health-care providers, hotels, home builders and retailers all added workers. Only the energy industry cut jobs. Here’s the breakdown: Mining and logging, which includes oil drilling and exploration lost 18,000 jobs; education and health services added 74,000; professional and business services added 63,000 jobs; leisure and hospitality added 57,000; retail trades added 31,000; government added 18,000; transportation and warehousing added 13,000; financial activities added 13,000; construction added 17,000; and manufacturing added 7,000. One discouraging stat is that about 20,000 jobs were temporary. That means employers are still reluctant to take on permanent positions or convert temps to permanent jobs. That is a continued sign of slack.

The alternate measure of labor underutilization, U-6, was unchanged at 10.8%. In May, some 17.3 million people were classified as unemployed, involuntary part-time workers or the marginally attached. When we talk about slack in the labor market, this is where we find it, in the difference between the headline unemployment rate of 5.5%, known as the U-3, and the 10.8% unemployment rate of U-6. For May, the difference is 5.3%, but it has been as high as a 7.5% spread. We will likely continue to see slack until the spread drops down to about 3%; meaning we probably won’t see higher wage pressure until these workers find meaningful employment. Wages can go up, but it is unlikely wages would go up fast.

Average pay rose 8 cents to $24.96 an hour, pushing the increase over the past 12 months up to 2.3%, so wages are just barely staying ahead of inflation. That’s the highest rate since mid-2013, suggesting the increase in hiring over the past few years is finally forcing companies to pay a little more to attract workers. The Labor Department estimated that average hourly earnings for production and nonsupervisory employees increased to $20.97, up 0.3 percent from April and 2 percent from a year earlier. That pace falls far short of the pre-recession average of 3.4 percent.

And workers are not really seeing income gains; median inflation-adjusted household income is down 5.3% in the past 8 years, slipping from $54,674 to $51,939. Education and skills are big factors; median inflation-adjusted household income for college educated workers $45,400, for workers with high school education it drops to just $25,900. There is even some pent-up demand for workers with skills, such as machinists, engineers, and information and technology workers.

The May Jobs Report looks solid but we should probably consider some seasonal factors at work; specifically, young people entering the workforce. People under the age of 25 accounted for 96% of the 397,000 increase in the labor force in May, which includes those looking for work as well as those working. They accounted for 76% of the actual net new jobs. So, most of the gain is not attributable to discouraged workers suddenly deciding to look for a job, but rather young workers just entering the labor pool.

May is a time for new grads to enter the workforce, and the Class of 2015 faces some challenges. Unemployment of young graduates is extremely high today, but not because of something unique about the Great Recession and its aftermath that has affected young people in particular. Rather, it is high because young workers always experience disproportionate increases in unemployment during periods of labor market weakness. Unemployment and underemployment rates among young graduates are improving but remain substantially higher than before the recession began. For young college graduates, the unemployment rate is currently 7.2 percent (compared with 5.5 percent in 2007), and the underemployment rate is 14.9 percent (compared with 9.6 percent in 2007). For young high school graduates, the unemployment rate is 19.5 percent (compared with 15.9 percent in 2007), and the underemployment rate is 37.0 percent (compared with 26.8 percent in 2007).

The current unemployment challenges for young workers did not arise because today’s young adults lack the right education or skills. Rather, it stems from weak demand for goods and services, which makes it unnecessary for employers to significantly ramp up hiring. And if recent grads don’t jump into a job, if they are idled for some period of time, they risk missing the two main paths – receiving further education or getting more work experience – that enable future career success. Wages of young college and high school graduates are performing poorly, and are substantially lower today than in 2000. The real (inflation-adjusted) wages of young high school graduates are 5.5 percent lower today than in 2000, and the wages of young college graduates are 2.5 percent lower.

Graduating in a weak economy has long-lasting economic consequences. Economic research suggests that for the next 10 to 15 years, those in the Class of 2015 will likely earn less than if they had graduated when job opportunities were plentiful.

Something else happened in May; the number of self-employed workers surged by 370,000 last month, according to the U.S. Labor Department’s survey of households. And nearly 1 million workers have gone to work for themselves since just February. Now, this is a volatile statistic because the Labor Department puts out two surveys: the establishment survey, which gets most of the attention including the headline number of jobs created, and the household survey, from which the unemployment rate is derived. Some of the strength could be attributed to a reversal from losses during a cold winter. And also self-employment can mean lots of things: someone who works as a consultant while looking for more stable employment, or maybe they saw their regular job cut to independent contractor status so the employer could avoid taxes or benefits; or maybe someone who struck out in a more typical job search and now they are freelancing; or it could be someone who starts a business in hopes of success on their own terms.

If we are truly seeing a return to entrepreneurship, that would be a very positive sign. It takes a lot of confidence to start your own business. It also requires a healthy dose of crazy, because most start-ups will fail or just muddle along. The next Facebook or Uber is the exception, not the norm. And for those hoping to have the next big thing in start-ups, keep in mind that much of the Silicon Valley start-up culture only exists because there’s so much QE fueled free money for rich people sloshing around. And that spigot could soon be closed.

Wall Street was paying particular attention to the jobs report because of its potential impact on the Fed’s decision about when to raise interest rates above their near-zero levels. A Fed rate hike later this year is still on. The payroll report might give the Fed justification to hike rates, even though the first quarter GDP contracted 0.7%. Yesterday, the International Monetary Fund asked the Fed to hold off raising rates until the first half of 2016 because of disappointing growth and a lack of inflation. So we have weak economic data offset by what looks like a stronger job market.

The Fed fund futures contract is now signaling the first rate hike occurring in October, two months ahead of what had been expected prior to the release of the jobs report. Traders see a 53-percent chance that the first Fed rate hike will come at the Fed’s second-to-last meeting of the year, and just a 34-percent chance of a September rate hike. The bond market responded with a spike in yields. The strength in the May jobs report puts upward pressure on the entire yield curve; the yield on the 10 year Treasury note spiked up to 2.4%; and the dollar hit a 13 year high against the Japanese yen, with the Dollar index moving above 96.

We still have large parts of the economy stuck in the mud, even as some argue that today’s jobs report shows that the economy has reached escape velocity. Today’s report was good but not conclusive.

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.

FINANCIAL REVIEW

Fluctuations

Sinclair Noe — October 1, 2014

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Financial Review

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

DOW – 238 = 16,804
SPX – 26 = 1946
NAS – 71 = 4422
10 YR YLD – .10 = 2.40%
OIL – .43 = 90.73
GOLD + 4.30 = 1214.00
SILV + .20 = 17.28

Yesterday, we talked about third quarter results. Most of the stock indices were down in September but still slightly positive for the third quarter. Today wiped out the third quarter gains. Why? Well, that’s always fun; the headlines offer a plethora of reasons, including “global worries” or maybe it’s a “market top” or “geopolitical hotspots” or “commodity crash” or maybe it’s just the start of a “rocky October”. I don’t claim to know why the markets dropped today, or any given day. I can read a chart, and I can identify patterns, but there are no guarantees. We follow macroeconomics and we analyze company P&Ls, but there are no guarantees. We do not get stuck in cheerleader mode like the talking heads on TV business shows, nor do we follow the perma-bears.

Markets fluctuate; to paraphrase a line from J.P. Morgan, or maybe John Rockefeller. “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” That’s a quote from Warrant Buffet. We don’t yet know whether this is folly or a trend. We’ll just have to listen to the markets.

The Institute for Supply Management’s index of national factory activity dropped to 56.6 last month, its lowest level since June. A reading above 50 indicates expansion. The gauge of new orders fell to 60% from 66.7%, but that’s still very strong. Production edged up a tick to 64.6%, marking a four-year high. Fifteen of the 18 industries tracked by ISM reported growth in September. A similar survey put out by the private-research firm Markit was just slightly off a four year high in September.

And compared to the rest of the world, American manufacturing is red hot. The JPMorgan global manufacturing index edged down to a four-month low of 52.2% in September while the rate of expansion was the weakest since April. Growth was near-stagnant in the Eurozone and Asia, and the global index is being propped by the United States.

On Friday, we’ll get the monthly jobs report from the government. I always consider this one of the most important economic reports. The warm-up for the report comes from ADP, a private payroll processing firm. Each month they gather data and make their own estimate about the labor market. ADP is not always a good predictor of the Labor Department’s report; for example, last month ADP predicted the economy added 202,000 jobs, and the official number came in at 142,000. In defense, the government numbers for August are typically subject to upward revisions, more than other months; so after revisions, ADP’s estimate might turn out to be pretty close.

That’s a fairly long setup to let you know that today, ADP estimates the economy added 213,000 private sector jobs in September. Most estimates call for the government’s report to show that total nonfarm employment rose by 220,000 jobs in September. Weekly readings on jobless claims are near lows hit before the recession, signaling that employers are laying off few workers. And if the economy continues to add about 200,000 net new jobs each month; it would be consistent with about 3% GDP growth. Not shabby.

Job growth has been steady since 2009, but it has also been uneven. The Labor Department reports today nearly a quarter of the metropolitan areas in the country had fewer jobs in August than 5 years earlier; 92 regions have experienced net job loss since August 2009. The Tucson region recorded the largest total decline with 23,500 fewer jobs there in August compared with the same month in 2009. The Pine Bluff, Arkansas region saw the steepest decline, down 9.4% from 5 years earlier. The hardest hit areas are more lightly populated; indicating rural America has not really recovered. Los Angeles added the largest total amount of jobs during the five-year span, almost 390,000; Houston, Miami and Dallas followed.

In a separate report, the Commerce Department says construction spending dropped 0.8% in August to a seasonally adjusted rate of $961 billion. Looking at private outlays, spending fell 1.4% for nonresidential projects and dropped 0.1% for residential projects. For overall public construction projects, spending fell 0.9%. In addition, July’s rise was revised lower to a 1.2% rise from an initially reported 1.8% gain.

Fannie Mae and Freddie Mac are the giants of mortgage financing; they are government sponsored entities that issue and guarantee mortgage-backed bonds. Between those companies and Ginnie Mae, which guarantees loans insured by the Federal Housing Administration, the government backs nearly 97 percent of US mortgages.

And today, they crashed. Fannie and Freddie shares each dropped 37%. And preferred shares were down more than 60%. A federal judge on Tuesday threw out a lawsuit brought by Fannie Mae and Freddie Mac investors to stop the government from seizing most of the profits at the mortgage finance twins.

Let’s set the stage. In 2008 Fannie and Freddie were placed into conservatorship to avoid bankruptcy. Congress originally authorized Treasury to collect 10 percent dividend payments from Fannie and Freddie every quarter as a condition of the government’s $188 billion bailout of them. Treasury amended the terms of the agreement in 2012 to make Fannie and Freddie give the government most of their profits, a move known as the “sweep amendment.” And earlier this year, Fannie and Freddie paid off their bailout, and taxpayers recouped the $187 billion that was used to prop up the two GSEs. A couple of big institutional investors in Fannie and Freddie, including Perry Capital and Fairholme Funds, sued, claiming that the dividend sweep was tantamount to a purchase of new securities, which Treasury did not have the authority to make. It also claimed the FHFA failed to conserve the assets of Fannie and Freddie by allowing Treasury to take most of their profits.

The hedge fund argued that Treasury’s arrangement caused irreparable harm to all private investors, saying they have been shortchanged as Fannie and Freddie returned to profitability. In its original complaint, the hedge fund said the government “maneuvered to ensure that Treasury would be the sole beneficiary of the companies’ improved financial position.” Basically, the hedge funds were upset that the taxpayers that bailed out Fannie and Freddie got paid back before they could suck out profits for their hedge fund.

In Tuesday’s ruling, the judge expressed sympathy for the plaintiffs, but it wasn’t enough to reverse course. He found that Treasury and FHFA were well within their rights, as dictated by Congress; and if the hedge funds didn’t like it, they could take it up with Congress. What’s still unclear is how and when and if Fannie and Freddie will emerge from conservatorship.

Bill Gross’s surprise departure on Friday from Pacific Investment Management Co., or Pimco, shook up the $42 trillion bond market. The most-traded assets quickly recovered but the less-traded ones are still feeling the effects. And it may have exposed an Achilles’ heel: the lack of liquidity in the bond market. When you get a dislocation like this, it tends to exacerbate price movements maybe more than what you’d have seen 10 years ago.

One person pushing around borrowing costs for nations and companies worldwide, however briefly, shows the increasing fragility of credit markets. Average daily trading in the US bond market fell to $809 billion in 2013 from $1.04 trillion in 2008, according to data compiled by the Securities Industry & Financial Markets Association. Debt still largely changes hands off exchanges, through telephone calls and e-mails. And in September Pimco’s Total Return Fund was hit with $23.5 billion in withdrawals, or right at 10% of assets.

Bill Gross does not rule the bond markets; any effect from him changing jobs will be temporary. The Fed will soon unwind QE, and that has been and will be a much bigger story. Gross’ departure serves as a reminder that fluctuation should not be confused with liquidity. Bond markets fluctuate all the time but things get scary when prices stop fluctuating.

We’re pretty sure the bond market will feel a bit uneasy about the end of QE, but what about the energy markets? And what is the connection between the end of quantitative easing and raising interest rates, and energy? The oil and gas industry is extremely capital intensive, with billions of dollars required in some cases to suck hydrocarbons from the ground. That means that companies need to sell a lot of debt to financial markets to finance their projects. But if interest rates rise, it will significantly raise borrowing costs for oil and gas operators.

Increasing interest rates should strengthen the US dollar relative to other currencies; and we’ve already seen the dollar at 4-year highs in recent trading. Higher interest rates makes holding dollars more attractive, which increases demand for the currency. Oil is priced in dollars, so a stronger dollar pushes down oil prices, along with other commodities priced in dollars. Lower oil prices mean lower revenues for oil companies.

Higher interest rates will make debt more expensive, making it more expensive to borrow money to drill an oil well. Moreover, the problem becomes worse still because so much of the oil growth in recent years has come from shale, which has rapid decline rates after initial production. Companies have to keep borrowing to drill new wells, but will run into trouble if the cost of debt rises too fast. So, high interest rates mean higher expenses and a stronger dollar means a lower price; and that means some of the marginal players won’t manage, and that means a pullback in production growth.

So far this year, oil prices have been moving lower; production is strong, inventories are high. The Fed says it will be a “considerable time” before they raise rates. Best guess is that sometime next year the Fed will end the era of easy money; they will tighten the spigot of stimulus, and that will tighten the spigot on oil and gas output, especially for companies that have high levels of spending. There are other factors at play, including global production and the impact of renewable energy, but the formula is in place. Higher borrowing costs will likely necessitate higher revenue and if oil prices don’t rise the industry will need to pare back production; not today, but over the next year or two, and America’s oil boom will fizzle.