Financial Review

Decent August Jobs Report

Sinclair Noe — September 2, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 72 = 18,491
SPX + 9 = 2179
NAS + 22 = 5249
10 Y + .03 = 1.60%
OIL + 1.34 = 45.09
GOLD + 11.20 = 1325.80

The economy added 151,000 jobs last month. The unemployment rate was unchanged at 4.9%. Hiring was expected to taper off after strong gains in July and June in which more than a half-million new jobs were created. The results missed estimates of 180,000 new jobs.

Revisions subtracted a net 1,000 jobs from overall payrolls in the previous two months. The government said 275,000 new jobs were created in July instead of 255,000. But June’s gain was cut to 271,000 from 292,000.

The government’s underemployment rate, or U-6, held at 9.7 percent, as the number of people working part-time for economic reasons rose slightly. Some 6.05 million American employees were in part-time jobs but wanted full-time work, up from 5.94 million in the prior month.

The Labor Force Participation Rate was unchanged in August at 62.8%. This is the percentage of the working age population in the labor force.

Average hourly earnings rose 0.1 percent from a month earlier to $25.73, following a 0.3 percent increase in the prior month. The year-over-year increase was 2.4 percent, compared with 2.7 percent in the 12 months through July.

The average work week for all workers decreased by 6 minutes to 34.3 hours in July, the lowest since 2014 and the first drop in six months. If the jobs market were overheating, you would expect to see longer hours, not fewer.

When you combine the shorter workweek with the very small hourly wage gain, average weekly earnings actually fell in August, dropping 0.2 percent to $882.54.

We have now seen job growth for 71 consecutive months. Private employers have added 15.1 million jobs to their payrolls in the 78 months since February 2010, an average of 194,000 jobs a month. Total employment (private plus government) has averaged 191,000 a month over that period, as federal, state, and especially local government were net job losers.

That’s right, over the past 6 years, we have lost government jobs. In August, private employers added 126,000 jobs. Federal government employment increased by 1,000, state government employment was unchanged, and local government employment rose by 24,000.

Factories cut payrolls by 14,000, the most in three months. Mining and logging, which includes the oil patch, lost another 4,000 jobs. Employment at construction companies fell for the fourth time in the last five months; down 6,000 in August. Construction firms complain about a lack of skilled construction workers, but it may also portend a slowdown. If builders have orders, they tend to find the workers.

Employment slowed at private service providers, with payrolls in professional and business services adding 22,000 jobs, but that’s the smallest gain since a decrease in January. Retail jobs rose by 15,100. Leisure and Hospitality added 29,000. Education and health services added 39,000.

While equities advanced across the board, the S&P 500 Index remained squarely within the same 1.5 percent band it has now occupied for 37 straight days. That’s the tightest since 1964 for the gauge, with volatility hovering near a two-year low.

Things were no different in the currency and bond markets, where benchmark 10-year notes got stuck in the narrowest trading range in almost a decade in August. Yields on two-year notes, the coupon securities most sensitive to Fed policy, were little changed. The 10-year note dropped, pushing yields back above 1.6%; that selloff gave a boost to the banks, especially the regionals.

The dollar fell against the world’s major currencies; with a weaker dollar, gold was higher. And the gold miners (GDX) had a great day with a 1.9% pop.  GDX had dropped from $31.79 on August 12 to $25.17 yesterday, so maybe it was due for a bounce or maybe it’s just a dead cat bounce.

Oil rallied. In addition to a weaker dollar, oil halted four days of declines as Vladimir Putin said he would like Russia and OPEC to clinch a deal to freeze supply. The Russian president said he would likely give his backing to a plan to crimp production at the Group of 20 summit in China next week, ahead of OPEC talks in Algiers at the end of September. In the prior 4 sessions, oil lost just over 9%, so even with today’s gains, oil is down a little over 6% for the week.

So, the Jobs Report wasn’t great but not really bad. The economy only needs a little over 100,000 new jobs per month to maintain current levels. If we had seen a repeat of July’s report (275,000 new jobs), we would all be talking about how the job market was overheated. Instead, we have slow, steady growth.

The average growth over the past 3 months is still 232,000. In August, the year-over-year change was 2.45 million jobs; that is a very good, steady rate of growth, much better than expected at this point in the recovery.

Was it enough for the Federal Reserve to hike interest rates in September? The unemployment rate has been in a tight range between 4.7% and 5.1% for the past 12 months. No change last month. The economy is close to full employment but we aren’t seeing inflationary pressures as a result.

Fed rate hike odds are essentially unchanged. Fed funds futures imply a 30% chance of a September rate hike, down from 34% yesterday. But December is holding steady at 60%. We know that Fed Chair Janet Yellen said at Jackson Hole that 190,000 jobs would be a clear sign of a very strong labor market, and likely reason for a rate hike.

On Aug. 30, 2016, Fed Vice Chairman Stanley Fischer said the US is “very near full employment.” He added that an interest rate hike (or a series of them) would be made based on economic signs. FOMC members keep citing the current U.S. unemployment rate (U-3) of 4.9% as evidence that the US economy has recovered from the Great Recession. Fischer says the US is near full employment. Even though the U6 unemployment still seems to have some slack. As of August 2016, it was at 9.7%.

In December 2006, the U6 hit a low of approximately 7.9%. In October 2000, the U6 was at a much lower low of 6.8%. The U6 includes the U3 plus discouraged job seekers and those working less than full time because they have not been able to find full-time employment. It seems the data is not quite confirming the full employment argument – close, but not quite.

Richmond Federal Reserve Bank President Jeffrey Lacker said today, after the jobs report that the economy appears strong enough to warrant significantly higher interest rates. Lacker argued that a range of economic analysis suggests the Fed’s benchmark overnight interest rate is too low.

Meanwhile, the last time we saw the Fed hike interest rates in an election year was 2004, and that was part of an ongoing campaign of incremental, very widely anticipated quarter point moves. If the Fed hikes rates in September, it would be a surprise to the market, despite some recent, not-quite-convincing jawboning by policymakers. If the Fed wants to raise rates in September, they need to say it strong and loud – otherwise, we’ll wait for December, which is a long way away.

I read several headlines that called today’s report disappointing, or a “whiff”. Not at all. It just wasn’t as strong as June and July. August was still a good solid month of job growth. We’ve really only had one month this year that was really bad – that was in May, when we added just 24,000 jobs, which proved to be a blip.

The labor market still has problems.  More than 6 million Americans are working part-time because they can’t find full-time jobs, a number that has barely budged so far this year. Long-term unemployment remains a problem. Millions of Americans abandoned the labor force during the recession and are now returning at a trickle; the number of jobs increase, but the number of people coming off the sidelines and looking for jobs increased as well – that’s why the unemployment rate stayed steady at 4.9% instead of dropping.

The trend lines, however, are headed in the right direction – and one month of just decent job growth doesn’t change that.

We had some other economic data this morning:
The U.S. trade deficit slid almost 12% in July to $39.5 billion as a surge in soybean shipments pushed exports to a 10-month high. Exports rose 1.9% to $186.3 billion to mark the biggest advance in two and a half years. Soybean exports tripled to $5.2 billion, largely accounting for the increase. Imports, on the other hand, fell 0.8% in July to a seasonally adjusted $225.8 billion, even though the price of oil rose for the fifth straight month and hit the highest level per barrel since last September.

The Commerce Department says new orders for manufactured goods rebounded 1.9 percent in July after a downwardly revised 1.8 percent decrease in June. It was the biggest rise since October 2015 and followed two straight months of declines. Orders for non-defense capital goods excluding aircraft increased 1.5 percent in July. Manufacturing, which accounts for about 12 percent of the economy, remains constrained by the lingering effects of a strong dollar and weak global demand, which have crimped exports of factory goods.

Hurricane Hermine made landfall on Florida’s northwest coast early this morning, toppling trees and utility lines, cutting power to tens of thousands and leaving at least one person dead. The Category 1 hurricane moved ashore from the Gulf of Mexico near St. Marks, south of Tallahassee, with sustained winds of 80 miles per hour. It was downgraded to a tropical storm as it churned slowly toward the Carolinas.

Financial Review

Another Strong Jobs Report

Sinclair Noe — December 4, 2015

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

Subscribe: iTunes | Android | RSS

DOW + 369 = 17,847
SPX + 42 = 2091
NAS + 104 = 5142
10 YR YLD – .05 = 2.28%
OIL – 1.01 = 40.07
GOLD + 25.30 = 1087.90

The economy added 211,000 jobs last month, beating estimates of about 200,000. The unemployment rate held steady at 5% as more workers entered the labor pool. The Labor Force Participation Rate increased in November to 62.5%, from 62.4% in October. The last two months’ jobs numbers were revised higher. The government said 298,000 new jobs were created in October instead of 271,000. September’s gain was raised to 145,000 from 137,000. Over the past 12 months, the economy has added 2.64 million jobs.

Let’s break down jobs by sector: Employment in construction rose by 46,000 in November, with much of the increase occurring in residential specialty trade contractors (+26,000). Over the past year, construction employment has grown by 259,000.

Professional and technical services added 28,000 jobs. Over the year, professional and technical services have added 298,000 jobs.

Health care employment increased by 24,000 over the month, following a large gain in October (+51,000). In November, hospitals added 13,000 jobs. Health care employment has grown by 470,000 over the year.

Employment in food services and drinking places continued to trend up in November (+32,000) and has risen by 374,000 over the year.

Retail trades added 31,000 and has increased by 284,000 over the year.

Mining lost 11,000 jobs; this area includes jobs in oil drilling and support services. Since a recent peak in December 2014, employment in mining has declined by 123,000.

Information lost 12,000 jobs over the month. Within the industry, employment in motion pictures and sound recording decreased by 13,000 in November but has shown little net change over the year.

State and local governments added 8,000 jobs in November, while the federal government added 6,000 jobs.

The past five years of job growth have been in the private sector. Government jobs are still 561,000 below the peak.

The number of persons working part time for economic reasons increased in November. These workers are included in an alternate measure of unemployment known as the U6, which increased to 9.9% from 9.8%.

In November, average hourly earnings for all employees on private non-farm payrolls rose by $.04 cents to $25.25, following a $.09 cent gain in October. Over the year, average hourly earnings have risen by 2.3 percent, falling from a 2.5% pace in October that raised hopes of rising wages in the months ahead. The average workweek for all employees on private non-farm payrolls edged down by 0.1 hour to 34.5 hours in November.

Prepare for liftoff. Unless there is some catastrophe in the next 12 days, the jobs report was strong enough to lock in a Federal Reserve rate increase at the upcoming December 16^th FOMC meeting. This was the last major economic report before the Fed policy meeting, and recent speeches from Fed Chair Janet Yellen and other policymakers leaves little doubt about their intentions.

In yesterday’s testimony to Congress’s Joint Economic Committee, Yellen stated her view that given existing demographics the United States needs to create about 100,000 jobs per month to absorb the natural growth of the labor force. Any job creation above that would be consistent with continued improvement in the labor market, either further cutting the unemployment rate or else drawing new people into the labor force out of the ranks of the discouraged; and that is exactly what we saw in this month’s jobs report – more people entered the work force.

Yellen has not quite come out and said explicitly that 100,000 new jobs is the green light for a December rate hike, but she’s dropped about as many hints as the Fed ever does about the future course of economic policy. When the Fed hikes rates on December 16^th, it will be one of the best communicated rate hikes ever.

There is no question that the labor market has shown improvement. The economy has added jobs for 69 consecutive months, gaining more than 13.7 million jobs. The unemployment rate dropped down to 5% in October and even as more people moved into the labor force in November, the unemployment rate held steady.

This is quite simply a historic time for job growth. And don’t give me the garbage about how you don’t’ believe the numbers. The statistics are imperfect, I grant, but they are the most accurate information available and there is no evidence they have been doctored – none. And this slow, steady, and strong job growth doesn’t fit into many political narratives but you should look at the numbers rather than narratives.

We are now at what the Fed would like to call full employment; that point where everybody who has some job skills and wants a job, can find a job; the point where there are just enough jobs to stimulate growth without pushing inflation above target. The problem is – we’re not there yet. Millions of working age people left the workforce in the downturn and they have not returned. The percentage of the population working was unchanged at 59.3, which is only a tenth of a percentage point higher than it was a year earlier.

The uptick in the participation rate, though small and based on historically low levels, is an encouraging indication of progress for those who had dropped out of the labor force. It suggests that labor-market slack still is greater than the 5% unemployment rate would strictly indicate.

And wages just have not been growing, which means no wage push inflation. For many people, a pay increase only comes with a second, or third job. So, we’re not yet at the point where demand pushes economic growth. The economy can probably add millions more jobs and the unemployment rate could drop to about 4% before we really see full employment.

Yesterday, Yellen said, “I think we’ve seen some welcome hints” of wage increases, but she cautioned, “it’s tentative evidence; we don’t know if it will last.”

Meanwhile the European Central Bank cut interest rates yesterday and extended their quantitative easing program. The Bank of Japan recently added more stimulus to prop up their economy. The divergence has resulted in a stronger dollar which hurts US exports, as seen in a separate report today showing the U.S. trade deficit widened in October as exports fell to a three-year low, suggesting that trade could again weigh on economic growth in the fourth quarter. The Commerce Department said the trade gap rose 3.4 percent to $43.9 billion, a sign that the worst of the drag from a stronger dollar was far from over. September’s trade deficit was revised up to $42.5 billion from the previously reported $40.8 billion.

The blowout year for mergers and acquisitions just keeps getting bigger. According to Dealogic, global M&A volume just soared to $4.3 trillion, pushing 2015 to date ahead of 2007’s total, when the previous record of $4.29 trillion of mergers was struck. U.S. targeted M&A volume hit a record high in September and currently stands above $2 trillion for the first time ever. What’s driving the deal making? Cheap debt, which might change if the Fed hikes rates.

Uber is raising more money, and the new valuation will make it larger than 80% of the S&P 500 stocks, including old, established names like Dow Chemical, BlackRock, and Netflix. Bloomberg reports the car-booking startup is looking to raise as much as $2.1 billion in a financing round that would give it a valuation of $62.5 billion. Uber has increased actual U.S. gross revenue about 200 percent this year and is profitable in more than 80 cities around the world, and the number of U.S. trips completed this year has increased 250 percent compared with the same period last year.

So, why is the Fed on a near-certain track to raise interest rates? Normally Wall Street reacts badly to the prospect of rate hikes, but today’s triple digit rally in the Dow Industrials and the NASDAQ Comp, are just an indication that a Fed rate hike has been baked into the cake and the strong jobs numbers really are an indication of a stronger economy, which should be reflected with higher valuations.

The Fed’s easy money policies have driven Wall Street for the past 7 years, and there has to be some concern that if the Fed takes the punchbowl away, the party might be over. But that might be part of the reason why the Fed is no longer willing to keep monetary policy at the emergency levels of 2008. The Fed has to be concerned that an overabundance of free money is spoiling corporate America, resulting in unicorn valuations. We know how that story ends and it is ugly. The thinking is that it is better to tap on the brakes now, even though the economy is growing slowly, rather than waiting for the economy to go much faster and slam on the brakes, only to swerve into the ditch, again.

Also, remember the exhortations of Former Fed chair Bernanke, repeated by current Fed chair Yellen, that there is only so much we should expect from monetary policy. Economic growth must be supported by fiscal policy. The House and Senate have taken a concrete step toward reviving the Export-Import Bank, by voting to renew the bank’s funding as part of a five-year highway and transportation construction measure. Obama signed the bill into law today, hours before current funding was scheduled to run out. The highway bill is a good example of fiscal policy adding to economic growth; spending on infrastructure is an investment that pays dividends in jobs and increased productivity, and taking on infrastructure projects while rates are still low just makes sense.

But today’s jobs report signals that rates won’t stay low for long. And that means higher mortgage rates, higher credit for auto loans and credit cards, and all manner of debt. And it is coming sooner rather than later.

Financial Review

Thursday Jobs Report

Sinclair Noe — July 2, 2015

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

Subscribe: iTunes | Android | RSS

DOW – 27 = 17,730
SPX – 0.64 = 2076
NAS – 3 = 5009
10 YR YLD – .02 = 2.39%
OIL – .03 = 56.93
GOLD – 2.60 = 1166.70
SILV + .13 = 15.78

Normally, we get the jobs report on the first Friday of the month, but the stock and bond markets will be closed tomorrow for the 4^th of  July holiday; so, it’s a Jobs Report Thursday.

The US economy created 223,000 new jobs in June. The unemployment rate dropped from 5.5% to 5.3%; that’s the lowest level in 7 years. Employment gains for May and April were revised lower by a combined 60,000.  Most estimates were calling for 225,000 new jobs last month, so today’s report was right in line. Total employment is now 3.5 million above the previous peak.  Total employment is up 12.2 million from the employment recession low. The economy has produced at least 200,000 jobs in 13 of the last 15 months.  The economy added 2.9 million jobs in the past 12 months.

The participation rate – the percentage of workers in a job or actively seeking a job – dropped three ticks to 62.6%, as 432,000 people dropped out of the labor pool. And this explains why the unemployment rate dropped to 5.3%, because fewer people were looking for work.  Part of the reason may be demographics, as the Boomer generation moves into retirement; so, to get a better indication we can look at the 25-54 age group, which is considered prime years for working – too old for school and too young for retirement; among this age group, the participation rate dropped to 80.8% in June from 81%. This is not a good sign.

The decline in the participation rate is even more disconcerting because June tends to be a month when people move into the labor force; teenagers get summer jobs, recent college grads throw the CVs out on the internet, teachers take work between semesters. In the last decade, an average 1.35 million workers have entered the labor force every June on a not seasonally adjusted basis. This year, the gain was 564,000. That translates into a decline for the seasonally adjusted data, since the monthly increase was much less than it usually is. One theory is that the cold winter weather resulted in snow days, and many students and teachers were still in the classrooms in June. If that is the case, we might see a pop in the July numbers. Or it might be a data glitch, which will be corrected in revisions. Or not. It might just be an indication that there is still way too much slack in the labor force. Unless this trend changes, the shrinkage in the labor force implies that the United States’ economic potential is lower than it would be if there were millions of people ready to jump back into the work force if there were jobs on offer. (And no, I do not know how they count recently announced presidential candidates. Clearly that is a number that could skew results.)

So anyway, the labor force participation rate is at 62.6%, and that is the lowest level since October 1977. It is interesting to look at the changes between the 1977 labor market and today. The biggest difference is in the number of women employed, from 36 million in October 1977 to 54 million now. Male employment has also climbed, but not as much. So as the female labor-force participation rate has climbed, the male rate has dropped, from 80% to 72%. And whereas the male unemployment rate was much lower in 1977, now there’s gender parity. What hasn’t changed is the racial imbalance. The black unemployment rate is about double the white unemployment rate, then and now. The other big change is that in 1977 there were more people working in manufacturing, more than 19 million compared to a little more than 12 million today. Construction is up, a bit; transportation and public utilities have grown the most by percentage. But the big difference is in the service sector, which has exploded from around 15.5 million in October 1977 to almost 62.5 million today.

And that isn’t the only way the labor market has changed in the past 38 years; work has become untethered from the office thanks to the technological revolution; that has led to an explosion in freelance or a more flexible workforce.  Imprecise terms like “temp,” “contingent,” and even “freelance” fail to reveal the shift taking place; there is a new category of “on demand” workers. The rise of the on-demand workforce encompasses far more than Lyft, its rival Uber, or similar start-ups like Airbnb, for overnight stays, that allow for new “sharing” sources of income. And it’s hardly a millennial phenomenon, although younger workers do have the highest rates of “freelance” work, and generally hope to keep it that way. It’s possible that “work” is also coming in multiple forms, from multiple sources.

Of self-described freelance workers, 27% have a traditional job and “moonlight,” and another 18% do a mix of full-time and freelance work, whether by choice or necessity. The classification of people as either employees or independent contractors for legal purposes is also not keeping up with reality. And here’s a shocker, the governmental agencies assigned with tracking this workforce, haven’t kept up. The Labor Department’s “Contingent Work Supplement” was designed to track some of the indicators, but they ran out of money in 2005. So, the reality is we just don’t know.

The number of people working part-time for economic reasons decreased from 6.6 million in May to 6.5 million in June. An alternate measure of unemployment known as U-6, which includes underutilized workers, dropped to 10.5%, the lowest level since July 2008.

Most industries added jobs in June, with the notable exception again of energy producers; the mining and logging sector, which includes jobs in the oil fields, lost 3,000 jobs last month; the unemployment rate in the mining and gas industry now hovers around 8.9% – a sharp increase from 2.5% one year ago. White-collar workers in fields like finance, insurance, software and marketing have been in high demand lately, a turnaround from the early days of the recovery when many new jobs tended to be in low-wage sectors like retailing and restaurants. Professional and business services added 64,000 jobs last month; since last summer, for example, the financial sector has added more than 100,000 new positions; the banking and finance industry now boasts the lowest unemployment rate, 2.5%, of any industry tracked by the Bureau of Labor Statistics.

Taking a look at other industries: education and health services added 50,000 jobs, retail added 33,000, leisure and hospitality gained 22,000, financial activities 20,000, transportation gained 17,000, information added 7,000, and manufacturing added 4,000. Utilities lost a few hundred jobs and mining down 3,000. Government jobs both at the federal level and the state and local level were flat.

Retailers hired 33,000 people in June after taking on 26,000 new workers in May. Over the past year the industry has filled some 300,000 positions to boost overall employment to a record 15.7 million. Retailers are hiring like they expect sales to pick up, even though we haven’t seen an indication that sales are actually picking up. And that goes in line with another economic report this morning showing orders for goods produced in U.S. factories fell 1% in May. Orders for durable goods, products meant to last at least three years, fell 2.2%, compared with a prior estimate of a 1.8% drop. Meanwhile, orders for nondurable goods increased 0.2%. Last week the Commerce Department reported consumer purchases rose 0.9 percent in May, the biggest gain since August 2009

Average hourly earnings for all employees on private nonfarm payrolls were unchanged at $24.95. Weekly hours were unchanged for the fourth month in a row, at 34.5. Over the year, average hourly earnings have risen by 2.0 percent. Any increase is good, but the pace is discouraging because it’s still far below the 3% to 4% wage gains that were common in the mid- to late-1990s.Every month for the past 3 years the economy has added at least 100,000 new jobs, but wage growth shows no pulse, no signs of life. This would suggest that the unemployment rate could go much lower before we need to worry about wage push inflation.

So, the economy added 223,000 jobs but there was weakness in the participation rate, and wages, and the prior 2 months were revised lower. And that means nothing in today’s jobs report is expected to dramatically change the Federal Reserve’s outlook for the economy or a possible rate hike in September. Still, traders who use fed funds futures contracts cut their expectations of a September move down to 17% and even lowered their expectations of a move by December a bit. The Fed has four policy meetings left this year: July, September, October and December. If you think the Fed will hike rates in September, today’s report probably did not change your outlook. If you think the Fed will wait till December or maybe next year, again, no need to rewrite your thesis.

The Fed seems to think full employment is when the unemployment rate hits about 5% to 5.2%; that’s the most jobs we can have while keeping the inflation genie in the bottle. But when you look at the shrinking participation rate, and weak wages, and underutilized workers, and temps, and part-timers – maybe 4% unemployment rate is closer to full employment. Nobody knows how low unemployment can go before inflation picks up. Everybody, including the Fed, is just guessing. The only thing we do know is that we’re not there now. And that’s why there’s a strong case for the Fed to wait.

Today’s report: 223,000 new jobs in June. The unemployment rate 5.3%. Flat wages, declining participation. Decent, not great.

Financial Review

Just Around the Corner

Sinclair Noe — April 17, 2015      

 

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

Subscribe: iTunes | RSS

DOW – 279 = 17,826
SPX – 23 = 2081
NAS – 75 = 4931
10 YR YLD – .03 = 1.85%
OIL – .52 = 56.19 Oil posted a 12% gain for the past week.
GOLD + 5.30 = 1,203.30
SILV – .06 – 16.23
 
The economy continues to expand and consumers are feeling better. The University of Michigan Consumer Sentiment Index rose to 95.9 in April, up from 93 in March. Separately, The Conference Board said leading indicators rose 0.2% in March; the leading economic index has been slowing over recent months but it still points to moderate expansion in economic activity.

Consumer prices rose 0.2% in March. Gasoline prices rose 3.9%, which was the biggest jump since February 2013; still, gas prices are about 33% below year-ago levels.  The core-CPI, which excludes energy and food prices, also rose 0.2% due to higher cost of housing and used cars. The cost of clothes, housing, cars, and medical care increased, while food and airfare decreased. Core prices have risen 1.8% in the past year. While the “all-items index” (which includes things like food and energy) declined 0.1% over the last 12 months. Higher inflation would indicate a stronger dollar because it could reinforce the view that the Fed might hike interest rates sooner rather than later.

The Labor Department reports real average hourly earnings for all employees increased 0.1 percent from February to March, seasonally adjusted. This result stems from a 0.3-percent increase in average hourly earnings being partially offset by a 0.2-percent increase in the Consumer Price Index. Real average hourly earnings increased by 2.2 percent, seasonally adjusted, over the past 12 months.

Another tidbit from the Labor Department shows that long-term, wages have not just been flat but slightly down over the past 40 years. Adjusted for inflation, average weekly earnings for production and nonsupervisory employees, the bulk of the workforce, topped out in October 1972. In today’s dollars, the weekly paycheck in 1972 was the equivalent of $811, compared with current paychecks at $703 a week. A recent jump in real average earnings is largely due to low inflation, rather than surging paychecks. Cheaper gasoline and a strong dollar have pushed down overall prices, leaving many Americans with more money, even though they aren’t spending it.

After a string of soft U.S. economic data, the dollar hovered near a one-week low against a basket of major currencies on Friday and was on track for its biggest weekly drop in a month. The dollar index set a fresh one-week low this morning; but moved higher following the economic data on inflation.

An interesting article in the Murdoch Street Journal today argued the idea that the Fed has already tightened monetary policy just by talking about tightening monetary policy. The talk about hiking rates has made itself felt in stock, bond, and most important foreign exchange markets; a version of the taper tantrum, if you will. The dollar’s sharp rise in the last six months is due not just to the European Central Bank’s dramatic easing of monetary policy through quantitative easing (QE, the purchase of bonds with newly created money), but to the juxtaposition of the ECB’s action against anticipation that the Fed will soon tighten. Anticipation of tighter U.S. monetary policy also shows up in various measures of risk such as the spread between yields on corporate bonds and safe Treasuries, which have widened, or the stock market, which has stopped climbing.

This might explain why the economy didn’t seem to take off with the benefits of lower oil prices. It’s also a reminder of something investors and Fed officials routinely forget: Markets discount the Fed’s actions long before they actually occur, in ways that are not obvious at the time.

Bloomberg’s trading terminal experienced a global outage this morning, with traders complaining all over Twitter they had been hit by the issue. And yes, this does affect worldwide trading, especially in the bond markets. There are more than 300,000 subscribers to the Bloomberg terminals and they pay about $20,000 per year for the subscription, so it is for serious business. A lot of traders stepped out for coffee this morning. Service was restored after a couple of hours.

China’s securities regulator tightened rules on margin lending while the country’s two stock exchanges said they would make it easier to short stocks, or bet that stocks will fall in price in an effort to temper the country’s soaring stock markets. Asian markets were generally lower today.

German government bonds continued to break records this morning, lifted by the ECB’s commitment to stimulus, coupled with investors’ appetite for low-risk assets amid growing concerns over Greece. European stocks are down 2.1 percent this week, poised for the worst drop in four months and trimming 2015 gains to 18 percent. In early trade, the yield on Germany’s 10-year bond slipped to 0.049%, breaking through Thursday’s all-time low. The yield on the country’s 30-year debt was just below half a percentage point.

“Liquidity is drying up in Greece,” Greek Finance Minister Yanis Varoufakis said yesterday in Washington. Athens will continue to “compromise for a speedy agreement, but will not be compromised.” International Monetary Fund Managing Director Christine Lagarde warned that she wouldn’t let Greece miss a debt payment. Greece is struggling to win more aid to avoid a default, while resisting more austerity measures. And the Greeks seem to be dragging their feet when it comes to spelling out specific reforms; the reason is simple; the reforms the EU is requesting won’t work and would not be accepted by Greek voters. So, slowly the EU is starting to realize that a Greek exit from the Eurozone would be a big mistake; they don’t know how big a problem it would create but the thinking is that it would be major. Today, there appeared to be a shift in thinking.

In the event of a missed payment, there is no specific plan B to keep Greece in the monetary union. Which is a frightening proposition that now has the big banks scared of other countries exiting the euro, and even bigger concerns that it could breakdown into bank runs. So now, international creditors are starting to show more flexibility in negotiations over Greek finances to prevent a euro exit. The red-line is that the Syriza led government in Athens needs to commit to at least some economic reforms.

If you have been following the Greek situation, it sometimes sounds like it flips then flops between a possible resolution and what seems to be an inevitable train wreck; either Greece bows down to it paymasters or it defaults and exits the Euro Union. But the longer the Greeks delay, the more they are likely to see flexibility from creditors. A Greek exit would be.., well nobody knows but it would probably be bad. And yet, default seems inevitable because they are just too far in the hole. More and more it looks like a best case scenario is a partial default, a few concessions, Greece stays in the Eurozone. That doesn’t mean it will happen that way, but that looks like a possibility. And if, in this whole process, Greece can wean itself off of dependence from the banksters, they could even pull out of the economic depression they are in.

We have a few earnings reports to cover today:
American Express reported quarterly revenue that fell short of analysts’ estimates, dropping 2.7% to $7.9 billion. AmEx was hurt by a stronger dollar and the loss of several co-branded tie-ups; AmEx recently ended its co-branded relationship with JetBlue, while its agreement with Costco is due to expire next March.

Schlumberger shares rose slightly after the oil equipment provider topped first-quarter earnings projections, although revenue missed. Excluding charges, the company booked a per-share profit of $1.06, beating estimates of $0.91, but down from $1.21 a year earlier. Blaming a decline in drilling activity, Schlumberger said it now plans to cut 11,000 more jobs in addition to the 9,000 job cuts announced in January. You might think a big earnings miss would result in a nasty day of trading, but the Wall Street crowd like to see job cuts.

General Electric reports its revenue fell a worse-than-expected 12% in its first quarter. Overall for the quarter ended March 31, GE reported a loss of $13.5 billion, or $1.35 a share, compared with a profit of $3 billion, or 30 cents a share, a year earlier.

Honeywell reported a 5% drop in quarterly revenue, in part due to a stronger dollar, even as net income rose. Honeywell raised the lower end of its full-year profit forecast, even as they cut their full year revenue forecast.

Fifty years ago April 19th, Gordon Moore, he one-time CEO of Intel, predicted that the number of components on semiconductors or “chips” would continue to double every twelve to eighteen months even as the cost per chip would hold constant. The idea came to be known as Moore’s Law. And it really was a radical idea. Most commodities do not behave like that. Think about meat, grains, coffee, or oil, which get worse and more expensive over time. Computing power and related components of the digital revolution including memory, displays, sensors, digital cameras, software and communications bandwidth, continue to get faster, cheaper, and smaller roughly at the pace Moore anticipated. And through economies of scale, low prices encourage more uses, which raises production and lowers costs in a virtuous cycle. With each cycle of Moore’s Law, computing power doubles, even as price holds constant. If you want to have any understanding of the digital revolution, you have to be able to grasp Moore’s Law.

Thanks to Moore’s Law, tomorrow’s digital products are certain to be better and cheaper. Think of it as the granddaddy of disruption, and the life blood of innovation. Fifty years ago, Moore thought the exponential growth cycle might last for 10 years, but 50 year later it still applies. Every time it seems like innovation has hit a wall, we just break through. And that means there is something new and wonderful just around every corner.

Everything You Need to Know About the Jobs Report

Financial Review with Sinclair Noe 09-05-2014

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

DOW + 67 = 17,137
SPX + 10 = 2007.71 (record)
NAS + 20 = 4582
10 YR YLD + .01 = 2.46%
OIL – 1.00 = 93.45
GOLD + 7.50 = 1269.40
SILV + .13 = 19.29

The S&P 500 index closed at a record high; the Dow Industrials closed just short of a record high. The S&P 500 and the Dow recorded their fifth consecutive weekly gains. For the week, the Dow and the S&P each gained 0.2% and the Nasdaq rose 0.06%.

Today is a jobs report Friday. In August, the economy added 142,000 net new jobs and the unemployment rate dropped to 6.1%. This was a weaker than expected report.

The economy had been averaging more than 200,000 new jobs a month for the past 6 months. Economists expected somewhere around 220,000 to 230,000 new jobs.

Employment gains for July and June were lowered by a combined 28,000; June was revised from 298,000 to 267,000, and the change for July was revised from 209,000 to 212,000. The August report will likely be revised as well. Each job report starts with an initial estimate on the first Friday of the month, followed by two revisions. The month of August is prone to sharp revisions; over the past 5 years, the difference between the first and third estimates have averaged more than 70,000 per month; and each of the past 5 August revisions were higher, but revisions can go either way.

Last month, the economy added 212,000 jobs and the unemployment rate went from 6.1% to 6.2%. This month the economy added 142,000 jobs and the unemployment rate dropped back down to 6.1%, matching a six year low; but in this case, a lower unemployment rate is not good, it means more people stopped looking for work. The Labor Force Participation Rate decreased in August to 62.8% from 62.9% in July. This is the percentage of the working age population in the labor force. Labor force participation is now at a 36 year low.

The population can be divided into three categories: Working, looking, outside the labor force. The share of adults who are working fell sharply during the Great Recession and has recovered only slightly. The category of those looking, which is what the unemployment rate measures, has fallen steadily, but mostly because people stopped looking, not because they started working. The question then is how many people may start looking for work again? It is possible that the economy could improve, more people could look for jobs and actually get jobs, only to see the unemployment rate move higher. Last month, Federal Reserve Chair Janet Yellen said, “the decline in the unemployment rate over this period somewhat overstates the improvement in overall labor market conditions.”

Part of the decline in labor force participation is demographics, as the population ages, more people move to retirement, whether they want to or not. There might be some small amount attributable to workers returning to school. So, for better focus we can look at the participation rate for people age 25 to 54, the prime working years; for this group, the participation rate increased in August from 80.8% to 81.1%.

Employment is now up 2.48 million year-over-year. Total employment is now 753 thousand above the pre-recession peak. Total employment is up 9.46 million from the lows of the recession in March 2010. Employers outside the government have added jobs for 54 straight months–the longest such streak on records back to 1939. However, the average number of jobs added each month of the recovery remains weak by historical standards. In the first 8 months of this year, the economy has added 1.72 million jobs, or an average of about 215,000 per month. At the current pace, the economy will add 2.58 million jobs this year, with 2.52 million of those jobs coming from the private sector; that means 2014 could be the best year for job growth since 1999.

There are about 7.3 million people working part-time for economic reasons; that’s down slightly from 7.5 million in July. These workers are included in an alternate measure of unemployment known as the U-6, which includes unemployed and underutilized workers; U-6 dropped from 12.2% to 12.0%, the lowest level since October 2008.

There is a strange gap in the U-6 rate, and that is freelance workers. A new survey from the Freelance Union shows there are about 53 million people, or 34% of the workforce, that freelance. In 2006, the Government Accountability Office (GAO) put the number of freelancers at 42 million, though it’d be difficult to make a direct comparison between the two figures because of differences in methodology. The survey finds freelancers include 21 million independent contractors, 14 million moonlighters, 9 million who combine traditional work with freelance, 5.5 million temporary workers, and 2.8 freelance business owners; although I’m not sure temp workers always consider themselves freelancers.

The survey paints a generally sunny picture of what it’s like to be a freelancer, with 77% reporting that they make as much, if not more, than they did with a steady job. More than 40% said they even expected to make more in this coming year.

There are still more than 2.9 million workers who have been unemployed more than half a year; that’s down from more than 3.1 million in July. This number has been trending lower but in a healthier economic environment we might expect the number to be between 1 and 2 million. It is estimated that there were 4.7 million job openings in June, the most since 2001, but employers are taking longer to fill those vacancies; it’s taking 25 working days on average to fill vacancies, a 13-year high, and for companies with 5,000 employees or more, it’s taking more than twice that long, or about 58 working days.

So, there is still plenty of slack in the labor market and that is reflected in wages. Average hourly earnings for all employees on private nonfarm payrolls rose by 6 cents in August to $24.53; that followed no change in July. The workweek was 34.5 hours for the sixth month in a row. Over the year, average hourly earnings have risen by 2.1%. Low wage industries account for 44% of employment growth over the past four years but only 22% of job losses during the recession. Which is another way of saying good paying jobs have been replaced with bad paying jobs. The economy can’t grow much unless wages rise substantially.

Productivity since the mid-1960s has more than doubled while wages overall are essentially flat. Firms have been able to squeeze more profit and more revenue out of their employees. If companies continue to see that they can increase revenues and profits efficiently using their current work force, the incentive to hire may be less evident, as each new hire represents an additional overhead cost. So, I guess the message is that if you want to see more people get more jobs, you need to take a longer break for lunch.

In August 2014, private payrolls added 134,000 jobs; state and local governments added 5,000 jobs. State and local government employment is now up 123,000 from the bottom, but still 621,000 below the peak. And federal government employment is still down 19,000 for the year.

The best industry for job seekers in August was in professional and business services, which added 47,000 jobs. The top area for hiring within the industry was management of companies and enterprises. Other areas of strength included administrative and support services, architectural and engineering services and in management and technical consulting services.

The health care sector was a standout, adding nearly 43,000 positions. Bars and restaurants hired more workers once again last month. Employment in food services and drinking places rose by 21,500 in August. Construction employment also improved last month, as payrolls expanded by 20,000. Areas of strength included specialty trade contractors and construction of buildings.

On the other side of the August jobs report, there were pockets of labor-market weakness in several major industry subsectors. The factory sector, which added more than 50,000 positions in May, June and July, was unchanged in August. Retail employment shrank by 8,400 last month, following a gain of 85,000 jobs in the prior three months. Some of the moves may be temporary; thousands of employees at a supermarket chain in New England called Market Basket had their hours cut or they walked off the job to protest the firing of a well-liked chief executive. Auto makers laid off fewer workers in July, so they recalled fewer employees than usual in August.

If you have at least a bachelor’s degree, the unemployment rate is 3.2%, compared with 9.1% for high-school dropouts. And workers with four-year college degrees made 98% more an hour on average in 2013 than people without a degree. That’s up from 89% five years earlier, 85% a decade earlier and 64% in the early 1980s. It would seem the American workforce has never been better educated despite claims of a skills gap; the number of people with 4 or more years of college outweighs those who have only a high school degree, 63.3 million to 62.1 million.

A report from the New York Fed finds more and more college graduates have been finding work but that they are often underemployed. The unemployment rate for recent college graduates is around 5%, which is higher than historical standards, but the report finds nearly half of all recent grads are in positions that don’t necessarily require college degrees; most of the jobs offer decent wages, only 15% are working in low wage jobs.

So, today’s jobs report was not good. Maybe the revisions will make it better. For investors, it was not a bad report. Nothing in the numbers would give the Federal Reserve reason to raise interest rates sooner rather than later. The Fed will raise rates; that is a very, very high probability move. Today’s weak number was just one month, and one month does not reverse a trend, rather it reinforces the slow steady progress.

Friday, June 06, 2014 - Jobs Report Friday

Financial Review with Sinclair Noe

DOW + 88 = 16,924
SPX + 8 = 1949
NAS + 25 = 4321
10 YR YLD + .01 = 2.59%
OIL + .31 = 102.79
GOLD - .90 = 1253.30
SILV - .02 = 19.11

Another record high close for the Dow Industrial Average and the S&P 500.

It’s said that it takes a war to end a war; 70 years ago, 150,000 soldiers invaded Normandy, and it’s estimated that about 4,400 lost their lives in the biggest military assault in history, D-Day. There were ceremonies on the beach today, as well as locations around the world, to honor the soldiers lost and the veterans still with us; their numbers are dwindling with the passage of time, but about 3,000 made the pilgrimage to Normandy today.  For the rest of us, it’s hard to imagine what happened 70 years ago, but whatever difficulties we may face in our day to day lives seem small compared with what those men faced. This is a special day, one that should never be forgotten.

Each month we analyze the jobs report. The jobs number came in about as expected. Non-farm payrolls added 217,000 jobs in May. The unemployment rate, which is drawn from a different survey of households, remained unchanged at 6.3%.

April’s employment numbers were revised down to 282,000 jobs added from 288,000. March payroll figures were not revised, remaining at 203,000 jobs added. This is the fourth consecutive month that non-farm payrolls increased more than 200,000. That is the first time that we have seen four consecutive months of 200,000 or more since October of 1999.

The labor force participation rate also remained unchanged from the 62.8% rate reported for April. The participation rate has shown no clear trend since this past October but is down by 0.6% over the year. At 62.8%, the labor participation rate remains at lows not seen since the late 1970s, a sign that many Americans have given up the search for work entirely and remain wary about their prospects of getting a job, not even bothering to look for one. There are 3.37 million workers who have been unemployed for more than 26 weeks and still want a job; this is down from 3.45 million in April. Long-term unemployment is trending down; now at the lowest level since March 2009, but still high.

There are many reasons why the participation rate is low, and one key factor that we’ve heard repeated is that it is simply a case of demographics, or older workers who are near retirement age. However, according to data from the OECD, the employment to population ratio for workers between ages of 25-54 is down by 3.5 percentage points from its pre-recession level; and for workers between the ages of 55-64 it is only down by 0.9 percentage points.

With today’s jobs report, the US economy is now back to pre-recession peak levels of employment; we have recovered the number of jobs that were lost, and employment is now at an all-time high. This is the longest post-World War II recovery the US has experienced. The US lost 8.7 million jobs in the recession. Through the first five months of 2014, the economy has added 1,068,000 payroll jobs - slightly better than during the same period in 2013 even with the severe weather early this year. From the period between World War II and the 1980s there was a fairly predictable pace for recoveries. It took roughly six months for US employment levels to recover after each post-war recession through the 1980s. Then, things changed. It took 15 months after the 1990–91 recession for employment to reach its pre-crisis levels, and 39 months after the 2001 recession.

While the addition of nearly nine million jobs since hiring bottomed out in February 2010 is certainly good news, the number is still far from what is necessary to accommodate new graduates and millions of others who have entered the work force since payrolls last peaked in January 2008 at 138,365,000 jobs. We now have about the same number of jobs as we did then, but millions more who might wish to hold them. So, we’re back to where we were but not where we should be.

Here's one way of looking at that. There were 7.6 million unemployed people in the US in January 2008, and the unemployment rate was 4.9%. Today, there are 9.8 million unemployed Americans, well over 2 million more than before the recession, and the unemployment rate is much higher.

Another important milestone as today’s report marks the 51^st consecutive month of private sector job gains, which matches the longest previous string of consecutive employment gains. Our current streak matches the one that ran from February 1996 to April 2000. These two milestones give us an indication of how deep the losses were, but also how much further we need to go to get back to a solid economy.

The number of persons working part time for economic reasons declined in May to 7.26 million from 7.46 million in April.  These workers are included in the alternate measure of labor underutilization, known as U-6, which decreased to 12.2% in May from 12.3% in April. This is the lowest level for U-6 since October 2008, and down from the peak of 17.2%, but still high by historical standards.

Within various job segments, the business and professional services segment added 55,000 jobs, the same as its average monthly job gain over the prior 12 months. The healthcare industry added 34,000 jobs for the month, twice its average monthly gain for the prior twelve months. Retailers added 12,500 jobs and the transportation and warehousing sector added 16,400. The manufacturing sector added 10,000 jobs, and the length of the typical workweek for manufacturing workers increased slightly to just over 41 hours, a sign factory managers would rather add overtime instead of hiring additional workers. By contrast, the workweek for all employees in the private sector, including white-collar workers, was unchanged at 34.5 hours.

In May, average hourly earnings rose 5 cents to $24.38; over the past twelve months, average hourly earnings have risen 2.1%. We frequently hear that employers would hire more workers but the workers lack the skill set for the jobs. If employers were actually having difficulty finding workers with the necessary skills we should expect to see occupations or industries in which wages are rising rapidly. That is how employers attract workers for positions they have trouble filling. We are not seeing any major sectors of the economy with significant increases in wages, so that tends to invalidate the issue of a skills mismatch.

Even as private employers have gradually increased hiring in the recovery, the work force at government agencies and the Postal Service has shrunk dramatically. Total government employment is still down by more than one million from where it was four years ago. State and local governments added 6,000 jobs.  State and local government employment is now up 107,000 from the bottom, but still 637,000 below the peak. It appears state and local employment is now increasing.  Federal government layoffs are ongoing, with another 5,000 jobs lost in May.

Unlike previous reports, the gains have been broad based—there were new jobs created in many sectors, including higher paying and important ones like manufacturing and construction. But 50% of all the jobs being created in this country are still in the low-wage category: retail clerk positions, home heath aids, waitresses and the like. And more importantly, pay isn’t going up much. While it is certainly better to have a job compared to no job, better still to have a job that pays decent wages, and that is still missing.