Good Jobs Report, Not Liftoff
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.