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Rainbows over Canyonlands - Dave Stoker

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Friday, October 02, 2015

Jobs Report Friday: meh

Financial Review

Jobs Report Friday: meh

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.

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