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Friday, June 03, 2016

38,000 Not a Typo

Financial Review

38,000 Not a Typo

DOW – 31 = 17,807
SPX – 6 = 2099
NAS – 28 = 4952
10 Y – .11 = 1.70%
OIL – .39 = 48.76
GOLD + 33.10 = 1244.50

The US economy added 38,000 jobs in May, which is not a typo, it is the fewest jobs added in more than 5 years – just 38,000.  The unemployment rate fell three-tenths of a percentage point to 4.7 percent in May, (again, not a typo) the lowest since November 2007.

The unemployment rate went down for the wrong reason; not because people were finding jobs but because 458,000 people dropped out of the labor force. Most forecasts were calling for 150,000 to 180,000 new jobs, so this was a big miss.

The government revised down the number of new jobs created in April to 123,000 from 160,000. March’s gain was lowered to 186,000 from 208,000, or a downward revision of 59,000. Over the past 3 months, job gains have averaged 116,000 per month. The drop-off in 2016 is the sharpest of the seven-year-old recovery.

Most industries eliminated jobs last month, the first time that’s happened in several years, but there may be some noise in the statistics; 35,000 striking Verizon workers were counted as unemployed but the jobs report was still the weakest in at least two-and-a-half years even if there were no ill effects from the strike.

Now, it seems a bit strange that the unemployment rate dropped from 5% to 4.7%, even as the economy added just 38,000 jobs. Part of this is that fewer people were in the labor pool. The number of Americans not in the labor force surged to a record 94.7 million, an increase of 664,000. The labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, fell 0.2 percentage point to 62.6 percent.

The participation rate has fallen since the recession, but economists don’t agree on why. Some suggest that demographic shifts, mainly the retiring baby boomers, is the main cause. Others think it’s more cyclical factors or changes in the economy, in other words people can’t find jobs and they give up.

That 4.7% unemployment rate is the headline number, also known as the U-3 unemployment rate. U-3 is defined as the “total unemployed, as a percent of the civilian labor force,” but doesn’t include a number of employment situations. A broader figure is the U-6 rate.

The U-6 rate remained unchanged at 9.7 percent in May. The U-6 rate is defined as all unemployed as well as “persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the labor force.” That means the unemployed, the underemployed and the discouraged.

Involuntary part time workers, that is those who would opt for full time jobs were they available, rose by 468,000 to 6.4 million. Jobs were skewed toward part time, which added 139,000 positions. Full time lost 59,000 jobs. While the U-6 rate has made substantial gains in the past years, it remains stubbornly at pre-recession levels.

Average hourly wages climbed 0.2% last month to $25.59. Hourly pay rose 2.5% from May 2015 to May 2016, just a hair below the post-recession high. The average workweek for all employees on private non-farm payrolls was unchanged at 34.4 hours in May.

In another bad sign, temp employment fell by 21,000 and it’s down 64,000 so far this year. Health care added 46,000 positions. Leisure and hospitality added 11,000. Government gained 13,000. Professional services up 10,000. Financial activities up 8,000.

However, mining (which includes jobs in the oil patch) lost 10,000 jobs, information-related jobs fell by 34,000 — the consequence of the recently resolved Verizon strike — while manufacturing lost 18,000. Construction lost 15,000 jobs.

Treasury prices jumped higher this morning, pushing yields lower, following the release of May’s official jobs report. Spot gold jumped almost 3%.  The dollar dropped more than 1.5% against the euro and the yen. Financial shares were hit; higher interest rates allow banks to earn larger spreads on the deposits they’ve collected. While the Fed’s efforts to reduce rates stabilized asset prices and helped lenders access cheap debt in the wake of the credit crisis, prolonged low rates have crimped banks’ margins.

The surprisingly weak jobs report pulled the rug from under a June Fed rate hike. Traders who use fed funds futures contracts now see only a 4% chance of a rate hike at the FOMC meeting in June, according to CME FedWatch. The odds of a rate hike in July have fallen to 36% from 42% prior to the job report. For September, the odds of a hike are 51%. Add in a UK referendum on a possible Brexit from the EU, scheduled for one week after the June FOMC meeting.

When we look at 38,000 jobs and realize it is not a typo, we then need to look at why we saw such a dramatic drop. One explanation is that it is statistical noise. The Verizon strike skewed things a bit. The jobs report is notoriously imprecise; by some estimates there is a margin of error of about 100,000 jobs, give or take, in any month. It isn’t easy to track all the job changes in the country. There will be revisions. Blah, blah – the economy only added 38,000 jobs. That’s the number for now.

Some claim the recovery is getting long in the tooth. The economy has added jobs for 75 consecutive months.  The economy cannot continue to create jobs more rapidly than the labor force is growing. But it certainly doesn’t feel like we’ve reached a tight labor market. There seems to be an overabundance of slack, as evidenced by part-time jobs and weak wage growth.

Another theory is that we might be seeing early indicators that productivity is increasing. Productivity has been very low over the past five years. If productivity goes back to near normal the jobs numbers are going to deteriorate quite a lot because it takes fewer workers to do the job.

The problem with this argument is that we haven’t seen any uptick in productivity. The Conference Board estimates domestic productivity ticked up an average of only 0.34 percent per year between 2011 and 2015. That’s well shy of the 1.93-percent average maintained between 1990 and 2010. And that recent productivity growth also falls short of several other major world economies.

So, what happened to productivity? Well, one of the things is that following the Great Downturn, workers were locked into their locations; residential mobility evaporated; homeowners with negative equity were unable to sell and move. We have a long history of packing up and moving to new places and new jobs, and historically this mobility has provided the economy with a critical dose of oomph, or the technical term – stimulus.

A slide in job turnover and relocation rates is undermining the economy’s dynamism, damping productivity and wages while making it more difficult for sidelined workers to find their way back into the labor force. Staying put can mean that workers are not moving to jobs where they would be more productive.

At the same time, many are forgoing the raises and ascents on the career ladder that often come with a job switch. Fewer openings can also have a ripple effect, shrinking the bargaining power of workers in general, making it tougher to ask for a bump up in pay. Mobility normally drops during downturns, and that was the case during the Great Recession. Millions of jobs vanished, and those fortunate enough to be working were less inclined to give up the one they had.

Another factor is that business investment has dried up. Many businesses saw Zero Interest Rate Policy as an excuse for stock buybacks, incurring low-priced to repurchase equity. Stock buybacks are a vehicle for returning excess cash to shareholders, without the commitment usually associated with a dividend; also a handy vehicle for executive compensation. According to analysis from Barclays these repurchases, which are a primary source of demand for equities, have contributed to the increase in the S&P 500 2010. Almost 60% of the 3,297 publicly traded non-financial U.S. companies have bought back their shares since 2010, according to a report from Reuters.

Unfortunately, this strategy undermines the companies that use it. Debt producing buybacks mean money is not being reinvested in the company for innovation and improving productivity. And among the approximately 1,000 firms that buy back shares and report R&D spending, the proportion of net income spent on innovation has averaged less than 50 percent since 2009, increasing to 56 percent only in the most recent year as net income fell. It had been over 60 percent during the 1990s.

If U.S. companies continue to dole out their cash to investors economic investment will go where it can be used well. If a company in Germany, India or Brazil has something to do with the money, it will flow there, as it should, and create growth and activity there, not in the United States.

And if the money isn’t being reinvested in R&D, it certainly isn’t going into training employees or providing them tools to be more productive. The productivity in the US is down, not because US workers suddenly got lazy but because companies aren’t giving workers the tools to be productive, opting instead to financialize value over the short-term.

Share repurchases have helped the stock market climb to records from the depths of the financial crisis. As a result, shareholders and corporate executives whose pay is linked to share prices are feeling a lot wealthier. That wealth, some economists argue, has come at the expense of workers by cutting into the capital spending that supports long-term growth – and jobs.

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