Financial Review

September Jobs Report

Sinclair Noe — October 7, 2016

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

DOW – 28 = 18,240
SPX – 7 = 2153
NAS – 14 = 5292
10 Y + .01 = 1.74%
OIL – .88 = 49.56
GOLD + 2.40 = 1258.60

The economy added 156,000 new jobs in September. The unemployment rate rose from 4.9% to 5% for the first time since April, though that was largely because 444,000 people entered the labor force, looking for work. Some 3 million people have joined the labor force in the past year.

Before the jobs report, the consensus estimates for about 170,000 new jobs in September. Still, this was the 72nd consecutive month of job gains, which compares to the previous record of 48 months of gains.

The U.S. has added an average of 178,000 jobs a month this year, down from 228,000 in 2015 and 251,000 in 2014.  The economy needs to add a little more than 100,000 jobs a month to keep up with the natural increase in the size of the labor force. So, even a modest increase of 156,000 jobs is enough to take a little slack out of the labor market.

The proportion of Americans in the labor force remains near 40-year lows; but the labor force participation rate increased 0.1% to 62.9%.  That may not seem like a lot, but compared to the same month a year ago, the labor force grew by 1.9%, the largest annual percentage jump since January 2007.

Importantly, the prime-age participation rate (25 to 54 years) was up 0.2% to 81.5%, the highest in nearly three years. Dig deeper and it looks like the labor force is getting younger. For 25 to 29 year olds, there has been a labor force increase of 2.5% over the past year.

The data doesn’t give any insight into why the increase is occurring, but it could be a combination of young people graduating from college or grad school or those who were not able to find work getting a job. For the first time in almost 20 years, we are now seeing a decline in the number of people outside the labor market, which is consistent with periods of full employment. I’m not saying we are at full employment, just that we are getting closer.

There is, of course, another way to look at the jump in the labor force participation rate; there is probably a very large, hidden pool of discouraged workers that still need to be pulled into the labor force. A broader measure of unemployment, the U-6 rate, which includes people who gave up looking for work or can only find part-time jobs was unchanged at 9.7% – representing about 5.9 million people. Meanwhile, just under 2 million people are long-term unemployed – out of work for more than 6 months.

So the increase in the labor force participation rate probably means businesses are now having to attract discouraged workers to re-enter the job market. And one way to attract workers is with higher wages. Hourly pay for the typical worker rose 0.2% in September to $25.79 an hour.

Over the past year hourly wages have climbed 2.6%, almost matching the post-recession high. The 2.6% rise in wages over the last 12 months is better than the 2.3% annual increase in 2015. For more than three and a half years, American workers have seen sustained real wage gains, as hourly earnings have grown faster than inflation.

Since the beginning of the current business cycle in December 2007, real wages have grown at a rate of 0.9% per year, faster than in any other cycle since 1973. Since inflation has been low, real wage growth — the actual buying power of your paycheck — has grown more quickly over this business cycle than in previous ones.

Sustained real wage growth in recent years, combined with continued strength in job creation, has led to increased incomes for middle-class families: last month, the Census Bureau reported that real median household income increased 5.2 percent from 2014 to 2015, the fastest annual growth on record. And while the wage increase for September was slightly below expectations, it still indicates the labor pool is shrinking, forcing employers to raise pay to attract workers.

Another positive is a rise in the workweek, up to 34.4 hours from 34.3 hours with the manufacturing week also slightly higher in what is a positive indication for September industrial production. While hourly wage growth has ticked up some, average weekly hours have been flat, and that means weekly earnings are only growing about 2 percent for the middle-wage group. That’s still beating inflation, which is only up about 1 percent, but this also signals the absence of full employment.

Even though wage gains have been positive, they should not be overstated – they are largely a result of low inflation rather than full employment. If prices pick up before nominal wage growth and hours pick up, any gains in real household income will prove fleeting, at best. We need to keep pulling workers in from the sidelines, and that will require more than weak wages that just barely outpace inflation. Full employment needs accommodative monetary policy from the Fed combined with fiscal policy that invests in training and education for workers, plus investment in infrastructure to support productivity.

One interesting area that might not show up in the Bureau of Labor stats is the number of people who freelance. According to new report on freelancing, there could be as many as 55 million people who don’t have traditional jobs. It is a good bet that not all those jobs are considered in the monthly jobs report. And about half of those freelancers say they don’t really want a “traditional” job.

It is important to keep in mind that freelancing is a very broad term. It can be people with multiple sources of income, or those who are doing temporary or supplemental work. It can be Uber/Lyft drivers, bloggers, editors or professionals who have full-time work but who moonlight on the side. Then there are business owners who are also freelancers.

The younger part of the workforce is much more likely to be freelancing than the older part. Among workers ages 18-24, 47% are freelancing either part-time or full-time, versus 28% of Baby Boomers. Major issues for freelancers include: debt, unpredictable income, being paid a fair rate, and benefits – or lack thereof.

Portable benefits appealed to the freelancers, with 67% saying they would support having access to health and retirement benefits regardless of their employment status. And 68% said freelancers should have the same access to credit as other workers, perhaps reflecting the difficulty even high-earning freelancers have in obtaining a mortgage.

The private sector added 167,000 jobs, while government jobs declined by 11,000. Professional and business services added 67,000 jobs. Education and health services gained 29,000 positions. Hiring by food and drinking establishments rose by 30,000. Retailers hired an additional 22,000 workers.

Construction added 23,000 jobs. Manufacturing lost 13,000 positions. Mining and logging (which includes jobs in the oil patch) showed zero change, which might actually be considered as good news – at least the energy industry wasn’t cutting jobs.

One of the key indicators for employment is education. Unemployment rate for: High school dropouts, 8.5%; High school grads, 5.2%; some college, 4.2%; College degree, 2.5%. According to a new report, “The State of American Jobs,” by the Pew Research Center, employment opportunities increasingly lie in jobs requiring higher-level social or analytical skills, while physical or manual skills are fading in importance.

Social skills are crucial in jobs that require a lot of writing, speaking, managing and negotiating, particularly in educational services and health care and social assistance. Examples of analytical skills are critical thinking, mathematics and computer programming, often found in science, technology, engineering and mathematics or STEM fields.

Overall, the jobs report was “not too hot, and not too cold” and not enough to change expectations for a Federal Reserve interest rate hike in December, although we will be able to look at 2 more jobs reports before the December FOMC meeting. Some senior Fed officials worry that wages could start to rise sharply and feed into inflation unless they act to prevent the economy from overheating.

Still, it looks like there is plenty of slack in the labor market and it seems more likely the expansion will run out of steam before we run out of discouraged workers who might fill an available job. We might have a strange jobs report next month because of Hurricane Matthew. At this time, we just don’t know how that will impact businesses and jobs but it will likely be a negative.

We also have an election to consider. The 5% September unemployment rate is the second lowest in the September before an election in nearly five decades. Since the 1968 election, only the 2000 race featured a lower pre-election jobless rate.

Most people say they are better off today than they were 8 years ago. Of course 8 years ago, the stock market had crashed, the economy was hemorrhaging about 800,000 jobs per month. That does not mean that people have been made whole from the damage suffered in the 2008 financial downturn, and it doesn’t mean that we’ve solved all the problems of the Great Recession.

When people are asked about their personal finances, and whether they are improving or worsening, people are as happy as they have been in many years – and that fits with the jobs report. But Gallup recently asked about “the way things are going” more broadly, and the results are much more negative.

By the way, if you’re wondering how different presidential administrations have performed in terms of jobs, here’s the job creation scorecard: Obama, 10.6 million so far; George W. Bush, 1.3 million; Bill Clinton, 22.9 million; George H.W. Bush, 2.6 million; Ronald Reagan, 16 million; Jimmy Carter, 10.3 million.

Financial Review

The February Jobs Report

Sinclair Noe — March 4, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 62 = 17,006
SPX + 6 = 1999
NAS + 9 = 4717
10 Y + .05 = 1.88%
OIL + 1.24 = 35.81
GOLD – 4.30 = 1260.60

The US economy added 242,000 new jobs in February, almost 50,000 more than estimates. The unemployment rate was unchanged at 4.9%. Employment gains for January and December were revised up by a combined 30,000.

Total employment is now 5.1 million above the previous peak.  Total employment is up 13.8 million from the employment recession low. Private payroll employment increased 230,000 in February, and private employment is now 5.5 million above the previous peak.

Private employment is up 14.3 million from the recession low. In February, the year-over-year change was 2.67 million jobs. The private sector has chalked up 72 months of uninterrupted job gains, the longest streak on record.

As we look at the different sectors where jobs were created or lost, a theme develops; the sectors involving energy, natural resources, and international trade were hit while the sectors that mainly involve the domestic economy seem to be prospering.

The mining sector, which includes oil and gas producers, cut jobs for the 17th straight month amid falling oil prices (down 18,000). After a 23,000 gain in January, manufacturers cut 16,000 jobs – that could be a one-month blip but could also suggest falling demand from overseas is hurting U.S. exporters. The transportation and warehousing sector, which is heavily involved in global trade, also cut jobs.

Retailers posted strong employment gains for a second month, along with the health care industry. Payrolls at retailers climbed about 55,000 in February after a 62,000 advance a month earlier, while health care employment increased 57,400. Leisure and hospitality added 48,000 jobs. Construction companies added 19,000 workers. Government jobs increased by 12,000, which seems to be part of a trend away from public sector job cuts, which were the norm for most of the past 7 years.

The labor-force participation rate moved up to 62.9%, the highest level in over a year, as more than half a million people joined the labor force. Over the last three months, that number totals 1.52 million, the highest it has been in 16 years. The improving job market is drawing Americans back into the labor force. The labor force participation rate is a measure of Americans working or looking for work; so it doesn’t measure jobs to the entire population, but rather jobs compared to the potential labor pool.

The participation rate took a big drop following the financial crisis as people abandoned job searches because there were no decent jobs to be found. Another reason for the falling participation rate is demographics; baby boomers started retiring at the rate of 10,000 per day; for many boomers, it was involuntary retirement. The rate kept falling even as employers started hiring again.

In September, the participation rate hit 62.4 percent, its lowest level since 1977. The BLS calculates there are still 7.8 million unemployed workers, but that is a measure of unemployed who are looking for work. Even with the improvement in this month’s report, there are still millions of who aren’t working and are not actively looking for a job – they are not counted. It’s like they are invisible. But many of those people might be lured back into the labor market if the right job comes along.

A stay-at-home mom, for example, might not be looking for a job, but if she hears from a friend that a company is looking for someone with her skills, she might apply. Sure enough, most of the people entering the labor force have a job already lined up; relatively few are joining to look for work.

A separate unemployment gauge (the U6) that includes those not actively looking for a job or at work part-time for economic reasons fell to 9.7 percent, the lowest reading since May 2008, but that still represents about 6 million people.

Job quality in February was titled toward part time, which the household survey indicated grew by 489,000, while full-time positions increased by just 65,000. And this is the downside to an increase in the labor force participation rate – as more people move back into the labor force, even if it is part-time work, there will be more competition for available jobs, holding down wages.

Despite the big gain in new jobs, average hourly wages fell 3 cents, or 0.1%, to $25.35. Hourly pay rose a mild 2.2% from February 2015 to February 2016. That’s down from 2.5% in the prior month. The average work week for all workers declined by 12 minutes to 34.4 hours; another indicator of weakness, because in a strong economy workers rack up overtime, and when you see too much overtime, employers hire a new worker.

The report’s household survey, from which the jobless rate is calculated, did however signal employees may soon get the upper hand in wage negotiations as the pool of those available to work continues to shrink. The share of the working-age population with a job climbed to 59.8 percent, the highest since April 2009.

So, as long as workers keep pouring into the labor pool, the employers have the upper hand, and that is the case now; but eventually the flow of workers back into the pool will dry up, and workers will have the upper hand.

The Federal Reserve and economists look at the jobs picture and try to determine when we have reached “full employment” – that magical place where almost everybody who wants a job can get a job, but the economy doesn’t get overheated as wages increase pushing inflation soaring.

In the past the Fed told us that they thought we would find ‘full employment” when the unemployment rate dropped below 5%; well, we’re at 4.9% and still pulling new workers in off the sidelines. And the reality is that after all these really strong job gains, there are fewer and fewer people on the sidelines.

Today’s stronger than expected jobs report means a rate hike is still a possibility when the Fed FOMC meets March 15-16, meanwhile a dip in wages means the Fed might wait. Wall Street seemed to like the report, it was good enough to show economic strength but not so strong that it forces the Fed to move quickly.

The consensus is that the Fed won’t raise rates in March, but they might very well try to set the stage for a future rate hike by changing some of the wording in their policy statement; setting up the market for a hike in April or June. And even though the Fed will look at the new jobs added to the economy, they will also need to address the weakness in wage growth.

Wages are a major driver of economic growth because workers spend their wages, creating demand – or at least that is the theory. It’s really a story about how money circulates. For pay to accelerate, the economy needs to pick up the pace. One way that can happen is if workers start to spend more of the income gains they’ve already received — something we saw a hint of in January’s stronger-than-expected increase in consumer spending.

Also, productivity is crucial: The more workers produce for every hour on the job, the more companies can afford to pay them without increasing prices. So far, that’s not happening. Nonfarm productivity has grown at an annualized rate of just 1 percent since mid-2009, less than half the average pace of the previous two decades.

So that brings us to a key question about the economy and the labor market. Can we see continued job gains plus wage increases in 2016? If the labor force keeps growing at a solid pace, all those new entrants will keep the downward pressure on wages.

On the other hand, it might take higher wages to keep pulling people out of their homes and into the workplace. And this all assumes that the strong rate of job creation, 242,000 positions added in February, plus positive revisions to previous months, doesn’t get undone by a new round of Federal Reserve interest rate increases and volatile global markets. So far the balancing act seems to be working.

A couple of extra news items today:

The US trade deficit widened more than forecast in January as exports slumped to the lowest level in more than four years. The gap grew 2.2 percent to $45.7 billion, the largest in five months, and up from a revised $44.7 billion in December.

Exports and imports are both tracking negative. Soft growth plaguing U.S. trading partners is also reducing the amount of goods and services the world’s biggest economy can ship out, pinching manufacturers. Demand from American consumers will be needed to pick up the slack, putting even more importance on an improving labor market that translates into real wage growth.

Also, there was very important news out of Brazil today. Former Brazilian President Luiz Inacio Lula da Silva was detained for questioning in a federal investigation of a bribery and money laundering scheme that police said had financed campaigns and expenses of the ruling Workers Party.

Now, keep in mind that Brazil, even though it is considered and emerging economy, it is the 9^th largest economy in the world and the largest economy in South America. Lula’s detention was the highest profile arrest in a sweeping corruption investigation that has ensnared powerful lawmakers and business executives.

Police, who arrested Lula at his home near Sao Paulo this morning and he has since been released, said they had evidence that Lula received illicit benefits from kickbacks at state oil firm Petrobras in the form of payments and luxury real estate.

The evidence against Lula brought the corruption investigation closer to his successor and current president, President Dilma Rousseff, who is fighting off impeachment over an unrelated issue and who is struggling to pull the country out of its worst economic downturn in decades. Brazil’s real headed for the best week since October 2008 and the Ibovespa stock exchange jumped.

Financial Review

The Last Jobs Report of 2015

Sinclair Noe — January 8, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 167 = 16,346
SPX – 21 = 1922
NAS – 45 = 4643
10 Y – .02 = 2.13%
OIL – .34 = 32.93
GOLD – 4.60 = 1105.60

The economy added 292,000 new jobs in December, much higher than estimates of 205,000 to 215,000. The unemployment rate was unchanged at 5.0%. The October and November reports were revised higher to show an additional 50,000 new jobs. In the final three months of 2015, the U.S. added an average of 284,000 jobs. That’s the fastest pace in almost a year.

For the past year the economy added 2.7 million jobs. In 2014 the economy added 3.1 million jobs; that’s the best 2 years for job growth since the late 1990s. The economy has added jobs for 70 consecutive months; right at 14 million jobs during that time.  Over the past year the unemployment rate has dropped from 5.7% to the current 5%.

Hiring in December was led by professional firms. They added 73,000 jobs, though almost half were temporary. Construction companies added 45,000 new workers (but that might be more a sign of mild winter weather across much of the country in December, rather than a big upsurge in construction).

Over the year, construction added 263,000 jobs, compared with a gain of 338,000 jobs in 2014.
Health care employment rose by 39,000, with most of the increase occurring in ambulatory health care services (+23,000) and hospitals (+12,000). Job growth in health care averaged 40,000 per month in 2015, compared with 26,000 per month in 2014.

Food services and drinking places added 37,000 jobs in December. In 2015, the industry added 357,000 jobs.

Employment in transportation and warehousing rose by 23,000 in December, with a gain of 15,000 in couriers and messengers.

Manufacturing employment changed little in December, though its nondurable goods component added 14,000 jobs. In 2015, manufacturing employment was little changed (+30,000), following strong growth in 2014 (+215,000).

Employment in mining continued to decline in December (-8,000). After adding 41,000 jobs in 2014, mining lost 129,000 jobs in 2015, with most of the loss in support activities for mining. When we say mining, what we are really talking about is jobs in oil exploration and development as well as oilfield support services.

Speaking of oil, Goldman Sachs’ chief equity strategist David Kostin joins analysts who are now seeing the impacts from the drop in oil prices as more negative for the overall stock market than previously thought. Kostin cut his earnings outlook for the S&P 500, citing a nearly $2 negative impact from energy stocks with that sector likely to see negative twelve-month earnings for the first time since the firm’s data begins in 1967. Overall, Goldman now thinks earnings will fall 7% in 2015. Which also does not bode well for mining jobs.

State and local governments added 13,000 jobs in December and the federal government added 4,000 jobs in the month, and only 17,000 federal jobs were added for the year. This has been a notable distinction of the current job recovery – it has been private employment, and public employment is still down 549,000 from the peak.

Worker pay fell a penny to $25.24, marking the first decline in a year. For the year wage growth was 2.5%. In a stronger job market, we would expect wage growth around 3% to 4%, which is clearly what the Federal Reserve is expecting as the year goes on. The average workweek for all employees on private nonfarm payrolls was unchanged at 34.5 hours in December.

Nearly half a million people rejoined the labor force, a sign that more jobs were available. The Labor Force Participation Rate was up slightly, (just 0.1%) to 62.6%. In the key demographic of 25 to 54, or the prime working years, the participation rate is 80.8%. Looking at other demographic markers, the unemployment rate for men over the age of 20 is at 4.7%, and for women age 20-plus the unemployment rate is 4.4%.

The unemployment rate for workers with less than a high school diploma is declining; it’s still higher than for skilled, educated workers, but it is coming down, and this may be one of the signs that some of the slack in the market is starting to ooze out. These workers, who on paper are among the least-qualified in the workforce, are vulnerable when the economy is soft and have made huge gains over the last 18 months or so.

And so thinking about the idea that there is no wage growth (or at least not much) the force keeping wages down, in the broadest sense, is remaining slack in the market. But data showing the least-qualified workers find their way back into the workforce the balance of power clearly tipping towards workers and away from employers. This is the slack being taken up. Part of that leverage once-held by employers allowing them to keep wages down, appears to be falling away.

The U6 measure of unemployment was unchanged at 9.9%. The U6 includes unemployed and underutilized workers, or people working part-time even though they would like a full-time job. In December, there were 6 million people part-time for economic reason, down by almost 750,000 for the year. So the economy is trending to more full-time jobs.

There are still 2.08 million workers who have been unemployed for 6 months or more but are still looking for a job; that’s up slightly from 2.05 million in November. This is an important number to watch. When this number goes down substantially, it will be a good indication that the economy is actually getting closer to full employment. That in turn should finally start to push wages higher, another important number to watch.

Another factor that could affect wages is a change in the minimum wage. The country has gone more than 6 years without an increase in the federal minimum wage of $7.25 per hour, but as of January 1, 14 states and several cities are moving forward with their own increases. California and Massachusetts are highest among the states, both increasing from $9 to $10 an hour. At the low end is Arkansas, where the minimum wage is increasing from $7.50 to $8. The smallest increase, a nickel, comes in South Dakota, where the hourly minimum is now $8.55.

The increases come in the wake of a series of “living wage” protests across the country, including a November campaign in which thousands of protesters in 270 cities marched in support of a $15-an-hour minimum wage and union rights for fast food workers. Food service workers make up the largest group of minimum-wage earners. With the increases, the new average minimum wage across the 14 affected states rises from $8.50 an hour to just over $9.

Several cities are going even higher. Seattle is setting a sliding hourly minimum between $10.50 and $13 on Jan. 1, and Los Angeles and San Francisco are enacting similar increases in July, en route to $15 an hour phased in over six years.

Backers say a higher minimum wage helps combat poverty, but opponents worry about the potential impact on employment and company profits. Part of the answer is in the speed of increase; slow, incremental increase seem to have less impact on employment. Soon we’ll have actual data to apply to those theories.

So, with another strong jobs report providing momentum to the labor market, the question is whether that momentum can carry into the broader economy and the markets. The Federal Reserve certainly anticipates job growth will eventually lead to wage push inflation, and keeps the Fed on track for more rate hikes.

Traders who bet on rate hikes using fed funds futures contracts now project greater-than-even odds of a March rate hike, according to CME FedWatch. Odds of a rate hike in March had slipped below 50% chance earlier this week as stock markets plunged on concerns that economic weakness in China could spill over into the US.

Another concern has been fourth-quarter US GDP growth, which have been trending down to a 1% annual rate, down from a 2% rate in the third quarter. The first reading on fourth-quarter gross domestic product is due Jan. 29. The jobs report indicates that fourth quarter GDP won’t drop too much.

With economy activity appearing to have leaked modestly lower in recent months, expect some of this positive momentum to be surrendered in the coming months, though the economy is expected to continue creating jobs in a manner sufficient to absorb excess labor market slack. The Fed is unlikely to raise rates at its Jan. 26-27 meeting, but is probably on track to move again at its March 15-16 meeting.

And then there is the problem of the rest of the world. Or at least the emerging markets and China. It was another wild day in China. China’s Shanghai Composite surged to a gain of 3% before plunging to a loss of 2% within the first 15 minutes of trading. The bottom was put in amid speculation the country’s so-called national team came in to support stocks, and the Shanghai Composite finished up 2%.

And fear of volatility spilled over to Wall Street; most of the day Wall Street was slightly positive, on the back off the strong jobs report, but as we headed into the final couple of hours, discretion was the better part of valor and traders decided the best defense was to exit positions before the weekend, and what might be a wild Monday morning of trading in Shanghai.

Both the Dow and S&P 500 had their worst five-day starts to a New Year in history, with the Dow falling 6.2% for the week and S&P 500 sliding 6%. The Nasdaq was down 7.3% this week.