Financial Review

Lousy Good Friday Jobs Report

Sinclair Noe — April 3, 2015

 

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The New York Stock Exchange and the Nasdaq were closed in observance of Good Friday. The Chicago Mercantile Exchange was open, for a holiday shortened session, so there was some trading in equity index futures, and interest-rate and forex futures, and also some light trading in the bond markets. Good Friday is not a federally recognized holiday, and so the monthly jobs report was issued on schedule. We’ll just have to wait until Monday to see how the markets react.

It was a lousy jobs report. The economy generated just 126,000 new jobs last month, marking the smallest gain since the end of 2013; estimates had been calling for twice as many new jobs. The unemployment rate was unchanged at 5.5%. Employment gains for February and January were revised lower by a combined 69,000. The result: The increase in hiring in the first three months of 2015 has slowed dramatically to an average of 197,000. While the pace of hiring this year is still fairly decent, it doesn’t come close to matching average job gains of 289,000 in the fourth quarter.

This was just one lousy jobs report, and that does not constitute a trend but it might reflect a slowdown that we’ve been seeing in other economic data, including consumer spending patterns, a slowdown in the energy sector, sluggish business investment; and don’t forget the bad weather. The energy sector has responded to lower oil prices by cutting the number of active oil rigs and laying off workers. Lower oil prices have been a boon for most consumers, but it hasn’t resulted in more spending; instead consumers are saving more.

With companies hiring at a slower pace, some 96,000 Americans dropped out of the labor force in March. The labor-force participation rate fell a tick to 62.7%, once again matching the lowest level in 37 years. This indicates that we are now realizing the demographic shift of the boomer population moving into retirement; 37 years ago, back in the late 1970s, the boomers were just moving into the jobs and careers – that pushed the participation rate higher. Right now the participation rate for 25 to 54 year olds, or people in their prime working years, is at 80.9%. For people older than 55 the participation rate is 39%. That’s because as people age, they retire and drop out of the labor force. And get this… in 2000, the 25-to-54-year-old group made up 42% of the population, while the 55-and-over group made up 20%. Today, the over-55 group makes up 27%, while the younger group has declined to 39%. Certainly some people dropped out of the labor force because they were discouraged, and some discouraged workers retired; but more and more we are seeing a massive demographic shift with boomers retiring. The demographic shift can play havoc with economic growth, lopping off more than a half a percentage point in economic growth per year.

Long-term unemployment also remains a problem for older workers even as more seniors are hanging on to their jobs well into their 60s. A report issued by the AARP Policy Institute this week noted that last year, on average, 45 percent of job seekers aged 55 and older were out of work for 27 weeks or more. The number of long-term unemployed was little changed at 2.6 million in March.

That said, we are not at full employment. We’re not even certain what full employment is anymore. The Fed guesstimates that it is around 5% to 5.2%, but that is a guess. There are still 6.7 million workers employed part-time for economic reasons; that means they want a good full-time job, but they can’t get one or because their hours were cut back. These workers are included in the alternate measure known as U-6, which measures unemployment and underutilization. The U-6 decreased to 10.9% in March from 11% in February. This is the lowest U-6 since the summer of 2008.

Slack in the labor market shows up in the wage numbers. If we were at full employment, workers should be demanding and getting higher wages. We are starting to see a little improvement, but still not enough to stoke wage push inflation. McDonald’s and Walmart each announced this week that they would start raising wages for low wage workers; this was not part of this month’s jobs report but it will start showing up over the next few months. Think of slack as who has leverage, employers or workers. Right now, employers still call the shots. Wages are starting to move higher because the leverage is starting to shift, just starting.

Average hourly wages rose a solid 0.3% in March, or 7 cents to $24.86; though how much employees get paid hasn’t shown much change despite the biggest increase in hiring in 2014 in 15 years. The increase in wages over the past 12 months was 2.1%.Year-over-year increases have stuck to a tight range of 1.9% to 2.2% for the past three years. And wage gains have averaged about 2% since 2010, just two-thirds as fast as they normally grow. Still, wage growth is now running just a little ahead of inflation, so the gains are real… except, the amount of time people worked each week slipped 0.1 hours to 34.5 hours after hovering at a post-recession high for months. So, wages up, hours down – it’s a wash.

Total employment increased 126,000 from February to March and is now 2.8 million above the previous peak.  Total employment is up 11.5 million from the employment recession low. Private payroll employment increased 129,000 from February to March, and private employment is now 3.3 million above the previous peak. Private employment is up 12.1 million from the recession low. And that is one of the unique things about the jobs recovery, it has happened without a boost from government jobs; to the contrary, government jobs have been cut since the recession and that has served as a drag on recovery in the labor market.

Breaking it down by industries: government lost 3,000 jobs last month, manufacturing and logging each lost 1,000 jobs, the mining and logging sector lost 11,000 jobs – this includes jobs in the oil exploration and drilling industries. We saw 2,000 jobs added in the information sector, 5,800 new jobs in wholesale trades, 8,000 new jobs in financial activities, a gain of 9,500 in transportation and warehousing, almost 30,000 jobs in retail, and 13,000 new jobs in hospitality and leisure (we saw a big jump in restaurant jobs – 88,000 in February – but that might be tapering off now), education and health services added 38,000 jobs, and professional and business services added 40,000.

So, what does this mean for the economy and the markets? Well, first of all, this is one month, it is not a trend. One year ago, we were just coming out of a harsh winter, and the economy was down, and then the economy bounced back very strong in the second and third quarters with a sharp uptick in new jobs. If you think you know what the economy is doing right now, you are probably delusional. About the only thing I can say with confidence is that these are uncertain times. I have no idea how the markets will respond on Monday. The dollar moved a little lower but it is still strong. Commodity prices moved lower despite a weaker dollar. The yield on the 10-year Treasury note slipped 7 basis points to 1.84%. Stocks could move up Monday on the idea that bad news is good; meaning the weak jobs numbers will restrain the Fed from raising rates in June or maybe even this year; or stocks might drop next week on the idea that bad news is bad; the economy is weak and that will hurt sales and profits.

I don’t think the Fed knows either. Speaking at a conference in San Francisco last week, Janet L. Yellen, the Fed’s chairwoman, warned that the recovery was fragile, despite steady progress on the jobs front. The Fed went from being “patient” about raising rates to being data dependent.

I do think this lousy jobs report means there is almost no chance the Fed will raise rates in June. My thinking is that the Fed does not want to make the mistake of shocking the markets, because markets tend to fall down when they are shocked. So they will want to see next month’s jobs numbers (because they are data dependent) and then they will want to communicate their position to the markets, and then they will want to communicate again (just to make sure everybody knows what they think without any equivocation), and that pushes a rate hike back to August at the earliest, and only if we see a strong rebound in economic data and an improving labor market. If the data remains squishy or turns a bit nasty, we might not see a rate increase this year.

We’ve made it through the first quarter and we still don’t know where we’re headed. Maybe the cold weather in the Northeast and the drought in the West hurt the economy; maybe the West Coast port slowdown was a factor; maybe the stronger dollar is hurting profits for multinationals, but the rest of the world’s economies are acting as a drag on the US. And then we need to remember that the economy still added jobs. It’s not like we lost 800,000 jobs; this is not 2008. The unusual thing about recent labor market data is the consistency of positive news. Over the last 30 years we’ve had just four calendar years in which we didn’t have at least one month with net private sector job creation of less than 100,000. Those years were 1987, 1994, 2013 and 2014. Prior to the relatively weak results for March, we had a streak of 12 consecutive months with private sector job gains exceeding 200,000. That was the first time that has happened since 1977. The trend is still up…, for now.

Financial Review

Jobs Report Friday

Sinclair Noe — March 6, 2015

 

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

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DOW – 278 = 17,856
SPX – 29 = 2071
NAS – 55 = 4927
10 YR YLD + .13 = 2.24%
OIL – 1.02 = 49.74
GOLD – 31.90 = 1164.30
SILV – .35 = 15.81

The first Friday of the month is all about jobs.

The Bureau of Labor Statistics reports the economy added 295,000 new jobs in February. The unemployment rate dropped from 5.7% to 5.5%. The results topped estimates of 235,000 jobs, and also beats the revised 239,000 reported for January (revised down from 257,000); and also up from 188,000 a year ago.

The estimates were lower, mainly because most of the country has been experiencing harsh winter weather, and on the West Coast there was a shutdown and a slowdown at the ports. None of that seemed to matter, and if you are thinking ahead, you might imagine that the economy will just keep getting stronger as the weather gets better.

Now, you might look at how Wall Street responded to this very good news about jobs and you might be scratching your head, you might even think Wall Street is opposed to honest, hardworking Americans. Well, maybe a little, but the reason for the sell-off is that a stronger economy means higher interest rates. Investors are looking and focusing entirely on what the Federal Reserve will do in the coming months. Effectively good news in this data point supports the notion that they will raise rates in the not-too-distant future. Wall Street and corporate America have been enjoying a long run of free or at least very cheap money.

The Fed says any interest rate increase decision will be data dependent, but it should not be just that the unemployment rate drops to a given level. Disinflation leaves some wiggle room. And the Fed should also consider the long-term damage suffered by workers who have dropped out of the labor force or are long-term unemployed. Better to grow a little faster than desired rather than stamp out a recovery that is just approaching escape velocity.

Wages rose 0.1%, or .03 cents to $24.78. Average hourly wages for private-sector workers have been rising slowly, at around a 2% annual pace, for the last few years. There was a 0.5% increase in wages in January, but that now looks like a “one off” month. The Consumer Price Index, or inflation at the retail level, fell 0.1% in January compared to a year earlier; so that means “real” wages actually grew.

The US economy added over one million jobs between November and January, and it looks like the labor market is getting stronger and stronger. February was the 53rd straight month of employment gains, and the 12th straight month payrolls have increased by at least 200,000, the best run since a 19-month stretch that ended in March 1995. Payrolls rose 3.1 million in 2014, the most in 15 years. And payrolls are up 3.3 million year-over-year in February.

Most industries added workers to their payrolls. Bars and restaurants led the way by adding 59,000 jobs. It looks like people who are saving a few dollars at the gas pump are spending a few dollars for dining out. Unfortunately, bars and restaurants are not typically high paying jobs. Education and health services added 54,000 jobs. White-collar business and professional firms hired 51,000 employees, while cutting back on their use of temporary workers. The number of temp workers fell for the second month in a row for the first time since 2011. A cut back in temp jobs may indicate that temp workers are getting permanent positions.

Retailers added 32,000 workers. Construction companies created 29,000 jobs in February despite poor weather in much of the eastern half of the country. Transportation and warehousing added 18,000 jobs; financial activities added 10,000 jobs; and Information added 7,000.

Manufacturers created 9,000 new jobs, the smallest amount in 18 months. A few factors hit manufacturing, including a stronger dollar and weak global growth that has curtailed demand for American-made goods. In a separate report this morning the Commerce Department said exports fell 2.9% in January to a seasonally adjusted $189.4 billion, marking the third decline in a row. Imports decreased 3.9% to $231.2 billion, resulting in a lower trade gap of $41.8 billion for December.

Government added 7,000 jobs last month; those were state and local jobs, not federal. State and local government jobs are slowly posting gains – now up 138,000 from the bottom but still 620,000 below the peak.

There are still 6.6 million workers who are underutilized, working part-time even though they would prefer full-time work; that’s down slightly from 6.8 million in January. If you add underutilized workers with unemployed workers, you come up with a different measure called U-6, which figures the unemployment rate at 11%, down from 11.3% in January, and the lowest U-6 since September 2008.

And let’s be clear when we look at U-6 compared to the U-3 unemployment rate, which is the headline number at 5.5%. Sometimes, some people say the U-6 is the real unemployment number, and it usually goes in line with some theory that the government is trying to hide the real numbers. No, these are two separate numbers. And you should not try to compare apples to oranges. The U-6 number can help us get a better understanding of slack in the labor market, which goes a long way to understanding why wages remain stagnant.

Another reason for stagnant wage growth is that many people have been sitting on the sidelines, sometimes discouraged from looking for work, sometimes they have gone to school for training, and in the case of the boomer population, many have retired, even if it was involuntary. According to the BLS, there are 2.7 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 2.8 in January. And this was reflected in the participation rate, which dropped from 62.9% to 62.8%. The participation rate is the percentage of the working age population in the labor force. What we see here is that some long-term unemployed have moved back into the labor pool, while the massive demographic shift persists, and others have walked away from the pool. The drop in the jobless rate reflected both an increase in hiring and a decline in the number of people in the labor force.

When people get back in the labor pool after a long bout with unemployment, they typically return for lower wages. Also, part-time workers have very little power in negotiating higher wages; usually their best hope is for more hours. This puts a downward bias on wages.  There is growing evidence that an improvement is underway. One indication is the growing number of younger workers changing jobs as they gain more confidence in their prospects. There were 2.7 million quits in December; you have to quit a job before you get a new job. And you don’t quit unless you are fairly confident about a new job. On average, workers who switch jobs get a 14% pay increase in their new salaries.

Job openings now top 5 million, the highest level since January 2001. The number of job openings is seen a measure of labor market slack, with more job openings indicating the balance of power in the labor market shifting towards workers looking for jobs and away from employers looking to hire.

We have seen strikes at oil refineries and a slowdown at the West Coast ports; that indicates that workers feel they have enough bargaining power and confidence to demand higher wages. At the same time, we heard that Walmart is raising wages for workers to $9 an hour, and up to $10 an hour next year; a move that is slowly and surely being repeated at other retailers. This indicates that it is cheaper to retain workers at higher wages than it is to find new workers.

Labor advocates say retailers should be focusing on adding hours as well as lifting pay for some workers. Retail workers make up 11% of working adults but that 18% of those who are working part time would rather be employed full time. Many who want more hours are women from minority groups.

Whenever we hear about stagnant wage growth we hear the argument of the “skills gap”; this is the idea that businesses can’t find the workers they need because American workers do not have the skills or education to perform. And it is always a little difficult to counter that argument without sounding anti-education. So don’t take this wrong. Education is still a great way to get a good paying job. Highly educated workers generally have a higher rate of employment and generally higher wages. But that doesn’t tell the whole story.

If businesses were desperate for workers with certain skills, they would presumably be offering premium wages to attract such workers. So where are these fortunate professions? You can find some examples here and there. Interestingly, some of the biggest recent wage gains are for skilled manual labor — sewing machine operators,boilermakers — as some manufacturing production moves back to America. But the notion that highly skilled workers are generally in demand is just false.

Meanwhile, the inflation-adjusted earnings of highly educated Americans have gone nowhere since the late 1990s; their wages are just as stagnant as everybody else. The premium to higher education has plateaued over the last 10 years. We see evidence highly skilled workers have less rapid career trajectories and are moving into less skill occupations if anything. Productivity is not growing very rapidly, and a lot of the employment growth we’ve seen in the past 15 years has been in relatively low education, in-person service occupations.  Wage inflation in the United States is 2%. It has not gone up in five years. There are not 3% of the economy where there’s any evidence of hyper wage inflation of a kind that would go with worker shortages. The idea that you can just have better training and then there are all these jobs that will magically appear, all these places where there are shortages and we just need to train people is fundamentally an evasion.

The simple reality is that demand creates jobs. If someone has a job, they spend their paychecks and that creates demand, and businesses then hire someone to meet the demand rather than lose the business. Unless you’re doing things that have things that are effecting the demand for jobs, more training and more education just means you’re helping people win a race to get a finite number of jobs. The core problem is that there aren’t enough jobs.

FINANCIAL REVIEW

The December Jobs Report

Sinclair Noe — January 9, 2015

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

DOW – 170 = 17,737
SPX – 17 = 2044
NAS – 32 = 4704
10 YR YLD – .05 = 1.97%
OIL – .54 = 48.25
GOLD + 14.50 = 1224.40
SILV + .14 = 16.62

Each month the Bureau of Labor Statistics reports on total non-farm payroll employment. The Jobs Report is usually released on the first Friday of each month. Last Friday was still considered part of the holidays, so we got the report this morning.

In December the economy added 252,000 net new jobs and the unemployment rate dropped to 5.6% from 5.8%. Job gains from November and October were revised higher by 50,000 additional jobs. November now posted 353,000 jobs, and October revised up to 261,000. Job gains occurred in professional and business services, construction, food services and drinking places, health care, and manufacturing. The economy has now added 200,000 or more jobs each month for the past 11 consecutive months. 2014 was the best year for total employment since 1999, and the best year for private employment since 1997. And for the past 3 months we’ve average 289,000, which is about as good as I can recall. Private-sector employment, which in December clocked in at 118 million, has grown 10.4% from its 2009 low. The nation has gained back all the jobs it lost during the recession, and added some more.

The economy gained just over 2.95 million jobs in 2014, with 2.86 million of those coming from the private sector. After 5 years of public sector job losses, we finally saw 91,000 new government jobs last year; with about 12,000 new government jobs in December. We have now seen 51 consecutive months of job gains, which is a record, and it is a particularly impressive accomplishment considering that the government has cut about 611,000 jobs since 2009. The sluggishness of government jobs to recover is unprecedented.

The labor-force participation rate dropped 0.2 percentage points in December to 62.7%, matching a post-recession low and a level last seen in 1978. The participation rate looks at the percentage of the working age population actually in the labor pool. And this has been low for quite some time; the major reason is because the Baby Boomers are now heading into retirement, so it is a demographic shift. The share of men in their prime, working years who are not working has more than tripled since the 1960s. Also, the downturn left many workers discouraged at job prospects. If some of those discouraged workers start to look for jobs again, it is possible that we could see more job creation without pushing the unemployment rate lower. Instead, in December the size of the labor force actually fell, with 273,000 people no longer either holding a job or looking for one. So, one of the reasons the unemployment rate dropped from 5.8% to 5.6% is because the labor pool was smaller. That may be a statistical aberration, but even over a longer period of time the steep drop in the labor force since 2008 has not reversed itself.

Breaking down the job gains by industry sector: professional and business services gained 52,000 jobs, education and health services added 48,000, also construction added 48,000, leisure and hospitality gained 36,000, manufacturing added 17,000, and financial activities added 10,000.

White-collar businesses, health-care firms, restaurants, hotels and construction companies were the top job creators in 2014. Professional and business jobs increased by 732,000 — a quarter of all jobs created in 2014. Some 30% of the professional jobs went to temporary workers who earn below-average wages. Many of those positions can lead to lucrative full-time offers, but not for now. The health-care industry hired 311,000 people in 2014. While most of these positions are well paid, more than one-third of new health-related jobs involved social workers who get paid less than the average US wage. Restaurants and hotels boosted staffing by 421,000 as Americans traveled more often and increased how much they went out to eat. Employment in the construction trade jumped 290,000 to mark the largest gain since 2005. Manufacturers added 186,000 jobs, the largest advance since 2011.

The U-6 unemployment rate declined from 11.4% in November to 11.2% in December, the lowest rate since September 2008. U-6 measures unemployed people plus people working part-time for economic reasons or because they can’t find decent full-time jobs, and by this measure there are 6.8 million underutilized or unemployed workers. And this indicates there is still slack in the labor market; these are workers who don’t have much leverage for higher wages. Meanwhile, there are more than 2.7 million people who have been out of work for 6 months or more, and nearly a third of those have not been able to find a job for more than two years; this number is trending down but is still considered high.

The number of full-time workers increased by 2.7 million in 2014, while part-time jobs rose by just 72,000. So, we’ve heard stories that companies would only hire part-time workers because of costs associated with health care insurance, but the reality is that companies did not replace full-timers with part-timers.

Wages fell 5 cents, or 0.2%, to $24.57 an hour. And the gain over the past 12 months slowed to just 1.7%. Wage gains have averaged 2% or slightly less since 2010, just two-thirds as fast as they normally grow. Economists predict a tightening labor market will spur higher wages but so far earnings haven’t budged much. The Federal Reserve in December cited a lack of clear evidence of rising wages as reason it may keep interest rates near zero for an extended period. Although wages aren’t rising especially fast, most Americans are taking home more money because they are working longer hours compared to a few years ago. The average length of the workweek was unchanged at 34.6 hours in December to remain at post-recession high.

At the current pace of job growth, the economy should be closing in on a 5% unemployment rate by this time next year, which is consistent with full employment. Wage growth should also pick up more broadly in coming months. Of course, that has been the expectation for quite some time; more jobs would lead to higher wages, but it hasn’t happened yet. The economy clearly has no wage or price pressures that would point towards an early liftoff on interest rates. A reminder that in November wages increased by 0.4%, which was a little higher than normal; but that number was revised lower, to a gain of just 0.2% for November. And the December number was a 0.2% decline – so in the past 2 months wages were completely flat.

Wages have been flat for a long time, decades in fact. But workers may be getting a little break lately; not that their wages have increased – they haven’t, wages are still flat, but you can probably buy more with those wages. The reason is because inflation remains low. One of the big examples is lower gas prices, which is like an extra $1,000 a year for a typical family. As the job market gets tighter, it is expected to push wages higher, and those higher wages would then be passed along in the form of higher prices, which is another way of saying higher inflation. The net effect is that many workers don’t realize an increase in buying power, even when they realize higher wages.

At a certain point, wage and price inflation is expected to increase when the unemployment falls to a specific level, known as the natural rate. The natural rate would be when inflation plus productivity growth matches nominal wage growth. Right now inflation is just under 2% and productivity is around 1.5%, so we wouldn’t be at the natural rate until wage growth hit about 3.5%; right now wage growth is about 1.7%, or about half the natural rate. Some people think the natural rate of unemployment is 5%; in other words, when the unemployment rate hits 5%, the market will tighten and wages will increase to that 3.5% range, but that’s more of a guess than a hard fact. First come jobs and then wages follow, but no one knows how much employment needs to increase before real wages start to increase. Also, keep in mind that inflation and productivity are also moving targets. The point is that whatever the natural rate is, we are not there yet, and that means more jobs can be created and more people can be employed before we have to worry about wage inflation.

It’s also a reminder that there are powerful deflationary or disinflationary forces at work. And with any luck the Federal Reserve should take note of this; there is still significant slack in the labor market. Tighter monetary policy carries the risk of slamming the brakes on economic growth; and that risk of killing economic recovery is greater than the risk of a little inflation in an otherwise deflationary world.

Now, if we could see an uptick in hourly earnings over the next few months, it would translate into significantly better living conditions for most workers, and could lead to a solid spurt of real wage growth. Don’t expect an uptick in wages though. For now, employers can add jobs without having to pay more in wages, which isn’t what most workers are hoping for, but it isn’t really terrible either. It means employers should be able to make a decent profit from the labor of their workers and for the workers a job still beats unemployment.

Yesterday I talked about how the economy has been improving, and that is true, but we still have a lot of work to do. Today’s jobs report confirms that notion. More people are getting jobs, which is much better than losing jobs, but even if you have a job, you are likely struggling to make ends meet. Economic inequality is soaring, social mobility is declining, earnings at most income levels are stagnant or falling, and the percentage of working-age Americans who are actually working is at a record low. We saw economic growth in the last quarter. But robust growth should lead to rising wages, and we didn’t see that.

FINANCIAL REVIEW

September Jobs Report

Sinclair Noe — October 3, 2014

0 0 

   

Financial Review

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

DOW + 208 = 17,009
SPX + 21 = 1967
NAS + 45 = 4475
10 YR YLD + .01 = 2.44%
OIL – 1.31 = 89.70
GOLD – 23.60 = 1191.70
SILV – .24 = 16.96

There is an old saying in the markets, “Sell Rosh Hashana, Buy Yom Kippur”, and when Yom Kippur falls on the first Friday of the month and coincides with a strong monthly jobs report, there is wisdom in the adage.

Each month we focus on the jobs report and try to tell you everything you need to know; let’s go. The economy added 248,000 net new jobs in September. The unemployment rate dropped from 6.1% to 5.9%, falling below the 6% level for the first time since July 2008. Most estimates had called for job gains in the range of 210,000 to 220,000.

In August the jobs report was far less than expected, coming in at just 142,000 jobs, however, today the August report was revised up to 180,000. And the July number was revised higher from 212,000 to 243,000. So, the two month revisions added a combined 69,000 more jobs than previously reported. The gain in payrolls over the last six months was the strongest for any six-month period since before the 2007-09 recession.

Employment is now up 2.63 million year-over-year. The economy has added 2,040,00 jobs year to date. At the current pace, the economy will add about 2.7 million jobs this year. It looks like 2014 is on track for the best total nonfarm and private sector employment growth since 1999. Total employment is now 1.07 million above the pre-recession peak. Private payroll employment increased 236,000 from August to September, and private employment is now 1,547,000 above the previous peak. Private employment is up 10.34 million from the low.

The Labor Force Participation rate dropped in September to 62.7% from 62.8%, not a big move, but enough to give a boost to the headline unemployment rate of 5.9%. Unemployment declined by 329,000 to 9.3 million and more than 200,000 people got jobs. There are two reasons why the unemployment rate can drop: more people getting jobs or fewer people in the labor pool; today’s report was a combination.

The number of people participating in the labor market is now at a 36 year low; you have to go back to 1978. Part of the reason people leave the work force is because of demographics; the population is aging and people are retiring, sometimes because they want to and sometimes because they just can’t find work. A Federal Reserve paper puts half of the decline to the aging of the baby-boom generation. While there are more older workers than ever, due to increased longevity, better health, and the need to work due to destroyed wealth from the Great Recession, this cohort is still retiring in great numbers.

That same Federal Reserve paper put as much as 1 percentage point of the decline from its 2000 peak of 67.3% due to cyclical factors; that is, people who previously wanted to work and now are discouraged.

The number of persons working part time for economic reasons decreased in September to 7.1 million from 7.2 million in August. These are people working part-time but they would like full-time work, or their hours have been cut back, or they just can’t find full-time positions. These workers are included in the alternate measure of labor underutilization, U-6 that decreased to 11.8% in September from 12.0% in August. This is the lowest level for U-6 since October 2008.

And there are still about 2.9 million people who have been unemployed for more than 6 months and are still looking for a job. This number has been trending lower but is still very high. Many people who have been unemployed for more than 26 weeks lose benefits and just fall off the charts. One in five workers was laid off in the past five years and about 22% of those who lost their jobs still haven’t found another one. Those who did find work had a difficult time with their job search and the effects of unemployment. Nearly 40% said it took more than seven months to find employment and about one in five of laid-off workers said all they could find was a temporary position. And 46% of the estimated 30 million layoff victims who found new jobs said they paid less than their old ones. While job growth has been consistent, it has been insufficient to produce enough full-time jobs for everyone. This has also impacted wages.

Average hourly earnings for all employees on private nonfarm payrolls, at $24.53, down 1 penny in September, but weekly earnings rose by more than $2 because they put in longer hours. The average workweek in manufacturing rose to 42.1 hours in September, near its highest level in more than 60 years. The average workweek across all sectors rose to a post-recession high. Eventually, employers will hire new workers rather than pay overtime, but we’re not there yet. Over the year, average hourly earnings have risen by 2.0%. In September, average hourly earnings of private-sector production and nonsupervisory employees were unchanged at $20.67. For the 80% of workers who aren’t supervisors, however, average weekly pay fell about $2. So, the lower unemployment rate has not yet translated into wage pressure.

Part-time workers have been part of the reason for slow-growing wages. The high number of part-time workers, especially given the broad number that would prefer full-time work, represents a significant underutilization of labor resources which is dampening wage growth. As the job market continues to improve, there is an opportunity for more of these part-time employees to move into full-time work. Eventually these employers are going to have to resolve their resource needs by hiring a qualified worker in the position.

Employment increased in every broad business sector, from manufacturing to hospitality. Services added 207,000 jobs, while manufacturing added just 4,000. The strongest gains were in professional and business, with gains of 81,000, however one quarter of those positions were filled by temp jobs; retail added 35,000 jobs after 5,000 were lost in August. Leisure and hospitality added 33,000; these are sectors that emphasize hourly employees with low benefits; these are also areas that have been leading job gains in the recovery, which might explain stagnant wages. Education and health services added 32,000; construction gained 16,000; finance added 12,000. Government added a net of 12,000 jobs; state and local governments added 14,000 jobs; federal lost 2,000. That’s a major turnaround from the draconian cuts we saw early in the cycle, which was a major drag. State and local government employment is now up 143,000 from the bottom, but still 601,000 below the peak. State and local governments lost jobs for 4 straight years. Federal government layoffs are down 25,000 for the year but it looks like the rate of decline is slowing slightly with just 2,000 federal government job layoffs in September.

Consider these facts from the National Employment Law Project:
Lower-wage industries constituted 22 percent of recession losses, but 44 percent of recovery growth. Mid-wage industries constituted 37 percent of recession losses, but only 26 percent of recovery growth. Higher-wage industries constituted 41 percent of recession losses, and 30 percent of recovery growth. Today, there are nearly two million fewer jobs in mid- and higher-wage industries than there were before the recession took hold, while there are 1.85 million more jobs in lower-wage industries. Service-providing industries such as food services and drinking places, administrative and support services, and retail trade have led private sector job growth during the recovery. These industries, which pay relatively low wages, accounted for 39 percent of the private sector employment increase over the past four years.

The September jobs picture was affected by a handful of onetime events, like the return to work of about 20,000 New England grocery store employees who walked out in July, and the loss of jobs at shuttered Atlantic City casinos.

Fed officials are going to have a hard time judging the health of the labor market. The unemployment rate is falling toward the range that Fed officials regard as normal more quickly than they had expected. Most Fed officials predicted in September that the rate would be no lower than 5.9 percent at the end of the year, but the latest data also shows that hourly wages rose just 2 percent over the last 12 months, suggesting that it was still unusually easy for companies to hire workers. In other words there is still considerable slack in the labor market.

The thinking is that the Fed is aiming for 5.5% unemployment, maybe a bit lower, as the target where a tighter labor market leads to faster wage growth and subsequent cost pressures feed through to higher inflation. This is the key reason the Federal Reserve has historically been nervous about keeping its foot pressed on the accelerator when unemployment got this low. But in reality, we don’t know when the wage pressure will kick in based upon the unemployment rate. After all, at the end of the Clinton administration, unemployment was below 4 percent, while inflation remained low and stable. Perhaps we should be looking at a combination of the unemployment rate and the increase in wages above and beyond the inflation rate before we start worrying about wage pressure.

Add in other variables, such as the participation rate, and the fed may need to rethink their target for unemployment, maybe below 5%. In September, 232,000 more people reported being employed and 329,000 fewer people reported being unemployed. The improving job market does not seem to be pulling people who left the labor force over the last few years back into it. In fact the size of the labor force actually ticked down by 97,000 in September. What we really should be looking at is an economy where everyone who wants a job has a good opportunity to get a job.

Fed chairwoman Janet Yellen said last month that she still saw clear problems in the labor market, and that the Fed’s stimulus campaign was still helping to ease those problems. As long as inflation remains sluggish, officials see relatively little risk; they would rather err on the side of pushing a little too hard to create jobs than retreat prematurely.

The economy has added jobs for 55 consecutive months. The September report of 248,000 jobs and 5.9% unemployment was better than expected. It was a very good report. We still have a long way to go, but we are headed in the right direction.

http://www.bls.gov/news.release/empsit.nr0.htm

http://data.bls.gov/timeseries/LNS14000000

http://www.nelp.org/page/content/lowwagerecovery2014/

Friday, May 02, 2015 - April Jobs Report

Financial Review with Sinclair Noe

DOW – 45 = 16,512
SPX – 2 = 1881
NAS – 3 = 4123
10 YR YLD - .01 = 2.59%
OIL + .57 = 99.99
GOLD + 15.70 = 1301.60
SILV + .44 = 19.56

Today is another Jobs Report Friday. We will go into quite a bit of detail here because really, most everything we talk about in regard to economics begins with work and jobs. It is my hope that you will join us here on the first Friday of each month to get your comprehensive, fact based coverage of the jobs report.

Last month the economy added 288,000 net new jobs, and the unemployment rate dropped to 6.3%. April marked the biggest monthly gain in jobs since January 2012, when the economy added 360,000 jobs. Employment gains for February and March were revised higher by a combined 36,000; that raised the monthly average to 214,000 jobs a month since the start of the year. Through the first 4 months of 2014, the economy has added 857,000 payroll jobs, slightly better than the first 4 months of 2013, despite the harsh winter this year.

In the current 58 month expansion, employers have added more than 200,000 jobs per month in 38% of the months. Current job creation performance is stronger than it was in the business-cycle expansion that occurred during the recovery in the early 2000s, even when a real estate construction bubble fueled growth.  Today’s job creation pace lags well behind previous recent economic recoveries, such as 1970, or 1975 that saw job creation above 200,000 in about 60% of months. Needless to say, 200,000 jobs a month means a lot less today with a population that is more than 100 million people larger than it was in 1970. Total employment is now only 113,000 below the previous peak, so we should top that next month; however, the overall population has increased in the past 6 years, so there are still millions of people without jobs.

The report came in far above expectations. The consensus estimates called for 210,000 new jobs and the unemployment rate inching down to 6.6%, however there was a wide range of estimates.

The drop in the unemployment rate to 6.3% was the biggest monthly drop in 31 years and the unemployment rate is at the lowest level since 2008, but the drop in the headline rate was for the wrong reasons; the participation rate declined to 62.8% from 63.2%, meaning the labor pool fell by 806,000 workers. The unemployment rate is measured against a labor pool of people who are considered actively looking for work or working. When someone stops looking for work, they stop being counted, although it doesn’t necessarily mean they wouldn’t like work.

There are 2 major reasons why the participation rate has dropped: the first reason is demographics, and the second is the economic downturn.

Looking at demographics, the baby boomers are retiring in massive numbers, and not always voluntarily. However, many boomers are re-entering the workforce in a stealthy manner; the highest rate of entrepreneurship activity belongs to the 55-64 age group. It turns out the recession spurred new-business formation. In a "necessity is the mother of invention" scenario, it appears that many people who lost jobs started their own businesses. Of course, it might take some time for a new venture to be profitable and in the meantime, those people might not be counted as actively seeking jobs.

Meanwhile, younger people are staying in school, either going back to school for training or re-training, or dragging out school because of the high cost of education. An interesting point here is that unemployment for young adults age 20-24 dropped from 12.2% to 10.6% in April. Millennials getting jobs; or dropping out of workforce. We don’t know for certain, but one possible explanation is that graduates from the Class of 2013, that have been biding their time looking for a job or just unable to find a job, suddenly got very serious about taking any kind of job as the Class of 2014 prepares to enter the workforce.

Another age group we watch is the 25 to 54 year olds; they’re in their prime working years, too young to retire and unlikely to be in school. The 25 to 54 participation rate declined in April to 80.8% from 81.2% in March, and the 25 to 54 employment population ratio decreased to 76.5% from 76.7%. The participation rate for this age group should increase as the economy improves.

The other reason is the economic downturn, many people lost jobs and have had a very difficult time finding work, driving long term unemployment to unacceptable levels. The recent loss of unemployment benefits for the long-term unemployed is another way in which people fell from the ranks; in order to receive unemployment benefits, one has to actively look for work. As the benefits were cut, people still unemployed were cut from the ranks. Extended benefits were cut off beginning in late December. If the expiration of benefits was causing hundreds of thousands of people to drop out of the labor force, it should have showed up in the data in January, or February. It didn’t. Maybe the unemployment rate fell because of 806k drop in labor force, a lagged effect from expiration of unemployment insurance, or maybe there is just some statistical noise. We won’t know for sure until we see a few more months data.

What’s also odd about the decline in the labor force is how it happened. The number of so-called re-entrants, unemployed workers who have started looking for jobs again, fell by 417,000. That’s the biggest drop since the government began keeping records in 1967.  And new entrants into the labor force, such as graduates or immigrants, fell by 126,000. That’s the biggest decline in more than five years. Put another way, two-thirds of the drop in the labor force stemmed from people choosing not to enter in the first place. Normally a decline takes place when workers exit the labor force.

According to the BLS, there are 3.452 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 3.739 in March. This is trending down, but is still very high. And it does not mean that 300,000 long term unemployed workers found jobs; they just stopped being counted.

And there is still quite a bit of slack in the labor market, with approximately 7.5 million workers employed part-time for economic reasons; people who have had their hours cut back or people working part-time because they can’t find full-time work. When you add in those under-utilized workers, you get a different measurement known as U-6, which dropped to 12.3% from 12.7% in March. The number of people holding multiple jobs jumped by 133,000 from April 2013 to April 2014. Women almost entirely led this statistic, with the number of employed single mothers increased 1.4% over the past year.

Hiring was widespread and it doesn’t look like there was any one industry or sector that had an unusual jump. Professional services added 75,000 jobs, but about one-third were temporary positions. Employment and temporary help services added 28,000 jobs. Retailers added 35,000 jobs, bars and restaurants added 33,000 and the construction industry hired 32,000 workers. Industries where minimum-wage employment is most prevalent in the economy, accounted for 40% of total new private-sector job creation in April, excluding health care. Manufacturers generated 12,000 jobs, but this was disappointing in light of recent economic data pointing to increased manufacturing activity; yesterday, the ISM reported it manufacturing index had increased to 54.9 last month, up from 53.7 in March. Government also added 15,000 jobs, with state and local governments adding 18,000 jobs and federal cutting 3,000 positions.

Average hourly wages were unchanged at $24.31, reducing the year-over-year gain to just 1.9%. Consumer spending has been outpacing income growth, resulting in low saving rates, meaning workers have less discretionary funds, meaning a dwindling likelihood they will go out and spend at an increasing rate. Paychecks have actually become leaner since the recession officially ended. Real median weekly earnings for full-time wage and salary workers during the first three months of this year were down 3% from the end of the recession.

Looking at the types of jobs making up employment also provides a cause for concern. Among 13 industries that make up total US private-sector employment, the 5 with the lowest nominal average weekly earnings represented about 52% of private-sector employment gains over the past year. Leisure and hospitality employment showed the strongest growth among low-earning industries, added 412,000 jobs over the year through April, representing about 17% of total private-sector job gains.

Middle-earning industries, professional and business services, construction and manufacturing, represented about 40% of annual job gains. While higher-earning industries made up about 8% of added employment. Among the five industries with the highest weekly earnings, private-sector employers added about 194,000 of these jobs over the past year. Longer-term trends show lopsided jobs growth, with lower-wage employment ramping up in recent years. During the recession, lower-wage industries made up 22% of job losses. But over the past four years, these jobs made up 44% of employment growth, according to a recently released report from the National Employment Law Project. One indication that workers aren’t particularly confident is that quitting is below pre-recession levels, signaling that many workers are unwilling to trade some job stability and security to advance their careers.

Today’s jobs report was good, one of the best months we’ve seen in a long time, and we have a 58 month trend of job gains, which is a heck of a lot better than bleeding jobs, but the trend is still not strong enough. Nearly five years since the economy began expanding, the labor market continues improving, but at a frustrating pace for the 10 million unemployed workers and 3 million people not counted as unemployed who still currently want a job. Ongoing elevated unemployment is not only a serious drag for those families enduring it, but it will continue to drag on the overall economy until lawmakers get serious about full employment and creating quality jobs that deepen and secure the middle class.

Friday, April 04, 2014 - The March Jobs Report

Financial Review with Sinclair Noe

DOW – 159 = 16,412
SPX – 23 = 1865
NAS – 110 = 4127 (-2.6%)
10 YR YLD - .06 = 2.73%
OIL + .77 = 101.06
GOLD + 15.50 = 1303.30
SILV + .14 = 20.06

Today is a jobs report Friday. Let’s get geeky.

The Labor Department reported nonfarm payrolls increased by 192,000 jobs last month after rising by 197,000 in February (that’s revised from 175,000). The prior 2 months were revised to show 37,000 more jobs than previously estimated; the revisions indicate that the bad winter weather was not a huge problem for the labor market; it did have an effect but not huge, and we certainly shouldn’t hear any more weather related excuses. The unemployment rate was unchanged at 6.7% as more people were looking for jobs. The consensus estimate was 200,000 jobs, so the figures were a little below expectations.

Private employment rose to 116.09 million, finally moving beyond the previous high of 115.98 million recorded at the very start of the recession in January 2008.Total employment is just a little below the pre-financial crisis days; we still have about 437,000 fewer jobs than the peak in 2008, but private employment is now above the peak by 110,000 and at a new all-time high; the difference is that more than a half million government jobs have been cut during that time; also, the population and the labor force has grown over the past 6 years, so the unemployment rate remains fairly high. And the idea is not just to get back to where we were, but to get back to where we should be. Keep in mind, we have 15 million more people now than we did then.

The economy added 533 thousand jobs in Q1 this year compared to 618 thousand in Q1 2013; the bad weather is the excuse for the weaker performance. Still the unemployment rate has dropped from 8.2% in March 2012 to 6.7% now.

The Labor Force Participation Rate was increased in March to 63.2%. This is the percentage of the working age population in the labor force.  And while the participation rate is still low compared to the past 20 years, it is a positive sign that more people are looking for jobs, suggesting they were lured back into the job hunt as openings began to appear. Or possibly, more long-term unemployed were pushed back into the job market as benefits were cut. The number of long-term unemployed fell by 110,000, and over the past year, the ranks of the long-term jobless have dropped by 837,000; meanwhile, the ratio of the population reporting they had a job ticked up to 58.9% from 58.8%. Much has been made of the multiyear slide in the labor force participation rate since the financial crisis of 2008. In the last few months, however, the labor force participation rate has actually stabilized.

Anyway, about a half million people jumped back into the labor pool and about that many found jobs; if it were not for the increase in the size of the labor force, the unemployment rate would have fallen to 6.5%. It also means that the unemployment rate is unlikely to keep falling as sharply as it has in the last two years, because people who are again looking for work are counted as unemployed, while those who have given up and dropped out of the labor force are not.

There are 7.4 million people working part-time who would prefer to work full-time, or they are part time because their hours have been cut back, or they have given up looking for a job. There is a separate measure for them, known as the U-6 unemployment rate, which comes in at 12.7%; up from 12.6% in February, but down from 13.8% a year ago. The headline unemployment rate of 6.7% is known as U-3. The U-6 includes all those people in U-3 plus all the underutilized and discouraged workers. In healthier job markets, the gap between U-3 and U-6 is closer to 3% or 4%.

After months of declines in the part-time labor force, the BLS reported a spike of 414,000 new part-time workers in March, which was the largest monthly increase in nearly two years. This could just as well be an aberration, as it was a year ago, but the part-time picture in the American workforce is far from rosy. The financial crisis resulted in a spike in the number of part-time workers as a percentage of the labor force, and this has remained elevated ever since.

The increase in jobs was paced by gains in construction, retail and professional services. Government employment over all remained flat, with federal and state governments cutting 11,000 jobs even as local governments added 9,000 positions. Over the past 12 months, total federal employment has fallen by 85,000. That's pretty much how it has gone throughout the grinding recovery; private hiring has been slow but steady, while austerity has led to government job cuts that have helped keep the recovery frustratingly slow.

The health care sector added 19,000 jobs. Business services added 57,000 jobs. Food services employment increased by 30,000, bringing the sector’s gain over the past year to 323,000. The manufacturing sector lost 1,000 jobs.

While average hourly earnings were basically flat, the length of the average workweek edged higher. The average work week for private employees edged up to 34.5 hours, offsetting a net decline over the prior three months; as a consequence of the bad weather, many people lost time on the job, but it was made up in March. Average weekly hours, at 34.5 per worker, aren't far off of the 34.7 hours per worker recorded six years ago, but when you add up a fifth of an hour across more than 100 million workers, it makes a very big difference in the amount of time Americans actually spent on the job.

Average hourly earnings for private employees fell by 1 cent to $24.30 from a month earlier. Over the year, average hourly earnings have risen by 49 cents, or 2.1%. The average weekly wage rose to $838.55 from $833.83. The reason for this anomaly: a 12-minute increase in the average amount of time worked each week.  Conclusion: Bargaining power for workers is still subdued. But their services are more in demand.

The jobs report also provides details about who is benefiting from recovery and who is not. The recovery has been good for college educated workers and whites. It has been much more difficult for the long-term unemployed, young adults without a college education, and African Americans. Among adults 25 and older who have a bachelor’s degree the unemployment rate is just 3.4%, about half the over-all rate.

The unemployment rate for college graduates never went above five per cent in the downturn. At the other end of the educational spectrum, things were very different. For adults 25 and older without a high-school diploma, the jobless rate hit 15.6% in 2010. Last month, it stood at 9.6%.

Among white men aged 20 and over, the unemployment rate is now 5.3%; for African-American men over 20, it is 12.1%. The gap between white and black females is also very large, 5.3% of white women aged twenty and over are out of work (the same as the rate for white men), but 11% of black women in the same age group are jobless. Hispanics also have substantially higher rates of unemployment than whites, but the differences aren’t as large. Among Hispanic men aged twenty and over, the jobless rate in March was 6.9%; among Hispanic women aged twenty and over, the rate was 8.4%.

For teenagers between the ages of 16 and 19 who aren’t in school or college, the unemployment rate is 20.9%. That’s down from 23.3% a year ago. It’s still a very high figure, and, among minority teenagers, it’s even higher.

The stock market moved a little higher this morning following the jobs report. It wasn’t a bad jobs report that sank the market today. Most of the stories I read had a theme of not too hot, not too cold, a Goldilocks report. The Fed uses the jobs report to help determine the timing and pace of further cuts to its monthly bond-buying program. The central bank also looks to the unemployment rate as a factor in deciding when to raise its benchmark interest rate. This report did not sway the Fed one way or the other.

What went wrong on Wall Street? It’s always dangerous to lay an exact cause on any singular event, but the big damage today was in the Nasdaq and the tech and biotechs. There’s a little bit of nervousness about some of the high multiples in the biotech area and computer and Internet-related stocks. You’re having another wave of selling in that very high-momentum group. When you’re at record high levels, people start to get a little tentative going into weekends.