Financial Review

December Jobs Report

Sinclair Noe — January 6, 2017

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

Subscribe: iTunes | Android | RSS

DOW + 64 = 19,963 (intraday record 19,999.63)
SPX + 7 = 2276
NAS + 33 = 5521 (another record close)
RUT – 4 = 1367
10 Y + .05 = 2.42%
OIL – .11 = 53.66
GOLD – 8.40 = 1172.80

Today is a Jobs Report Friday. The US economy added 156,000 jobs in December; this was below estimates of around 170,000. The unemployment rate edged up to 4.7% from 4.6% as more people entered the labor force in search of work.

Employers hired 19,000 more workers than previously reported in October and November. The U.S. has created more than 2 million jobs in each year since 2011, though hiring has slowed over the last two years. Employment growth in 2016 averaged 180,000 jobs per month, down from an average gain of 229,000 per month in 2015.

The slowdown in job growth is consistent with a labor market that is near full employment. The latest payrolls tally brought the advance for 2016 to 2.16 million, after a gain of about 2.7 million in 2015.

The steady gains in employment have finally started to push worker pay higher. Average hourly wages jumped 0.4% to $26 in December. Hourly pay increased 2.9% from December 2015 to December 2016, marking the fastest 12-month increase since a recovery that began in mid-2009.

Hours worked were unchanged at 34.3 last month. December’s job gains were broad, education and health services employment rose 70,000, the biggest increase since February. Leisure and hospitality added 24,000. Manufacturing payrolls gained 17,000 after declining for four straight months.

Transportation added 14,700 jobs. Financial activities gained 13,000 jobs. Retail sector employment rose 6,300 after increasing 19,500 in November, although holiday hires were down significantly from 2015 as many retail outlets turned cautious. Government employment increased 12,000 in December. Construction payrolls fell 3,000 in December after three consecutive months of increases.

Among the details of the December report, the participation rate, which shows the share of working-age people in the labor force, increased to 62.7 percent, from 62.6 percent. The participation rate has fallen significantly since its high around the year 2000. The root cause of declining participation remains disputed, with demographics and discouraged workers cited as some of the possible explanations.

In 2017, the labor-force participation number will likely remain a major focus. About half of the decline reflects Baby Boomers moving into retirement; the other half reflects prime-age workers, many of whom have just abandoned their hopes for a job.

The U-6 unemployment rate dropped one-tenth of a point to 9.2%; U-6 is a broader measure that includes unemployed, under-employed or people working part-time who would like to be full-time, and discouraged workers who have stopped looking for jobs. The U-3 rate has in the past few months returned to the pre-recession levels that economists consider full employment.

The U-6 has seen significant gains in recent months, but remains higher than before the recession. When we hear talk about the economy being near full employment, consider the U-6 rate and realize there is still plenty of slack. The BLS reports 1.7 million people are marginally attached – looking for work; 5.6 million are employed part-time for economic reasons.

Janet Yellen has said the economy only needs to add about 100,000 new jobs per month to maintain current levels of employment and absorb new workers into the labor force. Trump promised to create 25 million new jobs under his administration. The math doesn’t work. To add 25 million jobs, would mean dragging people out of retirement and putting school kids to work, and the unemployment rate would be a negative number. It won’t happen. But there is room for continued job growth in 2017.

This is the last full jobs report of the Obama administration. Since January 2009, the economy has added 11.3 million jobs. This includes a decrease of 354,000 government workers, so private payroll growth has been slightly higher.

The Obama administration loves to tout that the economy has added jobs every month for the past 75 months, the longest streak on record and much higher than the previous record of 48 between 1986 and 1990. By comparison, the Clinton administration added 22.9 million total jobs; Reagan added 15.9 million; Johnson added 12 million nonfarm payrolls.

So, on jobs, Obama tops Carter, Nixon, Truman, Eisenhower, Kennedy, Bush I and Bush II, and Ford – in that order. Considering that the US lost more than 700,000 jobs in each of the first three months of Obama’s presidency — including 791,000 jobs lost in January 2009 — the comeback for the US labor market has been impressive by most counts. As of December 2016, total non-farm employment exceeded its pre-recession peak by 6.9 million jobs.

As more Americans find work and the labor market tightens, you can expect wages to rise because of the competition among employers to attract the remaining qualified job candidates. In recent months, wages have again gained ground, up 2.9% in the past 12 months, compared to inflation running around 1.5% – so we have real gains.

Before the crash, the U.S. was cruising along with annual wages rising at rates between 3 and 4 percent and those rates are characteristic of other economic boom times over the past 30 or so years. So things are still not quite as good as they were—and a lot of the wage growth that did happen in the first several years of the recovery was in fact eaten up by inflation.

So, if there is slack in the labor force, why are we seeing wages start to pick up?

Part of the answer is basic supply and demand. Part of the answer is demographics and skill sets; many younger workers stayed in school during the downturn and now they are entering the workforce well-trained and demanding decent wages. Part of the answer might be recent legal changes affecting wages.

A few weeks ago, over four million Americans were poised to benefit from new overtime regulations at the start of the new year. The new rule – which would require time-and-a-half pay for those working more than 40 hours a week – was part of an executive order signed by President Obama in 2016. The order would have effectively doubled the salary threshold for mandatory overtime pay from $23,660 to $47,476 – forcing employers to either pay many more workers overtime, or bump their salaries beyond the reach of the threshold.

That executive order was overturned in November by a federal judge in Texas, but it is possible that some workers got a raise before that ruling. Those raises might not last; there are already reports that some employers are clawing back those raises. And there is a strong probability the executive order will be rescinded under President-elect Trump.

Some employers will choose to follow-through with existing salary hikes: Walmart says it plans to keep the pay raises it instituted for entry-level manager salaries. In September, the retailer bumped pay for the position to $48,500 up from $45,000 to avoid the federal-overtime threshold.

Also, many minimum wage workers are seeing an increase in their paychecks. According to data collected by the National Employment Law Project, a workers-rights advocacy group, 19 states and 21 local jurisdictions raised their minimum wages at the start of 2017. Many of those increases were small cost-of-living adjustments, but some of them were dramatic.

Arizona, where voters approved a wage hike on Election Day, raised its minimum wage by nearly $2 an hour, to $10 from $8.05. Maine’s minimum wage jumped to $9 an hour from $7.50. Washington state and Massachusetts both raised their minimums to $11 an hour. In total, six states plus the District of Columbia now have minimum wages of at least $10 an hour. (Oregon will join the club later this year.)

Most of those increases in minimum wage did not show up in the December jobs report, but we should see some impact on the January 2017 report in one month. The big question is whether these aggressive increases in minimum wage will be job killers or poverty preventers.

Most studies have found that wage increases have at most a small impact on total employment – that is, there is little evidence for the claim that the minimum wage is a major job-killer. But over the next few months we will see the minimum wage experiment unfold in real-time.

Part of the explanation for rising wages might also be found in the changing landscape of the labor market. According to a paper published last month through the US National Bureau of Economic Research, routine, low-paying, manual labor jobs are disappearing.

Routine occupations employed about 40 per cent of the working-age population in the US in 1979. That figure was stable for about a decade and then declined steadily to reach about 31 per cent in 2014. Many of those routine jobs have been automated or will be. For workers, that means they either accept low paying jobs in other areas, or train for higher-paying jobs, or drop out of the labor market.

This might go a long way to explaining the historically low labor force participation rate, and the stubbornly high U-6 unemployment rate, and the sudden resurgence in wages. The challenge for the future will be solving the mismatch between the types of jobs people used to have and the types of jobs the economy is currently creating.

In the immediate aftermath of the jobs report, the yield on the 10-year Treasury note rose. The dollar halted a two-day slide. Gold stayed lower, while emerging-market equities were little changed. Oil edged above $54 a barrel before sinking lower. The report did little to alter trader expectations on the Federal Reserve’s path for interest-rate increases.

Financial Review

Jobs Report Friday

Sinclair Noe — November 4, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 42 = 17,888
SPX – 3 = 2085
NAS – 12 = 5046
10 Y – .03 = 1.78%
OIL – .53 = 44.13
GOLD + 1.80 = 1305.00

The economy added 161,000 jobs in October; slightly below expectations of 175,000. The unemployment rate dropped to 4.9% from 5%. This was largely attributable to the 195,000 Americans that dropped out of the labor force, which brought the labor force participation rate down to 62.8% from 62.9%.

The government revised the September report to show 191,000 new jobs were created instead of a previously reported 156,000. August’s gain was raised to 176,000 from 167,000.

The 3-month average now stands at 176,000. Job growth has averaged 181,000 per month this year. In October, the year-over-year change was 2.36 million jobs. The U.S. economy has been adding jobs for 73 consecutive months.

Taking into account population growth and an aging work force, economists at the San Francisco Fed estimated the “break-even” point — growth that is sufficient to keep the jobless rate from rising — now ranges from 50,000 to 110,000 jobs a month. Federal Reserve Chairwoman Janet Yellen said the U.S. economy needs to create 100,000 net new jobs monthly to absorb new entrants to the labor market.

The biggest lingering weakness in the employment picture is in the millions of people who have left the labor force entirely — not just in October, but over the last seven years. Only 59.7 percent of American adults were employed in October, down from 62.9 percent at the start of 2008.

A big part of that decline is demographic: baby boomers hitting retirement age. But millions of people dropped out of the labor force entirely during and after the recession and have not returned to the work force.

Meanwhile, the employment-to-population ratio for prime age workers reached 78.2 percent, its highest level since 2008; and that was one of the best numbers in this month’s report; it is up a full percentage point in the past year.

Now, it still indicates that there is some slack in the labor force – this number could climb to over 80%, but still it is solid. Also, the 25 to 54 participation rate increased in October to 81.6%, an indication that the demographics of the workforce is changing, with older workers retiring and younger workers filling available jobs.

And thus, we are starting to see some increase in wages…, finally. Average hourly earnings climbed by 0.4% during the month, which was better than the 0.3% gain expected. This measure of wages is growing at a 2.8% pace year-over-year. The average U.S. employee earned $25.92 an hour in October, up 10-cents.

Non-managers — what the BLS calls “production and non-supervisory employees” — saw their earnings rise a more modest 2.4 percent, but they too are seeing gains that are running well ahead of inflation. With the PCE inflation gauge at 1.7%, most workers are seeing real gains in wages; for most workers, this means money in the bank.

For much of the past seven years of the economic recovery, the focus has been on just adding jobs, now we are starting to see a shift, where the jobs are a slightly better quality. Most of the employment gains in the past year have been in full-time jobs. Employers are starting to realize they need to pay better to attract and retain good workers. As workers earn wages, they will spend more, creating a virtuous cycle through the economy.

Meanwhile, the prospects of job seekers are improving: More than one in four unemployed workers found a job in October. The so-called job-finding rate fell early this year but has since rebounded. ZipRecruiter, which distributes job postings primarily from small and midsize businesses, reported a substantial jump in listings last month.

The October report showed the average workweek was unchanged at 34.4 hours. Typically, the work week goes down when there is a natural weather event such as Hurricane Matthew, although I have not seen anything to show the hurricane adversely affected job growth.

Health care companies, white-collar professional outfits, and financial firms led the way in job creation. The manufacturing sector lost 9,000 jobs last month. The retail sector lost 1,000 jobs last month. Retailers hired seasonal workers in October at a slower pace than the last two years.

Typically, retail companies start hiring for the holiday season in October, and increase hiring in November. This might be an early indicator of the holiday shopping season. Private payrolls increased 142 thousand. Government added 19,000 jobs.

A broader measure of unemployment, known as the U-6, fell to 9.5% from 9.7%, touching the lowest level since May 2008. The so-called U-6 rate includes part-timers who can’t find a good full-time position and discouraged job-seekers who’ve recently given up looking for work. Even as full-time positions have increased, nearly 6 million Americans are working part-time because they can’t find full-time work, a figure that has stalled out over the past year. At the same time, we are seeing a major shift in how people work.

The winners and losers in the economy have traditionally been easy to identify. If you had a full-time job, you won. A full-time job provided the steady income needed to support our traditional version of the American Dream. A full-time job was also the only way to access important employer-provided benefits, such as health insurance and a pension, as well as protections against workplace injuries, discrimination, and harassment. Whereas a part-time job was on the fringes of the labor market.

One of the things workers learned in the downturn was that a full-time job was not a guarantee of job security. This, in turn, led to more workers engaging, whether involuntarily or voluntarily, in the gig economy. And it turns out the gig economy is just fine for many workers.

Workers with specialized skills, deep expertise, or in-demand experience win in the gig economy. They can command attractive compensation, garner challenging and interesting work, and secure the ability to structure their own working lives. On the other end of the spectrum, retail and service workers currently in low-skill, low-wage jobs can also win in the gig economy.

Consider – a driver for Uber is basically a taxi driver; they are contractors with low pay and no benefits, no overtime or minimum wage, and no access to unemployment insurance. But there are many more people willing to be Uber drivers than taxi drivers, in part because they can control when and how much they work.

There will always be bad jobs or low-paying jobs – the gig economy doesn’t change that reality. However, the gig economy gives low-skill workers a way to move from bad jobs to better work. It’s not a sufficient change, but it’s moving in the right direction.

Atlanta Fed President Dennis Lockhart in a speech this morning, called the jobs report a “solid” outcome. The Fed has been signaling for months that it intends to raise interest rates in December. Fed officials believe that the unemployment rate is close to the level where inflation may spike if rates don’t move up. The central bank said earlier this week that it is just waiting for “some” further evidence of a tightening labor market and rising inflation.

In his speech, Lockhart said the central bank was likely to tighten only “very gradually.” Dallas Fed President Robert Kaplan said in another speech that the case for a rate hike was strengthening and Fed Vice Chairman Stanley Fischer said the labor market is strong and the central bank could overshoot its goals.

The most recent data on inflation shows “core” PCE, the Fed’s preferred inflation measure, rose 1.7% year-on-year in October. In October, average hourly earnings rose 2.8% over the prior year, the fastest pace since the recession; this means workers are seeing actual improvement in earnings, for the first time in a long time.

This means the Fed is going to be concerned about inflation, and will have a hard time justifying low rates, better suited for an emergency. It doesn’t necessarily mean the Fed should raise rates, but it likely means they will.

The S&P 500 fell nearly 0.2 percent and extended its losing streak to nine sessions, the longest in almost 36 years. During that streak, the index has fallen nearly 3 percent. Although I tend to believe Wall Street was more concerned with the upcoming election than the jobs numbers.

Friday’s jobs report is, of course, the last one before the presidential election on Tuesday. The Trump camp called the October jobs report “disastrous,” adding that the report, “underscores the total failures of the Obama-Clinton economy that delivers only for donors and special interests and robs working families.”

As a Democrat, Clinton benefits from continued positive news out of the US economy given that voters and markets likely see her administration continuing the economic policies of President Obama. And while economic growth as measured by GDP has been middling at about 2%, the labor market has been notably strong during Obama’s time in office.

The October job numbers will have a large effect on the election. Most voters already know what they think about the economy and whom to credit or blame for it.

So, here are some cold, hard numbers, compliments of CalulatedRiskblog: The Obama administration has added 11,243,000 private sector jobs (and is on pace for 11,864,000); the George W. Bush administration posted a net loss of 396,000 private sector jobs; the Clinton administration added 20,966,000; George H.W. Bush administration added 1,510,000; the Reagan administration added 14,717,000; and the Carter administration added 9,041,000 private sector jobs.

The main message from the payroll report: Millions of Americans have gone back to work since the last recession. Now they’re finally getting some decent pay raises.

Financial Review

Decent August Jobs Report

Sinclair Noe — September 2, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 72 = 18,491
SPX + 9 = 2179
NAS + 22 = 5249
10 Y + .03 = 1.60%
OIL + 1.34 = 45.09
GOLD + 11.20 = 1325.80

The economy added 151,000 jobs last month. The unemployment rate was unchanged at 4.9%. Hiring was expected to taper off after strong gains in July and June in which more than a half-million new jobs were created. The results missed estimates of 180,000 new jobs.

Revisions subtracted a net 1,000 jobs from overall payrolls in the previous two months. The government said 275,000 new jobs were created in July instead of 255,000. But June’s gain was cut to 271,000 from 292,000.

The government’s underemployment rate, or U-6, held at 9.7 percent, as the number of people working part-time for economic reasons rose slightly. Some 6.05 million American employees were in part-time jobs but wanted full-time work, up from 5.94 million in the prior month.

The Labor Force Participation Rate was unchanged in August at 62.8%. This is the percentage of the working age population in the labor force.

Average hourly earnings rose 0.1 percent from a month earlier to $25.73, following a 0.3 percent increase in the prior month. The year-over-year increase was 2.4 percent, compared with 2.7 percent in the 12 months through July.

The average work week for all workers decreased by 6 minutes to 34.3 hours in July, the lowest since 2014 and the first drop in six months. If the jobs market were overheating, you would expect to see longer hours, not fewer.

When you combine the shorter workweek with the very small hourly wage gain, average weekly earnings actually fell in August, dropping 0.2 percent to $882.54.

We have now seen job growth for 71 consecutive months. Private employers have added 15.1 million jobs to their payrolls in the 78 months since February 2010, an average of 194,000 jobs a month. Total employment (private plus government) has averaged 191,000 a month over that period, as federal, state, and especially local government were net job losers.

That’s right, over the past 6 years, we have lost government jobs. In August, private employers added 126,000 jobs. Federal government employment increased by 1,000, state government employment was unchanged, and local government employment rose by 24,000.

Factories cut payrolls by 14,000, the most in three months. Mining and logging, which includes the oil patch, lost another 4,000 jobs. Employment at construction companies fell for the fourth time in the last five months; down 6,000 in August. Construction firms complain about a lack of skilled construction workers, but it may also portend a slowdown. If builders have orders, they tend to find the workers.

Employment slowed at private service providers, with payrolls in professional and business services adding 22,000 jobs, but that’s the smallest gain since a decrease in January. Retail jobs rose by 15,100. Leisure and Hospitality added 29,000. Education and health services added 39,000.

While equities advanced across the board, the S&P 500 Index remained squarely within the same 1.5 percent band it has now occupied for 37 straight days. That’s the tightest since 1964 for the gauge, with volatility hovering near a two-year low.

Things were no different in the currency and bond markets, where benchmark 10-year notes got stuck in the narrowest trading range in almost a decade in August. Yields on two-year notes, the coupon securities most sensitive to Fed policy, were little changed. The 10-year note dropped, pushing yields back above 1.6%; that selloff gave a boost to the banks, especially the regionals.

The dollar fell against the world’s major currencies; with a weaker dollar, gold was higher. And the gold miners (GDX) had a great day with a 1.9% pop.  GDX had dropped from $31.79 on August 12 to $25.17 yesterday, so maybe it was due for a bounce or maybe it’s just a dead cat bounce.

Oil rallied. In addition to a weaker dollar, oil halted four days of declines as Vladimir Putin said he would like Russia and OPEC to clinch a deal to freeze supply. The Russian president said he would likely give his backing to a plan to crimp production at the Group of 20 summit in China next week, ahead of OPEC talks in Algiers at the end of September. In the prior 4 sessions, oil lost just over 9%, so even with today’s gains, oil is down a little over 6% for the week.

So, the Jobs Report wasn’t great but not really bad. The economy only needs a little over 100,000 new jobs per month to maintain current levels. If we had seen a repeat of July’s report (275,000 new jobs), we would all be talking about how the job market was overheated. Instead, we have slow, steady growth.

The average growth over the past 3 months is still 232,000. In August, the year-over-year change was 2.45 million jobs; that is a very good, steady rate of growth, much better than expected at this point in the recovery.

Was it enough for the Federal Reserve to hike interest rates in September? The unemployment rate has been in a tight range between 4.7% and 5.1% for the past 12 months. No change last month. The economy is close to full employment but we aren’t seeing inflationary pressures as a result.

Fed rate hike odds are essentially unchanged. Fed funds futures imply a 30% chance of a September rate hike, down from 34% yesterday. But December is holding steady at 60%. We know that Fed Chair Janet Yellen said at Jackson Hole that 190,000 jobs would be a clear sign of a very strong labor market, and likely reason for a rate hike.

On Aug. 30, 2016, Fed Vice Chairman Stanley Fischer said the US is “very near full employment.” He added that an interest rate hike (or a series of them) would be made based on economic signs. FOMC members keep citing the current U.S. unemployment rate (U-3) of 4.9% as evidence that the US economy has recovered from the Great Recession. Fischer says the US is near full employment. Even though the U6 unemployment still seems to have some slack. As of August 2016, it was at 9.7%.

In December 2006, the U6 hit a low of approximately 7.9%. In October 2000, the U6 was at a much lower low of 6.8%. The U6 includes the U3 plus discouraged job seekers and those working less than full time because they have not been able to find full-time employment. It seems the data is not quite confirming the full employment argument – close, but not quite.

Richmond Federal Reserve Bank President Jeffrey Lacker said today, after the jobs report that the economy appears strong enough to warrant significantly higher interest rates. Lacker argued that a range of economic analysis suggests the Fed’s benchmark overnight interest rate is too low.

Meanwhile, the last time we saw the Fed hike interest rates in an election year was 2004, and that was part of an ongoing campaign of incremental, very widely anticipated quarter point moves. If the Fed hikes rates in September, it would be a surprise to the market, despite some recent, not-quite-convincing jawboning by policymakers. If the Fed wants to raise rates in September, they need to say it strong and loud – otherwise, we’ll wait for December, which is a long way away.

I read several headlines that called today’s report disappointing, or a “whiff”. Not at all. It just wasn’t as strong as June and July. August was still a good solid month of job growth. We’ve really only had one month this year that was really bad – that was in May, when we added just 24,000 jobs, which proved to be a blip.

The labor market still has problems.  More than 6 million Americans are working part-time because they can’t find full-time jobs, a number that has barely budged so far this year. Long-term unemployment remains a problem. Millions of Americans abandoned the labor force during the recession and are now returning at a trickle; the number of jobs increase, but the number of people coming off the sidelines and looking for jobs increased as well – that’s why the unemployment rate stayed steady at 4.9% instead of dropping.

The trend lines, however, are headed in the right direction – and one month of just decent job growth doesn’t change that.

We had some other economic data this morning:
The U.S. trade deficit slid almost 12% in July to $39.5 billion as a surge in soybean shipments pushed exports to a 10-month high. Exports rose 1.9% to $186.3 billion to mark the biggest advance in two and a half years. Soybean exports tripled to $5.2 billion, largely accounting for the increase. Imports, on the other hand, fell 0.8% in July to a seasonally adjusted $225.8 billion, even though the price of oil rose for the fifth straight month and hit the highest level per barrel since last September.

The Commerce Department says new orders for manufactured goods rebounded 1.9 percent in July after a downwardly revised 1.8 percent decrease in June. It was the biggest rise since October 2015 and followed two straight months of declines. Orders for non-defense capital goods excluding aircraft increased 1.5 percent in July. Manufacturing, which accounts for about 12 percent of the economy, remains constrained by the lingering effects of a strong dollar and weak global demand, which have crimped exports of factory goods.

Hurricane Hermine made landfall on Florida’s northwest coast early this morning, toppling trees and utility lines, cutting power to tens of thousands and leaving at least one person dead. The Category 1 hurricane moved ashore from the Gulf of Mexico near St. Marks, south of Tallahassee, with sustained winds of 80 miles per hour. It was downgraded to a tropical storm as it churned slowly toward the Carolinas.

Financial Review

June Jobs Report

Sinclair Noe — July 8, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 250 = 18,146
SPX + 32 = 2129
NAS + 79 = 4956
10 Y – .02 = 1.37%
OIL + .05 = 45.19
GOLD + 4.80 = 1365.60

*S&P just shy of intraday and closing record highs, going back to May 2015.

The Jobs Report for June showed the economy added 287,000 new jobs, and the unemployment rate rose to 4.9% in June from 4.7% as more people entered the labor force in search of work. The results topped consensus estimates around 175,000.

June payrolls were boosted by the return of 35,000 striking workers at Verizon. The May report was revised from 38,000 down to 11,000. April’s gain was revised higher to 144,000 from 123,000. April and May revisions resulted in a net loss of 6,000 jobs compared to initial estimates.

Goldman analysts blamed the month to month discrepancy on weather, saying that during April and May, industries most affected by weather barely hired. Construction, leisure and hospitality and retail, added just 4,000 jobs compared to 113,000 in October through March. Construction hiring was again low in June.

Another consideration is seasonal adjustments based on the school year. In May, we saw a decline in the unemployment rate and a drop in labor-force participation. The change suggested that unemployment was falling for “bad reasons,” as discouraged workers gave up looking for work. Reinforcing that notion, the share of unemployed workers leaving the labor force spiked, on a seasonally adjusted basis.

The unadjusted data painted a different picture. When schools finish up in May, more students start looking for work, which adds people to the labor force. So normally, in data that aren’t adjusted for seasonal fluctuations, fewer people drop out of the workforce from jobless rolls during the month.

That big slowdown in dropouts we usually see in May didn’t happen this year. So when the normal seasonal adjustment was applied, it magnified the flows out of the labor force. That, in turn, helped push the unemployment rate down to 4.7 percent, even though the report only showed 11,000 new jobs created.

In June, however, the slowdown in labor-force dropouts played out more fully. The unemployment rate jumped back 0.2 percentage point, while the participation rate rose 0.1 percentage point, and the economy added 287.000 new jobs.

The numbers in May and June were probably flukes, or outliers. So we can look at broader trends. The US added an average of 147,000 jobs in the past three months. Over the past six months the economy has averaged 172,000 net new jobs per month. Clearly the trend is down from an average of 230,000 per month in 2015, but that is to be expected at this point in the economic cycle.

Taking account of the growing numbers of retiring baby boomers and the population growth, a monthly gain of 75,000 to 100,000 jobs is sufficient to keep the unemployment rate steady, while a 125,000 monthly gain is what is required to nudge it down further.

The Labor Force Participation Rate increased in June to 62.7%, up from May’s 62.6 percent, close to its lowest level since the 1970s. The U-6 unemployment rate declined to 9.6%. The U-6 rate includes the unemployed, the underemployed and the discouraged – people who have given up looking and are no longer counted in the headline number.

While the U-6 rate has made substantial gains in the past years, it remains stubbornly at pre-recession levels. There are 1.97 million long-term unemployed (that’s more than 26 weeks), and that number is up from 1.88 million May. The number of part-time workers who prefer full-time jobs fell by nearly 600,000.

And the ranks of temporary workers increased by 15,000 after falling by 19,000 in May and posting meager gains in recent months. Employers often add such contingent workers before hiring permanent staffers. And even though more than 400,000 candidates jumped back into the labor market, the low labor force participation rate indicates there is still plenty of slack.

Leisure and hospitality added 59,000 jobs in June, following little employment change in the prior month. Job gains in leisure and hospitality have averaged 27,000 per month thus far this year, down from an average of 37,000 in 2015.

Health care and social assistance added 58,000 jobs in June. Employment in financial activities rose by 16,000 in June. Employment in information increased by 44,000 in June. Employment rose in telecommunications (+28,000), largely reflecting the return of workers from the Verizon strike.

Employment in professional and business services continued to trend up in June (+38,000). The industry has added an average of 30,000 jobs per month, compared with an average monthly gain of 52,000 in 2015.

Employment in retail trade edged up by 30,000 in June, after changing little over the prior 2 months; a positive sign for consumer spending. Retail trade has added 313,000 jobs over the year.

Employment in mining continued to trend down in June (-6,000). Since reaching a peak in September 2014, mining has lost 211,000 jobs. Employment in other major industries, including construction, manufacturing, wholesale trade, transportation and warehousing, and government, showed little or no change in June.

Average hourly wages rose 2 cents to $25.61 in June. In June, the average workweek for all employees on private nonfarm payrolls was 34.4 hours for the fifth consecutive month. Hourly pay increased 2.6% in the 12 months to June 2016, matching the highest level of the recovery; that’s good enough to outpace inflation, so wage gains mean more money in workers pockets, still the gains are not enough to raise concerns about wage push inflation.

More than a dozen cities and states raised wages this year, and those higher pay floors should cause a ripple of extra earnings for people making as much as 20 percent more than the minimum. For states like New York and California, which will increase wages to $15 an hour over the next few years, those benefits will extend to people making $18 an hour. Wage increases above the minimum wage are believed to be a response to what economists call “wage compression,” which occurs when more senior employees are no longer better compensated than less senior employees.

Say you worked at a fast food restaurant in Washington, D.C., at the old local minimum of $10.50. On July 1, your hourly wage increased to $11.50. That’s great news for you, but the shift manager getting paid $12 an hour may not be overjoyed about your sudden good fortune.  There is a hierarchy in wages, but anything above the minimum is discretionary, and that ripple effect only extends to about 20% of the wage scale, give or take.

Overall, only about 3 percent of workers are paid minimum wage, according to an analysis by the Brookings Institute. But nearly 30 percent of workers make less than 1.5 times the minimum wage. By that rough calculation, about 35 million workers could see raises if the minimum increased. The minimum wage does more than simply shift the wage distribution toward higher pay — it effectively compresses the lowest wages.

The end result is a reduction in wage inequality below the median wage — a little under $30,000 for individuals. Beyond that, the impact of increases in minimum wage don’t seem to affect middle income and upper income workers.

Of course, the bigger debate about minimum wage is whether it will mean fewer jobs; the basic idea is that raising the price of anything reduces demand. But there are other factors that must be considered. When workers earn more there is less turnover and productivity increases.

Also, lower wage workers tend to spend almost everything they make, meaning the wages are circulated, increasing the velocity of the money, and stimulating the economy. The net effect is mildly positive, with a lag time.

One of the recurring complaints from employers is that they have a hard time finding skilled workers. Wages of high school dropouts are lower than they were at the turn of the century in real terms. The same goes for workers with a high school diploma, and also for workers who went to college but stopped short of a bachelor’s degree. Although some of the hardest to fill jobs in the country don’t require college degrees: chefs, butchers, bakers, mechanics and electricians. These jobs certainly require skills.

The most obvious solution would be to train workers for skills that are in demand. The problem is that we don’t see much job training in the US. According to the Organization for Economic Cooperation and Development, the United States government spends only 0.03 percent of its gross domestic product on worker training, well below budgets for other developed nations. Penny wise, pound foolish.

The Federal Reserve is back in the game. That’s the simple message from the strong June jobs report. That said, don’t expect a rate hike this month. The May jobs report appeared to spook the central bank and convinced investors the Fed would keep rates on hold all year. Though most Fed officials have continued to signal a desire to raise rates at least once in 2016, minutes from the Fed’s June 14-15 meeting, released on Wednesday, showed the Federal Open Market Committee “generally agreed” they needed to see more data before contemplating another hike.

The Fed won’t overreact to one strong report any more than it would to a single weak one. The Fed will almost certainly remain on hold at their next meeting on July 26-27. Prior to the report this morning, markets had priced in one rate hike through the end of 2018; now the CME Fedwatch calculates a 23% chance of a rate hike by December.

Financial Review

The July Jobs Report

Sinclair Noe — August 7, 2015

Podcast: Play in new window | Download (Duration: 13:14 — 12.1MB)

Subscribe: iTunes | Android | RSS

DOW – 46 = 17,373
SPX – 5 = 2077
NAS – 12 = 5043
10 YR YLD – .06 = 2.17%
OIL – .79 = 43.87
GOLD + 4.30 = 1094.80
SILV + .15 = 14.91

The economy added 215,000 net new jobs in July. The unemployment rate was unchanged at 5.3%, the lowest level in 7 years. The May and June reports were revised slightly higher, employers added 6,000 more jobs in May and 8,000 more in June than previously estimated. The U.S. has added an average of 235,000 jobs a month since May, up sharply from a 195,000 pace in the first quarter. Last year, the economy added 240,000 jobs a month on average between January and July. This year that figure is 178,000.

Most industries added workers, with the notable exception of the mining/logging sector which includes jobs in energy or oil fields, which lost 4,000 jobs. Professional and business services added 40,000, education added 37,000, retailers hired 36,000 people, leisure and hospitality gained 30,000, health-care companies boosted payrolls by 28,000, financial firms tacked on 17,000 workers, transportation and warehousing increased by over 14,000, wholesale trade added more than 6,000, and manufacturers increased employment by 15,000.

Construction added 6,000 jobs, but it is interesting to break out this data. The slump in energy sector investment continues to lead to job loss in the nonresidential construction activity. Outside the energy sector, construction is finding it difficult to find properly credentialed workers. The public sector added 5,000 jobs, while private employers bolstering payrolls by 210,000.

The average hourly wage paid to American workers rose 0.2% in July, or 5 cents to $24.99. Average hourly earnings of private-sector production and non-supervisory employees increased by 3 cents to $21.01 in July. Over the past year wages have risen a mediocre 2.1%, well below long-term averages; closer to 3.6%. The average workweek also grew slightly to 34.6, another sign the economy is maintaining some momentum after a slow start to the year. We have been adding jobs without seeing any significant impact on wage-push inflation.

Total employment is up 12.4 million from the employment recession low. Private employment is up 13.0 million from the recession low. In July, the year-over-year change was just over 2.9 million jobs. And we found an interesting breakout of private sector job growth at CalculatedRiskblog.com broken down by presidential administrations over the past 40 years. Under President Carter’s administration the economy added 9,041,000 private sector jobs. During the Reagan administration, the economy added 14,717,000 jobs. Under the George HW Bush (Bush the senior) administration, we added 1,510,000 jobs. The Clinton administration added 20,955,000 private sector jobs. The George W Bush administration (Bush the junior) posted a net loss of 463,000 private sector jobs. The Obama administration has seen a gain of 8,750,000 private sector jobs, so far.

A big difference between the presidencies has been public sector employment. The public sector grew by more than 1 million jobs under the terms of Carter, Reagan, Bush 41, Clinton, and Bush 43. However the public sector has declined significantly during Obama’s term. These job losses have mostly been at the state and local level, but more recently at the Federal level. This has been a significant drag on overall employment.

Clinton’s two terms were the best for both private and total job creation, followed by Reagan’s second term. Obama’s second term is on track for second best private job creation, but since there were not many government jobs added, it’s only on pace for third best total job creation.

Today’s labor-market report showed that the number of full-time U.S. jobs as a share of total employment rose to 81.7%, the highest level since November 2008. This is good news about the quality of jobs being created. The pool of Americans working part-time for economic reasons fell last month by 180,000 to 6.3 million. That was the lowest level since September 2008. Additionally, the number of people working part-time for non-economic reasons plunged by 589,000, the biggest decline since June 2012.

In July, 1.9 million persons were marginally attached to the labor force, down by 251,000 from a year earlier. These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Among the marginally attached, there were 668,000 discouraged workers in July, little changed from a year earlier. The U-6 unemployment rate declined slightly to 10.4%. That’s the lowest level in eight years. U-6 includes unemployed, underutilized, and discouraged workers.

The participation rate remained stuck at 62.6%, a 38 year low; this is a measure of the percentage of able-bodied Americans who have a job or are seeking one, and suggests the labor market is doing little to draw people off the sidelines. One reason for the low participation rate is the graying of the Boomer generation. Some 10,000 boomers retire each day, whether they want to or not. For a better read, we can look to the 25 to 54 age group, and we see a very slight decline to 80.7%, indicating that there is still quite a bit of slack in the labor market. This slack means that the unemployment rate can probably drop below 5% before the slack is removed and we start to see any wage push-inflation; maybe quite a bit below 5%.

Among the major worker groups, the unemployment rate for teenagers declined to 16.2 percent in July. The rates for adult men (4.8 percent), adult women (4.9 percent), whites (4.6 percent), Asians (4.0 percent), and Hispanics (6.8 percent) showed little or no change. The unemployment rate  for blacks fell to 9.1%, its lowest mark since April 2008. As recently as May, the rate was over 10%. Blacks have suffered from the highest rates of unemployment. More job growth for blacks bodes well for the rest of the job market.

So, the jobs report came in as expected – no surprises. The economy, and the job market, are improving at the same steady, consistent, gradual rate they have been for half a decade or so. Still this was a solid jobs report. The labor market continues to show solid gains. The Fed has said they just need to see “some” improvement in order to hike interest rates.  That should make it easy for the Fed to hike interest rates sooner rather than later.

With the Fed’s next policy meeting just over a month away, and only one more jobs report to be issued before then, Janet Yellen has a looming deadline, and nothing in today’s report is likely to change the minds of policymakers. This does not mean that a September rate hike is a lock; they might delay if the August jobs report shows a horrible breakdown; they might delay a rate hike if we see the bubble pop in China; they might delay if something unexpected happens; or they might just delay because there is still plenty of slack in the labor market and no signs of inflation.

Indeed, you could make the case for deflation; and that’s what Bill Gross, fund manager at Janus Capital did this morning.  Gross pointed to how the CRB Commodity Index isn’t just at a cyclical low, but lower than in 2008 when Lehman Brothers went bankrupt. He says the commodity markets tell a truer story of what is happening in the economy because they are subject to real-time supply and demand. Oil, metals and crops have plunged as China’s economy has decelerated and gluts in multiple markets have further depressed prices. Still, Gross expects the Fed to increase rates in September.

But should they? It seems like most analysts and fed funds futures are expecting a rate increase in September, but is it the right thing to do? The unemployment rate has dropped to 5.3% but I don’t hear anyone saying we have achieved full employment. Wages have remained sluggish, and that’s being kind. If the Fed takes its foot off the gas too soon, people who might otherwise have found jobs will be left behind. And if the Fed acts now, it might imply that they consider a 2% inflation target is a ceiling on inflation; a point that confines the upper bound. Who says we can’t live happily with inflation just a little higher than 2%? Also, a hike would strengthen the dollar, putting further pressure on exporters, and really putting pressure on emerging market economies.

But there are further considerations in the timing of a rate hike. The Fed is not supposed to be political; don’t believe it. But they don’t want to appear political. If the Fed waits until next year and inflation heats up, they might have to hike rates fast, maybe a bigger rate hike; slamming the brakes on the economy – right before the elections. Or they could make small, incremental hikes, maybe just 25 basis points, starting in September, just tapping the brakes, just a little.

Beyond the politics, the Fed just wants to get a hike done. Zero Interest Rate Policy was implemented during a crisis; we are no longer in emergency mode. It may be time to return to normal. That still doesn’t guarantee a hike in September, something could happen before then; a black swan event could throw us back into emergency mode. But absent that, the Fed wants to increase rates because that gives them some flexibility in case something bad does happen further down the road; they want some tools in their toolbelt.

For Wall Street, good news on the jobs front is bad news for equities. The Dow Industrials were down again today; that makes 7 straight losing sessions, the worst losing streak since the summer of 2011. US investors poured $20.3 billion into low-risk money market funds this week, their biggest inflows since December 2013. Stock funds saw $3.6 billion in outflows, their fourth straight week of withdrawals. So, it looks like the market and investors are coming to terms with, and pricing in, the idea of a Fed rate increase.

Financial Review

Thursday Jobs Report

Sinclair Noe — July 2, 2015

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

Subscribe: iTunes | Android | RSS

DOW – 27 = 17,730
SPX – 0.64 = 2076
NAS – 3 = 5009
10 YR YLD – .02 = 2.39%
OIL – .03 = 56.93
GOLD – 2.60 = 1166.70
SILV + .13 = 15.78

Normally, we get the jobs report on the first Friday of the month, but the stock and bond markets will be closed tomorrow for the 4^th of  July holiday; so, it’s a Jobs Report Thursday.

The US economy created 223,000 new jobs in June. The unemployment rate dropped from 5.5% to 5.3%; that’s the lowest level in 7 years. Employment gains for May and April were revised lower by a combined 60,000.  Most estimates were calling for 225,000 new jobs last month, so today’s report was right in line. Total employment is now 3.5 million above the previous peak.  Total employment is up 12.2 million from the employment recession low. The economy has produced at least 200,000 jobs in 13 of the last 15 months.  The economy added 2.9 million jobs in the past 12 months.

The participation rate – the percentage of workers in a job or actively seeking a job – dropped three ticks to 62.6%, as 432,000 people dropped out of the labor pool. And this explains why the unemployment rate dropped to 5.3%, because fewer people were looking for work.  Part of the reason may be demographics, as the Boomer generation moves into retirement; so, to get a better indication we can look at the 25-54 age group, which is considered prime years for working – too old for school and too young for retirement; among this age group, the participation rate dropped to 80.8% in June from 81%. This is not a good sign.

The decline in the participation rate is even more disconcerting because June tends to be a month when people move into the labor force; teenagers get summer jobs, recent college grads throw the CVs out on the internet, teachers take work between semesters. In the last decade, an average 1.35 million workers have entered the labor force every June on a not seasonally adjusted basis. This year, the gain was 564,000. That translates into a decline for the seasonally adjusted data, since the monthly increase was much less than it usually is. One theory is that the cold winter weather resulted in snow days, and many students and teachers were still in the classrooms in June. If that is the case, we might see a pop in the July numbers. Or it might be a data glitch, which will be corrected in revisions. Or not. It might just be an indication that there is still way too much slack in the labor force. Unless this trend changes, the shrinkage in the labor force implies that the United States’ economic potential is lower than it would be if there were millions of people ready to jump back into the work force if there were jobs on offer. (And no, I do not know how they count recently announced presidential candidates. Clearly that is a number that could skew results.)

So anyway, the labor force participation rate is at 62.6%, and that is the lowest level since October 1977. It is interesting to look at the changes between the 1977 labor market and today. The biggest difference is in the number of women employed, from 36 million in October 1977 to 54 million now. Male employment has also climbed, but not as much. So as the female labor-force participation rate has climbed, the male rate has dropped, from 80% to 72%. And whereas the male unemployment rate was much lower in 1977, now there’s gender parity. What hasn’t changed is the racial imbalance. The black unemployment rate is about double the white unemployment rate, then and now. The other big change is that in 1977 there were more people working in manufacturing, more than 19 million compared to a little more than 12 million today. Construction is up, a bit; transportation and public utilities have grown the most by percentage. But the big difference is in the service sector, which has exploded from around 15.5 million in October 1977 to almost 62.5 million today.

And that isn’t the only way the labor market has changed in the past 38 years; work has become untethered from the office thanks to the technological revolution; that has led to an explosion in freelance or a more flexible workforce.  Imprecise terms like “temp,” “contingent,” and even “freelance” fail to reveal the shift taking place; there is a new category of “on demand” workers. The rise of the on-demand workforce encompasses far more than Lyft, its rival Uber, or similar start-ups like Airbnb, for overnight stays, that allow for new “sharing” sources of income. And it’s hardly a millennial phenomenon, although younger workers do have the highest rates of “freelance” work, and generally hope to keep it that way. It’s possible that “work” is also coming in multiple forms, from multiple sources.

Of self-described freelance workers, 27% have a traditional job and “moonlight,” and another 18% do a mix of full-time and freelance work, whether by choice or necessity. The classification of people as either employees or independent contractors for legal purposes is also not keeping up with reality. And here’s a shocker, the governmental agencies assigned with tracking this workforce, haven’t kept up. The Labor Department’s “Contingent Work Supplement” was designed to track some of the indicators, but they ran out of money in 2005. So, the reality is we just don’t know.

The number of people working part-time for economic reasons decreased from 6.6 million in May to 6.5 million in June. An alternate measure of unemployment known as U-6, which includes underutilized workers, dropped to 10.5%, the lowest level since July 2008.

Most industries added jobs in June, with the notable exception again of energy producers; the mining and logging sector, which includes jobs in the oil fields, lost 3,000 jobs last month; the unemployment rate in the mining and gas industry now hovers around 8.9% – a sharp increase from 2.5% one year ago. White-collar workers in fields like finance, insurance, software and marketing have been in high demand lately, a turnaround from the early days of the recovery when many new jobs tended to be in low-wage sectors like retailing and restaurants. Professional and business services added 64,000 jobs last month; since last summer, for example, the financial sector has added more than 100,000 new positions; the banking and finance industry now boasts the lowest unemployment rate, 2.5%, of any industry tracked by the Bureau of Labor Statistics.

Taking a look at other industries: education and health services added 50,000 jobs, retail added 33,000, leisure and hospitality gained 22,000, financial activities 20,000, transportation gained 17,000, information added 7,000, and manufacturing added 4,000. Utilities lost a few hundred jobs and mining down 3,000. Government jobs both at the federal level and the state and local level were flat.

Retailers hired 33,000 people in June after taking on 26,000 new workers in May. Over the past year the industry has filled some 300,000 positions to boost overall employment to a record 15.7 million. Retailers are hiring like they expect sales to pick up, even though we haven’t seen an indication that sales are actually picking up. And that goes in line with another economic report this morning showing orders for goods produced in U.S. factories fell 1% in May. Orders for durable goods, products meant to last at least three years, fell 2.2%, compared with a prior estimate of a 1.8% drop. Meanwhile, orders for nondurable goods increased 0.2%. Last week the Commerce Department reported consumer purchases rose 0.9 percent in May, the biggest gain since August 2009

Average hourly earnings for all employees on private nonfarm payrolls were unchanged at $24.95. Weekly hours were unchanged for the fourth month in a row, at 34.5. Over the year, average hourly earnings have risen by 2.0 percent. Any increase is good, but the pace is discouraging because it’s still far below the 3% to 4% wage gains that were common in the mid- to late-1990s.Every month for the past 3 years the economy has added at least 100,000 new jobs, but wage growth shows no pulse, no signs of life. This would suggest that the unemployment rate could go much lower before we need to worry about wage push inflation.

So, the economy added 223,000 jobs but there was weakness in the participation rate, and wages, and the prior 2 months were revised lower. And that means nothing in today’s jobs report is expected to dramatically change the Federal Reserve’s outlook for the economy or a possible rate hike in September. Still, traders who use fed funds futures contracts cut their expectations of a September move down to 17% and even lowered their expectations of a move by December a bit. The Fed has four policy meetings left this year: July, September, October and December. If you think the Fed will hike rates in September, today’s report probably did not change your outlook. If you think the Fed will wait till December or maybe next year, again, no need to rewrite your thesis.

The Fed seems to think full employment is when the unemployment rate hits about 5% to 5.2%; that’s the most jobs we can have while keeping the inflation genie in the bottle. But when you look at the shrinking participation rate, and weak wages, and underutilized workers, and temps, and part-timers – maybe 4% unemployment rate is closer to full employment. Nobody knows how low unemployment can go before inflation picks up. Everybody, including the Fed, is just guessing. The only thing we do know is that we’re not there now. And that’s why there’s a strong case for the Fed to wait.

Today’s report: 223,000 new jobs in June. The unemployment rate 5.3%. Flat wages, declining participation. Decent, not great.

Financial Review

Good Jobs Report, Not Liftoff

Sinclair Noe — June 5, 2015

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

Subscribe: iTunes | RSS

DOW – 56 = 17,849
SPX – 3 = 2092
NAS + 9 = 5068
10 YR YLD + .10 = 2.40%
OIL + .96 = 58.96
GOLD – 4.10 = 1173.30
SILV + .05 = 16.23

The economy added 280,000 jobs in May. The unemployment rate increased to 5.5% as more people entered the labor force. Average hourly earnings rose by 8 cents to $24.96. Over the year, average hourly earnings have risen by 2.3 percent. March and April were revised up by a combined 32,000 jobs.

The headline of 280,000 jobs added in May is the strongest number since December. April’s numbers were revised down by 2,000 to 221,000, and March was revised up from 85,000 to 119,000 (so it went from very bad to just a little bad). The economy has added an average of 217,000 jobs a month so far this year. Still, job creation has also slowed from the second half of 2014, when the economy added an average of 281,000 jobs a month. The US economy has recorded 63 straight months of private sector jobs growth. Previous record was 51 months from 1996-2000. Total employment is now up 12 million from the employment recession low and up 3.3 million from the previous peak. Private employment is up 12.6 million from the employment recession low and up 3.8 million from the previous peak. Typically, government will increase jobs in a downturn but that did not happen over the past few years – just the opposite.

Perhaps the best news was in the survey of American households that determines the unemployment rate. The number of people in the labor force rose by almost 400,000, although not all of those people found a job. Still, it was enough to push the unemployment rate higher. The Labor Force Participation Rate increased in May to 62.9%. This is the percentage of the working age population in the labor force.   A large portion of the recent decline in the participation rate is due to demographics. And there are 2.5 million long-term unemployed workers who still want a job.

High-tech firms, health-care providers, hotels, home builders and retailers all added workers. Only the energy industry cut jobs. Here’s the breakdown: Mining and logging, which includes oil drilling and exploration lost 18,000 jobs; education and health services added 74,000; professional and business services added 63,000 jobs; leisure and hospitality added 57,000; retail trades added 31,000; government added 18,000; transportation and warehousing added 13,000; financial activities added 13,000; construction added 17,000; and manufacturing added 7,000. One discouraging stat is that about 20,000 jobs were temporary. That means employers are still reluctant to take on permanent positions or convert temps to permanent jobs. That is a continued sign of slack.

The alternate measure of labor underutilization, U-6, was unchanged at 10.8%. In May, some 17.3 million people were classified as unemployed, involuntary part-time workers or the marginally attached. When we talk about slack in the labor market, this is where we find it, in the difference between the headline unemployment rate of 5.5%, known as the U-3, and the 10.8% unemployment rate of U-6. For May, the difference is 5.3%, but it has been as high as a 7.5% spread. We will likely continue to see slack until the spread drops down to about 3%; meaning we probably won’t see higher wage pressure until these workers find meaningful employment. Wages can go up, but it is unlikely wages would go up fast.

Average pay rose 8 cents to $24.96 an hour, pushing the increase over the past 12 months up to 2.3%, so wages are just barely staying ahead of inflation. That’s the highest rate since mid-2013, suggesting the increase in hiring over the past few years is finally forcing companies to pay a little more to attract workers. The Labor Department estimated that average hourly earnings for production and nonsupervisory employees increased to $20.97, up 0.3 percent from April and 2 percent from a year earlier. That pace falls far short of the pre-recession average of 3.4 percent.

And workers are not really seeing income gains; median inflation-adjusted household income is down 5.3% in the past 8 years, slipping from $54,674 to $51,939. Education and skills are big factors; median inflation-adjusted household income for college educated workers $45,400, for workers with high school education it drops to just $25,900. There is even some pent-up demand for workers with skills, such as machinists, engineers, and information and technology workers.

The May Jobs Report looks solid but we should probably consider some seasonal factors at work; specifically, young people entering the workforce. People under the age of 25 accounted for 96% of the 397,000 increase in the labor force in May, which includes those looking for work as well as those working. They accounted for 76% of the actual net new jobs. So, most of the gain is not attributable to discouraged workers suddenly deciding to look for a job, but rather young workers just entering the labor pool.

May is a time for new grads to enter the workforce, and the Class of 2015 faces some challenges. Unemployment of young graduates is extremely high today, but not because of something unique about the Great Recession and its aftermath that has affected young people in particular. Rather, it is high because young workers always experience disproportionate increases in unemployment during periods of labor market weakness. Unemployment and underemployment rates among young graduates are improving but remain substantially higher than before the recession began. For young college graduates, the unemployment rate is currently 7.2 percent (compared with 5.5 percent in 2007), and the underemployment rate is 14.9 percent (compared with 9.6 percent in 2007). For young high school graduates, the unemployment rate is 19.5 percent (compared with 15.9 percent in 2007), and the underemployment rate is 37.0 percent (compared with 26.8 percent in 2007).

The current unemployment challenges for young workers did not arise because today’s young adults lack the right education or skills. Rather, it stems from weak demand for goods and services, which makes it unnecessary for employers to significantly ramp up hiring. And if recent grads don’t jump into a job, if they are idled for some period of time, they risk missing the two main paths – receiving further education or getting more work experience – that enable future career success. Wages of young college and high school graduates are performing poorly, and are substantially lower today than in 2000. The real (inflation-adjusted) wages of young high school graduates are 5.5 percent lower today than in 2000, and the wages of young college graduates are 2.5 percent lower.

Graduating in a weak economy has long-lasting economic consequences. Economic research suggests that for the next 10 to 15 years, those in the Class of 2015 will likely earn less than if they had graduated when job opportunities were plentiful.

Something else happened in May; the number of self-employed workers surged by 370,000 last month, according to the U.S. Labor Department’s survey of households. And nearly 1 million workers have gone to work for themselves since just February. Now, this is a volatile statistic because the Labor Department puts out two surveys: the establishment survey, which gets most of the attention including the headline number of jobs created, and the household survey, from which the unemployment rate is derived. Some of the strength could be attributed to a reversal from losses during a cold winter. And also self-employment can mean lots of things: someone who works as a consultant while looking for more stable employment, or maybe they saw their regular job cut to independent contractor status so the employer could avoid taxes or benefits; or maybe someone who struck out in a more typical job search and now they are freelancing; or it could be someone who starts a business in hopes of success on their own terms.

If we are truly seeing a return to entrepreneurship, that would be a very positive sign. It takes a lot of confidence to start your own business. It also requires a healthy dose of crazy, because most start-ups will fail or just muddle along. The next Facebook or Uber is the exception, not the norm. And for those hoping to have the next big thing in start-ups, keep in mind that much of the Silicon Valley start-up culture only exists because there’s so much QE fueled free money for rich people sloshing around. And that spigot could soon be closed.

Wall Street was paying particular attention to the jobs report because of its potential impact on the Fed’s decision about when to raise interest rates above their near-zero levels. A Fed rate hike later this year is still on. The payroll report might give the Fed justification to hike rates, even though the first quarter GDP contracted 0.7%. Yesterday, the International Monetary Fund asked the Fed to hold off raising rates until the first half of 2016 because of disappointing growth and a lack of inflation. So we have weak economic data offset by what looks like a stronger job market.

The Fed fund futures contract is now signaling the first rate hike occurring in October, two months ahead of what had been expected prior to the release of the jobs report. Traders see a 53-percent chance that the first Fed rate hike will come at the Fed’s second-to-last meeting of the year, and just a 34-percent chance of a September rate hike. The bond market responded with a spike in yields. The strength in the May jobs report puts upward pressure on the entire yield curve; the yield on the 10 year Treasury note spiked up to 2.4%; and the dollar hit a 13 year high against the Japanese yen, with the Dollar index moving above 96.

We still have large parts of the economy stuck in the mud, even as some argue that today’s jobs report shows that the economy has reached escape velocity. Today’s report was good but not conclusive.

Financial Review

April Jobs Report in Moderation

Sinclair Noe — May 8, 2015

 

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

Subscribe: iTunes | RSS

DOW + 267 = 18,191
SPX + 28 = 2116
NAS + 58 = 5003
10 YR YLD – .03 = 2.15%
OIL + .49 = 59.43
GOLD + 5.00 = 1187.20
SILV + .13 = 16.43

The economy added 223,000 new jobs in April. The unemployment rate dropped to 5.4% from 5.5% to mark the lowest level since mid-2008. The results were fairly close to estimates. Not too much, not too little. Wall Street actually liked the “Goldilocks” report and the Dow jumped to triple digit gains; the bond market, which is usually only happy when it rains saw strong initial selling, but then pushed bond yields slightly lower, and the dollar spiked briefly then held near lower levels. Once again we are reminded that the jobs report is probably the single most important economic report to follow because it affects almost everything else in the economy.

The number of jobs added in March was revised down to 85,000 from 126,000, reflecting the smallest increase in almost three years. The February jobs report was revised higher by 2,000 from 264,000 to 266,000. Payrolls for February and March were revised down by a combined 39,000. Typically, revisions add to prior months numbers. In 2014, for example, the government upgraded every monthly employment report except for one to show stronger job creation that originally estimated. The past three months have delivered average job gains of just over 191,000 jobs per month. That’s down from last year’s 260,000 average, but still decent. Another consideration: more people are hired in April than any other month of the year if seasonal adjustments are thrown out. And the number of jobs created in April with seasonal adjustments has exceeded the annual average in seven of the past 10 years.

By the way, revisions are to be expected. The Bureau of Labor Statistics’ monthly Employment Situation presents numbers compiled from two data sources: the payroll records of some 143,000 businesses and a telephone survey of about 60,000 households. The numbers are then seasonally adjusted. And over the next two months, the BLS revises the numbers “to incorporate additional sample reports and recalculated adjustment factors,” which can easily lead to big shifts in the data. It doesn’t mean the data is wrong, it just means that it is an almost impossible task to count all jobs every month with absolute accuracy, and this is a more or less accurate measure.

The average wage of American workers rose by 3 cents to $24.87 an hour in April, or a 0.1% increase. The increase means wages in the past 12 months have risen at a 2.2% rate. The amount of time people worked each week was unchanged at 34.5 hours. Workers are getting slightly higher wages on average, but the typical worker doesn’t feel any richer after taking inflation into account. Anemic wage growth has been one of the disappointing themes of the post-financial crisis recovery.

Last week we saw a report showing a big 0.7% Q1 jump in the employment cost index, and that had some people suggesting that the US economy has gone “beyond full employment.” Today’s numbers don’t show hardly any wage pressure. Despite the best year for hiring in more than a decade, the share of the nation’s income going to workers remains near an all-time low. You need strong wage increases to create a wage/price spiral, and the 0.1% increase in hourly wages wasn’t strong. One side note: the April report looks only at hourly wages, and not the wages of salaried workers.

Worker productivity slipped in the first quarter while labor costs surged, according to a Labor Department report Wednesday. The report marked only the third time in 25 years that productivity has suffered back-to-back quarterly declines. Lower productivity is usually a negative for the economy because it suggests that workers are becoming less efficient. It might also reflect weak capital expenditures by businesses.

Private sector jobs grew by 213,000, and the government sector added 10,000. Professional and business services added 62,000 jobs, health services added 61,000; mining and logging, which includes oil exploration and drilling, lost 15,000 jobs – reflecting ongoing weakness due to lower oil prices. Manufacturing employment was flat, reflecting the lingering effects of a stronger dollar that has curbed the sale of U.S. exports by making American goods and services more expensive.

Construction added 45,000 – construction jobs are a particularly positive sign of economic growth, but it might just be a sign of pent-up demand following a harsh winter. Home sales staged a big comeback in March, a possible sign that more Americans are eager to make expensive purchases. People bought existing homes at an annual pace of 5.19 million. The National Association of Realtors said those gains are expected to extend into April based on figures on signed contracts released by the Realtors. This could help spur additional growth in the construction sector as builders seek to meet demand. The combined employment in residential building construction and housing-related specialty trades posted the biggest advance since January 2006.

Among the major worker groups, the unemployment rate for Asians increased to 4.4 percent. The rates for adult men (5.0 percent), adult women (4.9 percent), teenagers (17.1 percent), whites (4.7 percent), blacks (9.6 percent), and Hispanics (6.9 percent) showed little or no change in April.

The rapid gains in employment over the past year, however, still have not made a huge dent in the number of people forced to work part time or those who have been unemployed for longer than six months. Some 6.6 million Americans can only find part-time jobs and while that is historically high, it is down from a peak of 9.2 million in 2010. Total employment is up 3 million from the peak and up 11.7 million from the employment recession low. Still, 2.5 million have been out of work for at last half a year. And there are about 15 million unemployed Americans who say they would like a job, even though they might not be actively looking.

The BLS has six measures of unemployment, numbered U-1 through U-6. U-3 sits in the middle and is the official rate. But U-3 leaves out a few sizable groups, “discouraged workers,” “marginally attached” and “part time for economic reasons.” Broadly speaking, this is a group that’s working either intermittently, or not at all and not even looking. The U-6 captures all those folks, and is the broadest measure of unemployment. It hit 10.8% in April, down from 10.9% a month ago and 12.3% a year ago. Think about how different our national conversation would be right now if we were talking about a 10% unemployment rate instead of a 5% rate.

The Labor Force Participation Rate increased 0.1% in April to 62.8%. This is the percentage of the working age population in the labor force. The higher number would indicate that more people are looking for work, or at least that employers are cutting fewer and fewer jobs. A large portion of the recent decline in the participation rate is due to demographics, as the boomer generation moves into retirement. The four-week average of the number of Americans applying for unemployment benefits fell to 279,500 last week, the lowest level in 15 years, according to the Labor Department. This figure tends to anticipate stronger hiring, though it’s possible that companies facing uncertainty are refraining from layoffs while delaying hiring until they get a better sense of the economy.

The unemployment rate and the Labor Force Participation Rate only tell part of the story, so we look to a subset, the participation rate and employment population ratio for people age 25-54, the prime working years. The 25 to 54 participation rate increased in April to 81.0%, and the 25 to 54 employment population ratio was unchanged at 77.2%; that’s still lower than it was at the lowest point of the previous two U.S. recessions.

All investment questions these days seem to revolve around when the Federal Reserve will raise interest rates, the April report didn’t provide any clear answers. The rebound in the April job report gives the Federal Reserve the green light to raise interest rates later this year, but no reason to rush. The data gives support to the consensus view at the Fed that weak first-quarter growth was an aberration, a blip in an otherwise decent economy. The unemployment rate at 5.4% is now closing in on the 5% rate, which many Fed officials consider consistent with full employment. Even without wages or inflation picking up, Fed policymakers will feel uncomfortable with rates sitting at zero as the unemployment rate closes in on 5 percent.

And what today’s report shows is that the economy is plodding along to recovery, slowly and consistently. It wasn’t a great report today, but it did not confirm the weakness of the March report, either. This slow improvement means the Fed can take their time before raising rates because the economy is not likely to get super-heated. So, forget about a rate increase in June, there is no need.

Many economist now think a September rate hike is possible. Fed policy makers have said some of the headwinds holding back the US will probably fade and give way to “moderate” growth; they have also said they will be data dependent; they have also indicated that it might be better to actually see the economy reach full employment before taking action – no need for a premature rate hike that might choke off growth.

Traders who use futures contracts to bet on the timing and pace of Fed rate hikes are wagering that the central bank will not move until December. Odds implied by Fed Fund futures show investors seeing a mere 7% chance the Fed raises rate in July, from 10% ahead of the jobs report. September odds slip to 22% from 27%. October odds down to 38% from 45%, and December odds to 55% from 62%. And a positive response from stock traders today says they don’t’ think today’s jobs report was strong enough to warrant quick response from the Fed. Of course, a lot can happen between now and then.