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

Inflation or the Lack Thereof

Sinclair Noe — October 22, 2014

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Podcast: Play in new window | Download (Duration: 13:21 — 6.1MB)

DOW – 153 = 16,461
SPX – 14 = 1927
NAS – 36 = 4382
10 YR YLD + .02 = 2.23%
OIL – 2.06 = 80.43
GOLD – 8.40 = 1242.00
SILV – .34 = 17.27

The major stock indices were higher this morning, then they dropped about the time were heard reports of a shooting in Ottawa Canada, near the parliament building. The shooting in the Canadian capital left a soldier dead and the city on lockdown.

The Labor Department said the Consumer Price Index edged up 0.1% last month. In the 12 months through September, the CPI rose 1.7%. The core CPI, which strips out food and energy prices, ticked up 0.1% last month, while the year-on-year change held steady at 1.7%.

Energy prices fell for a third straight month in September, with gasoline costs slipping 1.0% after dropping 4.1% in August. Food prices gained 0.3% in September and were up 3.0% from a year ago, the largest gain in nearly 2-1/2 years. Shelter costs increased 0.3% in September after rising 0.2% in August. The medical care index increased 0.2%, with prices for nonprescription drugs posting a record increase. Airline fares declined for a third straight month, while prices for new motor vehicles and apparel were unchanged. Prices for used cars and trucks fell for the fifth straight month. Wages remain stagnant. Average hourly earnings adjusted for inflation fell 0.2% in September and were up just 0.3% over the past year.

Higher rents are the main reason prices are rising at all. Excluding food, fuel and shelter costs, consumer prices dropped 0.5% at an annualized rate over the past three months. Those costs were up 0.9% over the past 12 months, close to the 0.8% increase in the year ended in February that was the smallest in a decade.

We know the Federal Reserve has a target of 2% inflation. The Fed uses a slightly different report to measure inflation, and their data shows inflation at 1.5%, well below target. The Fed had said last month that quantitative easing would probably end after its next meeting, on Oct. 28-29, and reiterated that rates would remain low for a “considerable time” after the asset purchases program ends. Federal Reserve Bank of St. Louis President James Bullard said last week that the central bank should consider delaying plans to end its bond-buying at the end of this month to halt a decline in inflation expectations. Bullard was probably just trying to talk up the markets, or jawbone; and it seems to have worked. The real question is whether the Fed will continue with QE, or maybe end QE3 and come up with some new stimulus program; after all, inflation is not preventing more stimulus. Indeed, the lack of inflation may be a bigger concern for the Fed.

Deflation can create a trap, but low inflation, or dis-inflation can create the same trap. The idea is that things will cost less tomorrow and so people put off buying, waiting for the lower prices. This also affects employment because there is less demand and fewer sales. Also, it is easier to give raises that are just a little bit less than the inflation rate; that’s like a real wage cut when adjusted for inflation. When inflation is low, the result is fewer new hires and more people laid off. And while inflation is bad for creditors, deflation is horrible for debtors. Prices and wages fall, but debt payments do not. So you’re forced to cut spending. And this cut in spending just increases the downward deflationary spiral.

For many years we were told that inflation was the problem, and it was a big problem…, 40 years ago. There are still some people fretting that, given all the money the Fed has pumped into the economy in quantitative easing, inflation is just around the corner. It might be a problem at some point in the future, but right now the concern is low inflation or deflation.

The CPI is the data that is used to determine Cost of Living Adjustments, or COLA, to Social Security benefits. Millions of older Americans will get a 1.7% increase in their monthly payments next year. The increase amounts to about $20 a month for the typical Social Security recipient. It’s the third year in a row the increase will be less than 2%. The $20 bump in Social Security payments may not sound like much, but it works out to about $240 a year, or about $500 for a married couple. The payments will hit in January.

Congress enacted automatic increases for Social Security beneficiaries in 1975, when inflation was high. For the first 35 years, the COLA was less than 2% only three times. Next year, the COLA will be less than 2% for the fifth time in six years. This year’s increase was 1.5%, the year before it was 1.7%.

The price of oil was down again today. This has been one of the biggest moves in the markets. The Department of Energy says American oil inventories increased by 7.1 million barrels in the week to October 17. Although this was somewhat smaller than the previous week’s 8.9 million-barrel build, it was still much larger than estimates of about 3 million barrels. The key question is whether this steep drop in prices is the result of cyclical factors; such as economic stagnation in Europe, the slowdown in countries such as China and Brazil; or whether it reflects a more fundamental trend.

The US is on its way to becoming energy independent, although it will take another 15 years or so. We are conserving more, thanks to ideas such as better fuel standards for cars, and at the same time we are producing more domestic oil. Next year, the US will become the top global oil producer. Nigeria used to be the fifth largest external supplier of oil to the US, but Nigeria has not exported a single barrel to this country since July. Lower oil prices will hurt some global economies, such as Russia and Iran, but it will help the economies of countries dependent on oil imports, such as Europe, Japan, India, and even the US. Moody’s estimates $1.2 billion in savings for United States consumers for each percentage-point decline in the price of gasoline every year. The drop in fuel will free up as much as $60 billion over the next year that the consumers can spend on other goods and services.

The global economics team at Bank of America Merrill Lynch weighed in with the idea that a 25 dollar drop in US crude oil prices could be good for as much as 40 basis points worth of GDP growth over two years. That’s doesn’t sound like much, until you realize the global economy is bumping along at something like 2% annual growth these days.

Of 135 US companies in the S&P 500 that have reported results, 68.9% beat expectations, higher than the rate over the previous four quarters.

Boeing said it had net income of $1.3 billion, or $1.86 a share, in the third quarter, up from $1.1 billion, or $1.51 a share, in the year-earlier period. The company blew past profit and sales estimates and raised its outlook for the full year. Shares dropped more than 4%. I don’t really understand that one, but Boeing is not a Wall Street darling this year.
AT&T reported adjusted third-quarter earnings of 63 cents a share on revenue of $32.96 billion. Analysts were looking for 64 cents a share on revenue of $33.22 billion.

Yelp is an online review site; so I’m told; I’ve never used it. Yelp reported third quarter results beat estimates but they issued weak guidance. Shares were slammed 15%.

US Bancorp said it earned a little more than $1.47 billion in the quarter, up from just under $1.47 billion a year earlier. On a per-share basis, the bank earned 78 cents, up from 76 cents. Revenue increased 2% to $4.99 billion. The results were in line with estimates. US Bank’s nearly 3,200 branches throughout the upper Midwest and West make the bank’s financial results a dispatch from the land of shale oil, which has fueled economic activity throughout the region. One sign: Lending by US bank for construction and development in the third quarter rose 27.6% from a year earlier, to $8.9 billion.

Tomorrow’s earnings calendar includes Microsoft, GM and 3M.

Yesterday we learned sales of previously owned homes just hit the highest level in a year. The latest numbers show new home sales surging August, when they hit their highest level since 2008. Consumer sentiment is hitting its highest levels since the crisis. Claims for unemployment benefits hit the lowest level in 14 years. Job openings are surging, hitting their highest levels since 2001. And the US is on track for its best year of job growth since the late 1990s. Industrial production just saw its biggest month-on-month gain since 2010. And capacity utilization hit a post crisis high. Meanwhile, inflation remains almost nonexistent, by historical standards, and is running so low that it might prompt the Fed to do something dovish. Consumer borrowing costs are falling, with mortgage rates at super low levels. And gas prices have dropped, and that should result in big savings and a little extra money in your pocket, which will be promptly spent, which will prop up the economy. The economy is actually looking pretty good.

But according to a new study by economists Emmanuel Saez of the University of California, Berkeley, and Gabriel Zucman of the London School of Economics, the middle class is getting killed. The middle-class share of American wealth has been shrinking for the better part of three decades and recently fell to its lowest level since 1940. In this case, “middle class” is defined rather expansively as the bottom 90% of all Americans. “Wealth” is the total of home equity, stock and bond holdings, pension plans and other assets, minus debt. The two big reasons why the middle class is getting clobbered? Inflation adjusted incomes have been stagnant for a few decades now, but debt has increased. Along with rising debt levels, stagnant wages have made it impossible for most families to save very much money, and so all the wealth the middle class accumulated since 1940 is gone.

If you want to make God laugh, tell him about your plans.