Tuesday, October 2, 2013 - Jobs, Jobs, Jobs

Jobs, Jobs, Jobs

by Sinclair Noe

DOW + 75 = 15,467
SPX + 10 = 1754
NAS + 9 = 3929
10 YR YLD - .10 = 2.51%
OIL – 1.57 = 98.11
GOLD + 24.60 – 1342.20
SILV + .47 = 22.81

The Labor Department reported the economy added 148,000 net new jobs in September. The change in total nonfarm payroll employment for July was revised from +104,000 to +89,000, and the change for August was revised from +169,000 to +193,000. With these revisions, employment gains in July and August combined were 9,000 more than previously reported.

The unemployment rate declined in September to 7.2% from 7.3% in August. This is the lowest level for the unemployment rate since November 2008.

The Labor Force Participation Rate was unchanged in September at 63.2%. This is the percentage of the working age population in the labor force. The participation rate looks at the people who are actually in the labor pool. As the Boomer generation retires, willingly or not, they get out of the labor pool, and this is why we've seen the unemployment rate decline, even though the economy isn't really doing a great job of adding jobs.

There are 4.146 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 4.290 million in August. This is generally trending down, but is still very high.  Long term unemployment remains one of the key labor problems in the US.

Is the Affordable Care Act causing a surge in part-time employment? Apparently not. The number of part time workers increased slightly in September from 7.91 million to 7.93 million, but that’s down from 8.6 million a year ago.  These workers are included in the alternate measure of labor underutilization (U-6) that decreased to 13.6% in September from 13.7% in August. This is the lowest level for U-6 since December 2008.

Last year, restaurants and health care accounted for about a third of all the country’s job growth. Those sectors are looking a bit sluggish in today's report. Health care posted a gain of only 6,800 jobs, compared with a monthly average this year of 22,000. And restaurants actually lost jobs, 7,100 of them, when they had been adding 25,000 a month. The health care sector had been slowing for some time, in keeping with a flattening of health care spending. Less spending on medical care may be good for the economy in the long term, but not so good for job hunter s right now. On the other hand, slowdowns in leisure and hospitality, a sector that includes restaurants and amusement parks, and in specialty construction, which includes home remodeling, point to a pullback in discretionary spending, as did a disappointing back-to-school shopping season. And then tourism took a big hit in the shutdown.

Total nonfarm employment is up 2.225 million from September 2012, and private employment is up 2.290 million. That means that over the past year governments have cut jobs. That trend changed a little in September as state and local governments added 28,000 jobs, and state and local employment is up 82 thousand so far in 2013. This would normally be a source of celebration since state and local austerity has been such a powerful headwind for the economy. But the pickup in government hiring has been more than offset by a slowdown in private job creation, to a monthly average of 129,000 in the last three months from 232,000 last December. Also, many of the government jobs in September are teachers returning from the summer break. Also, federal layoffs are continuing, and this September report was prior to the government shutdown.

The federal government employs exactly 2 percent of the people with jobs in this country, or 2,723,000; and that's before the shutdown. That's just slightly less than the number of federal workers, 2,724,000 in 1966. All these figures, by the way, are for civilian jobs. Members of the armed forces are not counted. If they were included, the contrast would be even sharper. In 1966 the Vietnam War was going on, and around 2.6 million people were on active duty. This year the figure is around 1.4 million.

Some analysts believe it's going to be very hard for anybody to figure out what the underlying strength of the job market is and we probably have to wait until December or January to figure that out; we may not get “clean” data until the Spring. Actually, the numbers we get today are reasonably “clean”; there will be revisions, of course, but the numbers are clean in that they reflect the political dysfunction that is now part of the economy. We don't have the luxury of acting as if the shutdown didn't occur. Someone looking for a job doesn't have the luxury of discounting economic conditions; they just need a job.

Still, there will be confusion, starting with the October Jobs Report, scheduled to be published November 8.The jobs report is based on two different surveys — one of households, and one of employers — and it turns out that furloughed federal government workers will be treated as unemployed in the first survey but employed in the second. In other words, the temporary layoff of federal workers will probably increase the unemployment rate, but not (at least directly) depress the payroll job growth numbers.

The key reason that furloughed federal workers affect the results of one survey but not the other has to do with the different ways the two surveys categorize workers who ultimately receive back pay.

In the survey of households, workers who were furloughed during the entire week of Oct. 6-12 (the week that the survey asks respondents about) and therefore did not work at all will be classified as “unemployed, on temporary layoff.”

That is not true in the establishment survey (which surveys nonfarm payroll employers).  In the establishment survey, people who did not work during the reference week would normally not be counted as employed — unless they receive back pay. If they receive pay for the time they were on furlough, they’re counted as employed, even though they didn’t actually spend any hours working. Congress agreed to retroactive pay for furloughed federal workers for work they missed. That means that federal workers who were not allowed to work during the shutdown will all still be counted as employed.

And then there are plenty of people who lost jobs or were furloughed who are not federal employees; private contractors or employees of businesses near government facilities. We don't know how many were furloughed or just fired.

Even before today's report the Fed was not inclined to taper its $85 billion a month of bond purchases, financed by printing money, when it meets again on October 29th and 30th. It could still begin to taper at its December 17-18 meeting, even if the labor market still appears soft, provided officials are relatively confident the outlook, as reflected in other data, is for improvement. But it will be hard to say by December whether that improvement has happened. More likely the next couple of jobs reports could be downright ugly.

Ben Bernanke could yet make the taper his last act as chairman in January, but the odds now favor it being Janet Yellen's first act as chairman, in March. She will not do so lightly; she is, if anything, more intent than Mr Bernanke on applying as much monetary stimulus as possible to get employment up faster. The decision to taper will not be an easy one. The Federal Reserve has lacked a certain clarity in defining the criteria for beginning and ending QE; we don't know the exact reason why QE started when it did, and the target for exit seems to shift like a trial balloon floating over Wall Street; but one thing is clear: they had hoped the labor market would be gaining, not losing, momentum by now. The exit seems no clearer than when this round of QE started a year ago.

We now have jobs data from the first three quarters of the year. Over the most recent quarter, payrolls were up an average of 143,000 per month, down from 182,000 in the second quarter, and 207,000 in the first quarter. Private payrolls expanded by only 129,000 a month on average last quarter, well down from the average monthly gain of 212,000 (itself just a moderate pace of employment growth) in the first quarter of the year.

It’s possible that employers were exercising some caution in hiring decisions based on their suspicions that a government shutdown was imminent. But I doubt it. The pattern of deceleration seems to me a lot more consistent with same weak demand story that’s been plaguing this disappointing recovery for years.  Unemployment is still highly elevated, and job growth is once again decelerating. This may be an economic recovery, but it is weak, sluggish, tepid – call it any name you want; it ain't good.

And the S&P 500 index hit another record high today. Wall Street has been the beneficiary of the Federal Reserves monetary policy of quantitative easing; yes, there has been some trickle down effect from low interest rates, especially in the housing and construction sectors, but anyone who wants to argue that trickle down is the best path to recovery only needs look at the job market to realize that trickle down doesn't. Political dysfunction and an austerian approach to fiscal policy has only led to rising inequality. There's simply no bargaining power for working people to claim their fair share of economic growth.

The S&P 500 broke to new highs on the payroll data. The gains in equities were linked to feelings that the Federal Reserve would have to keep interest rates lower for longer and maintain its pace of asset purchases in its upcoming meetings. If people are expecting a Fed taper in December, they may not find that under the Christmas tree. Instead, it might be January or March, Materials and interest-rate sensitive utility-sector stocks were the best performers of the day. The dollar was down 0.6%, buoying gains in raw materials and precious metals, positively attributing to the gains in these sectors. Apple released a new model of its iPad and iPad mini at an event this afternoon. It also announced that it would no longer charge for operation system upgrades on its Mac models. Netflix fell 17.25% during the day's trading after beating earnings strongly last night. On the conference call, CEO Reed Hastings mentioned that the company's solid reports were being unduly compounded by momentum investors.

The 10-year Treasury yield fell nine basis points to 2.51% as slower growth expectations were priced in. Crude oil continued its decline after breaking below $100 for the first time since July yesterday, falling 1.6%.  

The jobs report wasn't the only economic data postponed because of the government shutdown. The start of the 2014 tax filing season will be delayed by one to two weeks early next year as a result of the government shutdown, the Internal Revenue Service.  The original tax filing start was scheduled for Jan. 21, but the IRS said in a statement that the start date has been pushed back to between Jan. 28 and Feb. 4. The 16-day shutdown came during the peak period for preparing computer filing systems for 2014. The delay marks the second year in a row that the IRS has been forced to start the filing season late. In January of this year, the 2013 tax season was delayed by the Jan. 2 enactment of tax law changes made to resolve the so-called "fiscal cliff."

A bit more on the jobs report, because I tend to get a bit wonkish with jobs reports. To recap: the Labor Department reported today, about 3 weeks late because of the government shutdown, that only 148,000 jobs were created in September; way down from the average of 207,000 new jobs a month in the first quarter of the year.

Many Americans have stopped looking for work. The official unemployment rate of 7.2 percent reflects only those who are still looking, also known as the participation rate. If the same percentage of Americans were in the workforce today as when Barack Obama took office, today's unemployment rate would be 10.8 percent. Meanwhile, 95 percent of the economic gains since the recovery began in 2009 have gone to the top 1 percent. The real median household income continues to drop, and the number of Americans in poverty continues to rise.

The biggest debate in Washington over the next few months, right up to the next deadline on December 15, will be whether to slash the federal budget deficit by cutting future entitlement spending and closing some tax loopholes, or go back to the sequester. So, you will see an effort to reframe the dialogue back to the idea of jobs, jobs, jobs. However, if the next few months are anything like the last few years, it won't matter. Nobody really gets much done on the jobs front; it sounded good around election time and then the topic disappeared. Still, jobs and rising inequality are much more important than any of the political claptrap you'll hear about the budget, and the less you hear about jobs in the next few months will be in direct relation to the increase in political dysfunction oozing out of Washington.

JPMorgans preliminary, tentative $13 billion mortgage settlement with the DOJ could end up costing the bank $9 billion, after taxes, because the majority of the deal is expected to be tax deductible,. The deduction also means the government is getting less than it appears in this deal. Banks can often deduct legal settlements from their taxes, but cannot get tax benefits for penalties for violating laws. So, taxpayers are likely to pay for at least part of the settlement. If we really want to look at addressing the debt, we might look at loopholes like this.