Tuesday, February 04, 2014 - Adjust Accordingly

Adjust Accordingly

by Sinclair Noe

DOW + 72 = 15,445
SPX + 13 = 1755
NAS + 34 = 4031
10 YR YLD + .04 = 2.62%
OIL + 1.16 = 97.59
GOLD – 2.70 = 1255.40
SILV + .17 = 19.61

Here come the bears; they tend to come out of the woods when the Dow has a day like yesterday, and they tend to growl. The latest noise is in the form of a couple of projections and predictions that the market will drop 40%. Perhaps we’re just going through a period of pricing discovery as the markets digest information. Maybe this will pass or maybe not. The typical bear market lasts 2 to 4 years and the average drop is about 40%, so it isn’t unreasonable to guess. And bear markets come around with regularity. The median duration for a bull market is 50 months and the average duration for a bull market is 67 months. The current bull market dates back to March 2009, which is right at 58 months. The idea of a bear coming along right about now should not shock anybody. We’re not there yet; a bear market would be a 20% correction; so we’re not there yet. Of course you might not want to just sit around and wait to get mauled by a bear.

So, let’s consider where we are right now. Here’s the rundown:

China’s GDP is slowing and their manufacturing sector is contracting and their shadow banking system may be harboring a few entities on the verge of default;

emerging markets are hemorrhaging and that includes Argentina with runaway inflation, Brazil with export problems, Turkey which just raised short term rates to 12%, Ukraine with street protests, and Russia hosting the Olympics;

the Eurozone still hasn’t recovered and the PIGS – Portugal, Italy, Greece, and Spain – are essentially experiencing depression and the northern countries are experiencing double dip recession, and ECB Pres Mario Draghi  has said he’ll do whatever it takes but he hasn’t done it;

US economic data has been a string of disappointments including durable goods, auto sales, the ISM manufacturing report which included a nasty new orders index, the December jobs report, and a polar vortex, and a drought;

and Congress still hasn’t figured out the debt ceiling hike, and the Federal Reserve still seems bent on tapering, and NYSE margin debt is at high levels reminiscent of 2000 and 2007 which foreshadowed downturns, and PE ratios are a bit lofty;

and for all my technically oriented friends, the Dow Industrial Average has dipped  below its 200 day moving average and the S&P 500 has dropped below the 50 day MA.

Now, does this mean we’re in a bear market? No. Does this mean you should be complacent? No.

Maybe things are better than we think. It’s important to remember that good things happen all the time, every day. Go out for dinner tonight, if you want to. When things get tough, don’t get in a tither, and remember to look on the bright side of life. That is the new motto of the Federal Reserve Bank of New York: look on the bright side and adjust your data accordingly.

You will recall that last month, when the December jobs report was released, we learned that the economy had only added 74,000 net new jobs and at the same time the unemployment rate dropped from 7% to 6.7% because people were leaving the labor pool, dropping out of the labor force. The thinking was that many of the dropouts were discouraged workers who had given up on job prospects, or had simply been meeting with disappointment for so long that the government stopped counting them.

But the New York Fed says it’s just a bunch of Baby Boomers retiring. If these economists are right, then that means the recent swift drop in the official unemployment rate is a real sign of job-market health and not a function of people giving up on finding work. It also means that "slack" in the labor market could disappear more quickly than anybody expects. That could cause inflation pressures to rise suddenly, forcing Fed policy makers to raise interest rates to cool down the economy much sooner than they expected.

Certainly part of the reason is because Baby Boomers are retiring. Boomers have always had an outsized impact on the economy and as they slip into retirement that will be felt economically, but it seems optimistic to imagine that the jobs situation is really great. So let’s dig into some numbers, specifically the labor force participation rate and the employment population ratio.

The participation rate refers to the percentage of working-age Americans either working or looking for work. Participation peaked out in 1999 and then fell off sharply in the 2001 downturn and the 2008 downturn, and is now at the lowest level since 1978. So, it seems pretty clear that a big reason for the big drop in the labor force was a weak recovery and a lack of good job opportunities. Labor-force participation is trending down anyway because of Baby Boomer retirements, sure, but clearly something else happened after the recession.

So let’s look at the Civilian Employment Population Ratio, which is exactly what it sounds like: the ratio of employed civilians to the total population. It stands right around 58%, which is the lowest it’s been since the early 80s. Again, this ratio peaked in the late 90s and took a sharp dive in 2001 and a really big dive in 2008.  The employment population ratio tends to fall during a recession and then climb back during a recovery, but following 2008, the ratio did not recover, it just went sideways.

The New York Fed economists think the ratio has gone sideways because it doesn’t account for the mass retirements of the Baby Boomers, and so they made some adjustments. There is a little problem with the adjustment. More young people lost jobs in the downturn and over the past few years than older workers. Americans 55 and older didn’t lose their jobs during the recession to the extent that younger ones did. In fact, the proportion of older Americans with a job is higher now than in 2006, partly because it is harder to retire than in the past when asset prices were high and rising. The Boomers can’t retire and the younger workers can’t get a job.

And then today the Congressional Budget Office, the CBO, the nonpartisan numbers crunchers for Congress issued a report saying the labor force could shrink by the equivalent of 2.5 million full time workers due to the Affordable Care Act, or ObamaCare. They give two big reasons for this shrinkage.

First, the health reform law offers subsidies to low-income Americans that decline as their income goes up. It also offers expanded access to Medicaid benefits for the poorest workers, which is similarly tied to income. That means that for some people, it may make sense to earn less money through work so they can get a bigger break when buying health insurance. In other words, some workers will decide that having subsidized health coverage is more valuable to them than having more money to spend on goods and services.

Second, for some Americans the subsidies will essentially function as an increase in income because they won't be paying as much for their health care, allowing them to work less and still maintain the same standard of living.

The report states: "The estimated reduction stems almost entirely from a net decline in the amount of labor that workers choose to supply, rather than from a net drop in businesses' demand for labor.”

According to the CBO most full-time workers will probably decide that it doesn't make sense to reduce their own hours or leave their jobs to qualify for coverage. The people most likely to make that choice are low-wage workers, who either don't get company health benefits or are making so little that they would be close to qualifying for Medicaid or the subsidies.

In a somewhat unusual disclaimer, the CBO report says their “estimate of the ACA's impact on labor markets is subject to substantial uncertainty." One reason for the uncertainty is simply that the changes that will result from the health care law are going to take place on an unprecedented scale. Another reason is that there are a variety of ways Obamacare could affect workers: Some provisions may incentivize Americans to work more and some could push them to work less, resulting in the net loss of labor supply over a decade.

The White House issued a statement today in response to the CBO report, and they think the people most likely to reduce their hours or stop working are those who have a job mainly to get affordable health coverage -- people like second wage earners in a household, potential entrepreneurs or workers close to retirement. This is a phenomenon known as “job lock” where a worker stays on a job just for the insurance and it is generally considered a labor market inefficiency.

The White House statement reads: "Individuals will be empowered to make choices about their own lives and livelihoods, like retiring on time rather than working into their elderly years or choosing to spend more time with their families."

The CBO report says ObamaCare could incentivize hiring or decentivize employers to hire.  The law will require companies with at least 50 full-time workers to offer health benefits to anyone who works more than 30 hours per week starting next year. That may in turn give employers a reason to hire fewer people or more part-time workers to keep their labor costs down.  At the same time, the health care law could indirectly spur companies to hire. With lower-income families spending less for their health care, they would have more money to spend on goods and services, and companies would have to hire to meet the increased demand.

Always look on the bright side and adjust based on whatever reality you choose.

Friday, November 08, 2013 - Jobs, Jobs, Jobs Friday

Jobs, Jobs, Jobs Friday

by Sinclair Noe

DOW + 167 = 15,761
SPX + 23 = 1770
NAS + 61 = 3919
10 YR YLD + .14 = 2.74%
OIL + .13 = 94.33
GOLD – 19.10 = 1289.50
SILV - .17 = 21.60

Another record high close for the Dow. For the week, the Dow rose 0.9 percent, the S&P 500 was up 0.5 percent while the Nasdaq was down 0.1 percent.

Today was all about jobs. The Bureau of Labor Statistics reported that total nonfarm payroll employment rose by 204,000 in October and the unemployment rate increased from 7.2% to 7.3%. The 204,000 new jobs was much better than the estimates of about 120,000.

Further, the numbers from previous months were revised higher; September was revised from 148,000 new jobs to 163,000 new jobs, and August was revised from 193,000 jobs up to 238,000; for a net gain of 60,000 upwardly revised jobs.

So, why did the unemployment rate move higher? Part of this may have to do with the government shutdown and there might be a reversal in the November numbers. The furloughed government workers, at least some, were likely counted as unemployed with regard to the unemployment rate, but for the total number, that 204,000 number, those furloughed workers were not counted as unemployed.

The problem with the unemployment rate is that the rate can fall even when the labor market conditions get worse. There are two possible reasons why the unemployment rate drops; either more jobless people find work, or more jobless people get discouraged about their prospects and drop out of the labor force. Again, last month's increase in the unemployment rate was probably due to workers furloughed during the shutdown, and might be a one month aberration in the rate. One mystery buried in Friday’s report was a drop of 720,000 in the size of the labor force and the ensuing fall in the labor participation rate to 62.8 percent, a 35-year low. I haven't heard a good explanation for this, other than distorted data as part of the shutdown, but it would explain why the unemployment rate didn't drop further.

The Participation Rate looks at the number of working age people who are looking for work.The Labor Force Participation Rate dropped to 62.8% in October from 63.2% in September; that's a fairly substantial decline; again, this was at least partly related to the shutdown. The participation rate is still well below the normal rate, which is closer to 66% or 67% over the past 20 years.

If someone stops looking for work, they are not counted in the Participation Rate. There are just over 4 million workers who have been unemployed for more than 26 weeks and they still want a job. According to the Bureau of Labor Statistics, there are 2.3 million people among those who have dropped out of the labor force who wanted and are available for work. These individuals are not counted as unemployed because they have not searched for work in the previous four weeks. At a certain point, if the worker becomes discouraged, they become invisible. If all of these workers had been counted as part of the labor force, the unemployment rate in October would have been 8.6 percent instead of 7.2 percent, a major difference.

Meanwhile, the Employment Population Ratio dropped to 58.3% in October from 58.6% in September. The Employment Population Ratio doesn't look at whether a potential worker is discouraged or not; just if the person is of working age and whether they have a job or not. So, while the unemployment rate has dropped from a high of 10% back in October 2009 down to 7.2% in September, the Employment Population Ratio paints a very different picture; the Ratio was at 62.7% in December 2007 and dropped down to 58.3% last month, basically flat for the past couple of years.

Now a Ratio of 58.3% is really pathetic and this would seem to be a loud call for increasing aggregate demand stimulus. This is not happening, or at least we can say Washington isn't listening.

Part of the reason for the low Employment Population Ratio is that the Baby Boom generation is moving into retirement, so there is a demographic shift at play. So, we can look at the ratio excluding the people who are moving into retirement, by focusing only on workers in the 25 to 54 age range. Here the ratio was at 79.7% at the beginning of the economic downturn, dropped to a low of 74.8% in December 2009, and only recovered to 75.4%. So, again, we have another indication of a weak labor market.

There is still another measure to consider, and it looks at the unemployed, the discouraged unemployed, and the under utilized worker (someone working part time who wants to go full time); this is called the U-6 and it stands at 13.8%, up from 13.6% in September. The number of people employed part time for economic reasons increased from 7.9 million in September to just over 8 million in October.

We’re still 1.5 million jobs short of the peak employment level of January 2008. Wages are rising at a slow rate, up about 2.2 percent in the past 12 months, and too many people are unemployed or underemployed.

The private sector has steadily added jobs since early 2010 while the public sector has steadily cut them, which doesn't usually happen in an expansion. Since May 2010, the government sector has cut 1.1 million positions. But the government job-letting is coming to an end. In October, as might be expected, the federal government reduced its payrolls by 12,000. In the past year, the federal government has cut direct employment by 94,000, or 3.3 percent, but state and local government added a combined 4,000 jobs. In the past year, they have added a combined 68,000 positions. Modestly rising activity at the state and local level is counteracting, and almost entirely offsetting, the austerity-inducing actions of the federal government.

As in the past, the October report closely correlated jobs with education. While the unemployment level for workers over 25 with less than a high school degree rose to 10.9 percent in October from 10.3 percent in September, joblessness among college-educated Americans inched up to a modest 3.8 percent from 3.7 percent in the prior month. Similarly, the participation rate for the most educated workers stood at 75 percent, compared with 44.7 percent for the least educated ones.

The next jobs report, covering the month of November, should give us a slightly cleaner picture without distortions from the shutdown. On a seasonal basis, retail companies start hiring for the holiday season in October, and usually pick up hiring in November. Of course, retailers keep moving the shopping season earlier and earlier. Retailers added 44,000 jobs in October, an indication that consumer spending was steady.

Despite the housing turnaround, employment has improved only modestly in that sector. Construction employment rose to 5.8 million in October from 5.6 million a year earlier. But before the recession hit, employment in that sector had climbed as high as 7.7 million. Service industries have driven job growth in the recovery, adding 2.1 million jobs over the past year, 177,000 last month alone. The leisure and hospitality sector (restaurants, bars and hotels) added 53,000 positions last month. Manufacturers added 19,000 jobs, the sector’s best showing since February, helped in part by strong auto sales.

The Federal Reserve has one more jobs report before their scheduled FOMC meeting in December. If the labor market improves from here it would greatly increase the odds of tapering at that meeting. The jobs report won't be the Fed's only consideration. 

Toss in yesterday's Commerce Department Report showing the economy grew at a 2.8% pace in the third quarter. Or this morning's Commerce Department report showing personal income increased 0.5% in September from the previous month. It was the second-straight month of growth at that rate, which has been the best pace since February. Despite having more money in their wallets, consumers didn't open them more in September. Consumer spending increased 0.2%, down from the 0.3% rate in August. The personal savings rate rose to 4.9% in September, from 4.7% the previous month. It was the highest rate of the year, though still historically low. The slower growth in consumer spending helped keep inflation in check. The so-called core rate over the previous year held at 1.2% in September, well below the Fed's target of 2%.

And remember the story about the recovery of Fannie Mae and Freddie Mac? They will pay back their bailout money by the end of the year. And then there's the story of Twitter, which is a reminder that there is still a healthy dose of entrepreneurial talent in America. Twitter was founded 7 years ago with nothing and yesterday the market cap topped $32 billion. And remember the major market averages hit record highs this week; and all this happened in the face of the sequester, the shutdown, and general political dysfunction. Imagine what might happen if government got its act together, or at least stopped making it more difficult for businesses to do their thing.