Jobs Report Friday
By Sinclair Noe
DOW + 165 = 15,794
SPX + 23 = 1797
NAS + 68 = 4125
10 YR YLD - .03 = 2.67%
OIL + 2.21 = 100.05
GOLD + 9.30 = 1268.10
SILV + .07 = 20.12
SPX + 23 = 1797
NAS + 68 = 4125
10 YR YLD - .03 = 2.67%
OIL + 2.21 = 100.05
GOLD + 9.30 = 1268.10
SILV + .07 = 20.12
The best 2 days in a row for stocks in almost 4 months.
For the week the Dow was up 97 points, and the S&P 500 was up 15 points on
the week. The VIX, the volatility index slipped back down to 15, indicating a
general happy go lucky outlook for stocks, with just the slightest hint that
the past couple of days were part of a short squeeze; especially considering
the lousy nature of the unemployment report.
This is Jobs Report Friday and I tend to get a bit
wonkish with the numbers but I think it is important economic data, so here
goes.
The Labor Department reported the economy added 113,000
jobs in January while the unemployment rate dropped slightly to 6.6%. The
number of jobs added fell short of expectations; analysts had projected job
growth of around 185,000.
While weather was believed to have weighed on hiring in
December, it did not appear to be a major factor last month. There were strong
gains in the weather-sensitive construction sector, and while a survey of
households found 262,000 Americans were unable to work due to the weather, the
department said that was in line with historical trends.
This comes on the heels of an even weaker December jobs
report. Today’s report included revisions to November and December numbers.
November was revised from 241,000 jobs up to 274,000, and December was revised
from 74,000 to 75,000. The past two
months of job growth have been the weakest performance in 3 years, even with
revisions; and well below the average monthly gain of 178,000 positions over
the last six months.
The Labor Force Participation Rate increased in January
to 63.0% from 62.8% in December. This is the percentage of the working age
population in the labor force. In the
past we’ve seen the unemployment rate dropping as the participation rate drops.
It’s a pretty simple idea really; as the pool of working age people gets
smaller, it would require fewer new jobs to see the unemployment rate drop. In
January, however, the pool got bigger and the unemployment rate still dropped. There
are many reasons why the labor pool gets bigger or smaller. The pool of labor
gets bigger as the population expands and as discouraged workers look for jobs
again. It gets smaller because people give up looking for work or slip into the
underground economy or retire; a lot of Baby Boomers are retiring and that has
some impact on the labor pool.
Since the participation rate declined due to cyclical and
demographic reasons, in other words, the bad economy and an aging population,
we can look to the key working age group of 25 to 54 year old workers. The 25
to 54 participation rate increased in January to 81.1% from 80.7%, and the 25
to 54 employment population ratio increased to 76.5% from 76.1%.
The best explanation I’ve seen for this discrepancy is
that there was a benchmark revision going back to March 2013 to include certain
service sector jobs, specifically for services for the elderly and people with
disabilities, and these jobs had previously been uncounted or undercounted. Or
maybe the discrepancy is just that the unemployment rate is based on a separate
survey of households, and this whole process is slightly imprecise.
This month there was a huge discrepancy between the two
surveys. The less-reliable and much more volatile household survey shows
employment shooting up by 616,000 positions, and the employment-population
ratio increasing by two-tenths of a percentage point. That’s very good news: It
shows a stronger economy leading workers back into the labor force.
The more-reliable establishment survey shows employment
growing by just 113,000 jobs. So, in many respects, this report raises more
questions than it provides answers. However, one thing is becoming increasingly
obvious; the unemployment rate (now at 6.6%) is becoming less and less
reliable; and less and less representative of the strength or weakness of the
economy. The unemployment rate went down last month but this was a bad jobs
report. Unless you look at the household survey, which was very good.
Over time, the two surveys generally move in tandem, but
over short periods they can diverge wildly. Over the past three months, the
household survey says employment has increased by an average of 580,000 per
month. The establishment survey says payrolls have increased by just 154,000
per month. So, we either saw the best 3 month stretch since 2000 or the worst 3
month stretch since 2012.
The U-6 measure of unemployment dropped to 12.7%, down
from 13.1%. U-6 includes the unemployed plus the underutilized workers; people
working part-time because their hours were cut back or they weren’t able to
find full-time work.
In the January report, one sector holding back payrolls
was the government, which shrank by 29,000 jobs in January. State and local
governments lost 17,000 jobs; federal lost 12,000. Excluding that loss, private
employers added 142,000 positions, a slightly better showing, and is now
291,000 below the previous peak. Total employment is still 866,000 below the
peak in January 2008. It is possible
that private employment will be at a new high in March or April. The public sector
has declined by more than 760,000 jobs under the Obama administration, and this
has been a significant drag on overall employment. A big question is when the
public sector layoffs will end.
Education, health care and retail also lost positions. In
December and January together, just 2,600 health care positions were filled. By
contrast, as recently as November, nearly 25,000 health care workers were added
to payrolls. The retail sector lost 13,000 jobs in January; some of that reduction
might be related to excessive hiring for the holidays, but the cutbacks are
also likely related to weak performances by several retailers. For example, JC
Penney and Loehmann’s and Target announced job cuts last month. Manufacturing
and construction sectors led overall employment gains in January, adding 21,000
and 48,000 new jobs, respectively.
There are about 3.6 million workers who have been
unemployed for more than 26 weeks and still want a job; this is down from 3.8 million
in December and this is the lowest level since March 2009. And because off
Congressional inaction, about 1.7 million and counting, long-term job seekers
are losing emergency unemployment insurance benefits. The Congressional Budget
Office estimates that extending those benefits would add 0.2 percent to gross
domestic product growth and 200,000 jobs to the economy this year.
According to separate BLS data there are 3 unemployed
people for each job opening. The number of people that reported having lost a
job involuntarily increased, while the number that reported leaving a job
voluntarily and the number re-entering or rejoining the workforce declined. Temporary
employment services, often a stepping stone to permanent future employment,
added just 8,000 jobs in January.
The average work week remained unchanged at 34.4 hours,
and overtime hours notched down to 3.4 hours, meaning that employers have
considerable room to increase worker hours before they need to hire additional
people.
One mystery arising from today’s report is why employment
gains have not kept up with economic growth as measured by gross domestic
product, which picked up substantially in the second half of 2013. The
annualized pace of expansion was 3.2% in the fourth quarter, and 4.1% in the
third quarter. One reason may be that new technologies are allowing employers
to make do with fewer workers, for instance the use of automated customer
service systems instead of call centers, or Internet retailers’ taking over
from brick-and-mortar stores. In other words, the robots are taking over.
Maybe.
Or maybe technology has just passed over certain parts of
the country. In many cities in central California, unemployment remains about
10%, while on the coast of California the unemployment rate is about the lowest
in the nation. In the rust belt regions of Illinois, Michigan, and Ohio,
unemployment is very high and may be stuck at high levels as business and
industries that supported those jobs in those regions are gone and not likely
to return; especially as skill levels erode for the long-term unemployed.
Another possible explanation might be found in a report
yesterday on the labor share index. In the fourth quarter of 2013, the labor
share index dropped to 95.5, its lowest level since the 1940’s. This might
indicate higher demands on worker productivity per unit produced, or labor cost
per unit, resulting in a gap between the
work done and the compensation paid. Even though productivity was soft for last
year – up just 0.6% last year, the Labor Department reported productivity rose
at a 3.2% annual rate in the fourth quarter after increasing at a 3.6% pace in
the third quarter. Unit labor costs, a gauge of the labor-related cost for any
given unit of output, fell at a 1.6% rate in the fourth quarter, showing weak
wage-related inflation pressures in the economy.
This almost certainly should be considered a positive for
corporate profits. According to Thomson Reuters data, of the 343 companies in
the S&P 500 that have reported earnings through Friday morning, 67.9% have
topped Wall Street expectations, slightly above the 67% beat rate for the last
four quarters.
And for the Federal Reserve, today’s jobs report probably
doesn’t change their thinking. The unemployment rate went down, even for
dubious reasons, and so they can continue with their taper. The Fed has
committed to taper, and it would take a big jolt to knock that train off its
track; or as Dalls Fed President Richard Fisher said today, the Fed won’t be
swayed by a single number. Indeed, the focus on the Fed now shifts to interest
rates, as we get closer to 6.5% unemployment, which you may recall, the Fed set
as a target for their pledge to hold low rates steady.
For whatever reason, Wall Street shrugged off the jobs
report, at least for today.
