Friday, August 01, 2014 - Jobs, Mainly

Jobs, Mainly

by Sinclair Noe

DOW – 69 = 16,493
SPX – 5 = 1925
NAS – 17 = 4352
10 YR YLD - .05 = 2.50%
OIL - .32 = 97.88
GOLD + 13.70 = 1295.20
SILV - .09 = 20.40

The first Friday of each month brings us what I consider one of the most important economic reports we can cover, the jobs report; and so we provide comprehensive (wonkish) coverage.

The economy added 209,000 net new jobs in July. The unemployment rate moved up to 6.2% from 6.1%. Even though the economy added jobs, more people joined the labor force, and that is why the unemployment rate moved higher. The 209,000 new jobs was below estimates of about 230,000. The report from June was revised from 288,000 to 298,000; the May report was revised from 224,000 to 229,000 for a net 15,000 in upward revisions.

Employment is up 2.57 million year over year. We have regained the jobs lost in the downturn, and total employment is 639,000 above the pre-recession peak. Total employment is up 9.35 million from the lows of the recession, and private employment is up almost 9.9 million from the lows; the difference reflects the job losses in government related jobs.

So far this year an average of 229,000 new jobs a month have been created. That’s a significantly higher pace than in 2010 when a mere 88,000 jobs a month on average were added. Since the start of the year the economy has added 1.6 million jobs.  At the current pace, the economy could add 2.75 million jobs this year, which would be the best year for total and private job growth since 1999.

This was the sixth month in a row with more than 200,000 jobs added, and that hasn’t happened since 1997. It was probably a bigger achievement 17 years ago, because the economy and the labor force was smaller back then, but the employment recovery has been chugging along through a first quarter that was frozen by the polar vortex and rebound in the second quarter. And the private sector has been adding jobs consistently since the first quarter of 2010.

The unemployment rate was up to 6.2%. The jobless rate can rise for both good reasons (more people looking for work) and bad reasons (fewer people having a job). This month, more people were looking for work. The Labor Force Participation Rate increased to 62.9% in July; this is a measure of how many people who are of working age are actually in the labor force and working or looking for work. The idea that the pool of labor is increasing is a positive; the idea is that some people who have been unemployed for a long time are now finding jobs. The trend in employment growth remains more than strong enough for the unemployment rate to keep trending down, even though the rate rose a tenth this month

Part of the decline in the participation rate was due to demographics; many older workers retired, whether they wanted to or not, while many younger workers stayed in school or returned to school. So, it’s helpful to look at people aged 25-54, in their prime working age; among this group, the participation rate declined slightly; this confirms that younger and older workers were jumping back into the labor pool.  Still, the employment to population rate, which measures the country’s population that reported having a job in July was unchanged at 59%, a number that was up only barely from its 58.7% level of a year ago.

There are still more than 3.1 million workers who have been unemployed more than half a year. And there are just over 7.5 million people working part-time for economic reasons. These workers are included in an alternate measure of unemployment known as the U-6, which includes unemployed and underutilized workers; U-6 increased from 12.1% to 12.2%.

Many people think the U-6 is a more accurate measure of the jobs market, but let’s dig a little deeper. There are 9.6 million people unemployed and actively looking for a job. There are more than 2 million people who have stopped looking for a job within the past year. When you start adding all the unemployed workers who want a job, plus involuntary part-time, plus discouraged workers, you come up with about 23 million people that could possibly move into the labor pool. There is still massive slack in the labor market, and it will take a long time to take up the slack. For now, it is a slow, steady slog.

Where is the job growth coming from? Professional and business services added 47,000 jobs. Retail employment gained 27,000 jobs. Manufacturing added 28,000 jobs last month but the sector has recovered only 30% of the jobs lost during the recession. Construction added 22,000 jobs. Leisure and hospitality gained 21,000. Education and health services added 17,000. Government added 11,000. State and local government employment is now up 151,000 from the bottom, but still nearly 600,000 below the peak. Federal government jobs have dropped by 22,000 since the start of the year. The loss of government jobs is one of the major factors in the slow jobs recovery. In previous downturns, government did not have layoffs, and sometimes increased hiring. In this downturn government jobs were cut in a wave of austerity measures.

Even though the economy has been adding jobs, it has not been enough to push a recovery in wages. In July, average hourly wages rose a penny to $24.45, a disappointing result after strong gains in June and May. In 23 of the past 24 months, the yearly increase in hourly pay has ranged from 1.9% to 2.2%, or about one-third less than usual during an economic recovery. The 12-month increase in wages as of July was just 2%; and inflation wiped out about three-fourths of that gain. There’s been no change since the start of 2014. While it might seem counterintuitive that wages are flat while jobs are being added, the likely reason is that there are a lot of poor paying jobs plus a few very good paying jobs. The average length of the workweek for private sector workers was unchanged at 34.5 hours.

Stronger than expected US growth figures on Wednesday showed second quarter GDP up 4% on an annualized basis, along with hawkish comments from US Federal Reserve board member Charles Plosser, it prompted fears that the central bank may increase the cost of borrowing sooner than expected. Today’s non-farm payroll numbers were just weak enough to ease concerns about possible tightening from the Fed, yet not so awful as to indicate a downturn. It still points to a job market and an economy that is improving, but there is no real wage pressure and nothing to indicate inflation is a concern.

We had a couple more economic reports today. The Institute for Supply Management said its index of national factory activity rose to 57.1 in July, the highest since April 2011, from 55.3 in June. A reading above 50 indicates expansion in the manufacturing sector.

The Thomson Reuters/University of Michigan's final July reading on the overall index on consumer sentiment came in at 81.8, down from the final June reading of 82.5. The surveyors report that consumers’ attention has been dominated by jobs and income growth.

For the week, the S&P 500 fell 2.7%, its biggest weekly percentage loss since the week ending June 1, 2012, while the Nasdaq fell 2.2%. The Dow ended down 2.8% for the week. The Dow's losses dragged it further into negative territory for the year. For the year-to-date, it is down 0.5%.

Markets have suffered a turbulent few days, hit by a combination of interest rate concerns and growing geopolitical worries. The violence in Gaza also added to the sense of events escalating out of control; a proposed 72 hour cease fire didn’t last one day. An Israeli soldier was captured, and it looks like violence will escalate over the weekend. The week saw Argentina defaulting for the second time in 12 years, while continuing tensions with Russia over the Ukraine led to the imposition of further sanctions which could hit businesses and put the brakes on global growth.

It was a big week for US economic activity, with jobs and GDP statistics and a Fed meeting, but it was European equity markets that took a real tumble. Portugal was a big loser, as Banco Espírito Santo reported the largest-ever loss for a Portuguese company, sending its shares spiraling and prompting probes into possible accounting fraud at the bank.

Portugal’s major stock index dropped 10% for the week. German stocks were hit following stepped up sanctions against Russia, a major supplier of natural gas to Germany; the DAX index slipped 4.5%. Greece, Austria, Spain, UK, and France all saw declines of 3% or more. The major Russian index dropped about 1%.

Europe posted its own jobs report. Eurozone unemployment dropped to 11.5%, which is absolutely horrible, but getting better. Meanwhile, the region continues to flirt with the prospect of deflation, with euro zone wide prices rising a scant 0.4% in July from the prior year. So, there is still plenty the ECB can do to stimulate the economy over there.

Meanwhile, Congress is calling a 5 week recess, an extended summer vacation, which even Europeans think is excessive. They managed to get a few things done before running away. They passed a $16 billion VA bill to help deal with extensive treatment delays and a recent record-keeping scandal. They cobbled together a patch for highway funding, just a temporary patch. This Congress has only managed to pass 142 bills into law, which puts the legislative branch on pace for its least productive session in modern history. And now they’re heading out for a 5 week vacation. Maybe we’ll get lucky and they won’t come back.

Friday, June 06, 2014 - Jobs Report Friday

Jobs Report Friday
by Sinclair Noe

DOW + 88 = 16,924
SPX + 8 = 1949
NAS + 25 = 4321
10 YR YLD + .01 = 2.59%
OIL + .31 = 102.79
GOLD - .90 = 1253.30
SILV - .02 = 19.11

Another record high close for the Dow Industrial Average and the S&P 500.

It’s said that it takes a war to end a war; 70 years ago, 150,000 soldiers invaded Normandy, and it’s estimated that about 4,400 lost their lives in the biggest military assault in history, D-Day. There were ceremonies on the beach today, as well as locations around the world, to honor the soldiers lost and the veterans still with us; their numbers are dwindling with the passage of time, but about 3,000 made the pilgrimage to Normandy today.  For the rest of us, it’s hard to imagine what happened 70 years ago, but whatever difficulties we may face in our day to day lives seem small compared with what those men faced. This is a special day, one that should never be forgotten.

Each month we analyze the jobs report. The jobs number came in about as expected. Non-farm payrolls added 217,000 jobs in May. The unemployment rate, which is drawn from a different survey of households, remained unchanged at 6.3%.

April’s employment numbers were revised down to 282,000 jobs added from 288,000. March payroll figures were not revised, remaining at 203,000 jobs added. This is the fourth consecutive month that non-farm payrolls increased more than 200,000. That is the first time that we have seen four consecutive months of 200,000 or more since October of 1999.

The labor force participation rate also remained unchanged from the 62.8% rate reported for April. The participation rate has shown no clear trend since this past October but is down by 0.6% over the year. At 62.8%, the labor participation rate remains at lows not seen since the late 1970s, a sign that many Americans have given up the search for work entirely and remain wary about their prospects of getting a job, not even bothering to look for one. There are 3.37 million workers who have been unemployed for more than 26 weeks and still want a job; this is down from 3.45 million in April. Long-term unemployment is trending down; now at the lowest level since March 2009, but still high.

There are many reasons why the participation rate is low, and one key factor that we’ve heard repeated is that it is simply a case of demographics, or older workers who are near retirement age. However, according to data from the OECD, the employment to population ratio for workers between ages of 25-54 is down by 3.5 percentage points from its pre-recession level; and for workers between the ages of 55-64 it is only down by 0.9 percentage points.

With today’s jobs report, the US economy is now back to pre-recession peak levels of employment; we have recovered the number of jobs that were lost, and employment is now at an all-time high. This is the longest post-World War II recovery the US has experienced. The US lost 8.7 million jobs in the recession. Through the first five months of 2014, the economy has added 1,068,000 payroll jobs - slightly better than during the same period in 2013 even with the severe weather early this year. From the period between World War II and the 1980s there was a fairly predictable pace for recoveries. It took roughly six months for US employment levels to recover after each post-war recession through the 1980s. Then, things changed. It took 15 months after the 1990–91 recession for employment to reach its pre-crisis levels, and 39 months after the 2001 recession.

While the addition of nearly nine million jobs since hiring bottomed out in February 2010 is certainly good news, the number is still far from what is necessary to accommodate new graduates and millions of others who have entered the work force since payrolls last peaked in January 2008 at 138,365,000 jobs. We now have about the same number of jobs as we did then, but millions more who might wish to hold them. So, we’re back to where we were but not where we should be.

Here's one way of looking at that. There were 7.6 million unemployed people in the US in January 2008, and the unemployment rate was 4.9%. Today, there are 9.8 million unemployed Americans, well over 2 million more than before the recession, and the unemployment rate is much higher.

Another important milestone as today’s report marks the 51^st consecutive month of private sector job gains, which matches the longest previous string of consecutive employment gains. Our current streak matches the one that ran from February 1996 to April 2000. These two milestones give us an indication of how deep the losses were, but also how much further we need to go to get back to a solid economy.

The number of persons working part time for economic reasons declined in May to 7.26 million from 7.46 million in April.  These workers are included in the alternate measure of labor underutilization, known as U-6, which decreased to 12.2% in May from 12.3% in April. This is the lowest level for U-6 since October 2008, and down from the peak of 17.2%, but still high by historical standards.

Within various job segments, the business and professional services segment added 55,000 jobs, the same as its average monthly job gain over the prior 12 months. The healthcare industry added 34,000 jobs for the month, twice its average monthly gain for the prior twelve months. Retailers added 12,500 jobs and the transportation and warehousing sector added 16,400. The manufacturing sector added 10,000 jobs, and the length of the typical workweek for manufacturing workers increased slightly to just over 41 hours, a sign factory managers would rather add overtime instead of hiring additional workers. By contrast, the workweek for all employees in the private sector, including white-collar workers, was unchanged at 34.5 hours.

In May, average hourly earnings rose 5 cents to $24.38; over the past twelve months, average hourly earnings have risen 2.1%. We frequently hear that employers would hire more workers but the workers lack the skill set for the jobs. If employers were actually having difficulty finding workers with the necessary skills we should expect to see occupations or industries in which wages are rising rapidly. That is how employers attract workers for positions they have trouble filling. We are not seeing any major sectors of the economy with significant increases in wages, so that tends to invalidate the issue of a skills mismatch.

Even as private employers have gradually increased hiring in the recovery, the work force at government agencies and the Postal Service has shrunk dramatically. Total government employment is still down by more than one million from where it was four years ago. State and local governments added 6,000 jobs.  State and local government employment is now up 107,000 from the bottom, but still 637,000 below the peak. It appears state and local employment is now increasing.  Federal government layoffs are ongoing, with another 5,000 jobs lost in May.

Unlike previous reports, the gains have been broad based—there were new jobs created in many sectors, including higher paying and important ones like manufacturing and construction. But 50% of all the jobs being created in this country are still in the low-wage category: retail clerk positions, home heath aids, waitresses and the like. And more importantly, pay isn’t going up much. While it is certainly better to have a job compared to no job, better still to have a job that pays decent wages, and that is still missing. 

Friday, May 02, 2015 - April Jobs Report

April Jobs Report

by Sinclair Noe

DOW – 45 = 16,512
SPX – 2 = 1881
NAS – 3 = 4123
10 YR YLD - .01 = 2.59%
OIL + .57 = 99.99
GOLD + 15.70 = 1301.60
SILV + .44 = 19.56

Today is another Jobs Report Friday. We will go into quite a bit of detail here because really, most everything we talk about in regard to economics begins with work and jobs. It is my hope that you will join us here on the first Friday of each month to get your comprehensive, fact based coverage of the jobs report.

Last month the economy added 288,000 net new jobs, and the unemployment rate dropped to 6.3%. April marked the biggest monthly gain in jobs since January 2012, when the economy added 360,000 jobs. Employment gains for February and March were revised higher by a combined 36,000; that raised the monthly average to 214,000 jobs a month since the start of the year. Through the first 4 months of 2014, the economy has added 857,000 payroll jobs, slightly better than the first 4 months of 2013, despite the harsh winter this year.

In the current 58 month expansion, employers have added more than 200,000 jobs per month in 38% of the months. Current job creation performance is stronger than it was in the business-cycle expansion that occurred during the recovery in the early 2000s, even when a real estate construction bubble fueled growth.  Today’s job creation pace lags well behind previous recent economic recoveries, such as 1970, or 1975 that saw job creation above 200,000 in about 60% of months. Needless to say, 200,000 jobs a month means a lot less today with a population that is more than 100 million people larger than it was in 1970. Total employment is now only 113,000 below the previous peak, so we should top that next month; however, the overall population has increased in the past 6 years, so there are still millions of people without jobs.

The report came in far above expectations. The consensus estimates called for 210,000 new jobs and the unemployment rate inching down to 6.6%, however there was a wide range of estimates.

The drop in the unemployment rate to 6.3% was the biggest monthly drop in 31 years and the unemployment rate is at the lowest level since 2008, but the drop in the headline rate was for the wrong reasons; the participation rate declined to 62.8% from 63.2%, meaning the labor pool fell by 806,000 workers. The unemployment rate is measured against a labor pool of people who are considered actively looking for work or working. When someone stops looking for work, they stop being counted, although it doesn’t necessarily mean they wouldn’t like work.

There are 2 major reasons why the participation rate has dropped: the first reason is demographics, and the second is the economic downturn.

Looking at demographics, the baby boomers are retiring in massive numbers, and not always voluntarily. However, many boomers are re-entering the workforce in a stealthy manner; the highest rate of entrepreneurship activity belongs to the 55-64 age group. It turns out the recession spurred new-business formation. In a "necessity is the mother of invention" scenario, it appears that many people who lost jobs started their own businesses. Of course, it might take some time for a new venture to be profitable and in the meantime, those people might not be counted as actively seeking jobs.

Meanwhile, younger people are staying in school, either going back to school for training or re-training, or dragging out school because of the high cost of education. An interesting point here is that unemployment for young adults age 20-24 dropped from 12.2% to 10.6% in April. Millennials getting jobs; or dropping out of workforce. We don’t know for certain, but one possible explanation is that graduates from the Class of 2013, that have been biding their time looking for a job or just unable to find a job, suddenly got very serious about taking any kind of job as the Class of 2014 prepares to enter the workforce.

Another age group we watch is the 25 to 54 year olds; they’re in their prime working years, too young to retire and unlikely to be in school. The 25 to 54 participation rate declined in April to 80.8% from 81.2% in March, and the 25 to 54 employment population ratio decreased to 76.5% from 76.7%. The participation rate for this age group should increase as the economy improves.

The other reason is the economic downturn, many people lost jobs and have had a very difficult time finding work, driving long term unemployment to unacceptable levels. The recent loss of unemployment benefits for the long-term unemployed is another way in which people fell from the ranks; in order to receive unemployment benefits, one has to actively look for work. As the benefits were cut, people still unemployed were cut from the ranks. Extended benefits were cut off beginning in late December. If the expiration of benefits was causing hundreds of thousands of people to drop out of the labor force, it should have showed up in the data in January, or February. It didn’t. Maybe the unemployment rate fell because of 806k drop in labor force, a lagged effect from expiration of unemployment insurance, or maybe there is just some statistical noise. We won’t know for sure until we see a few more months data.

What’s also odd about the decline in the labor force is how it happened. The number of so-called re-entrants, unemployed workers who have started looking for jobs again, fell by 417,000. That’s the biggest drop since the government began keeping records in 1967.  And new entrants into the labor force, such as graduates or immigrants, fell by 126,000. That’s the biggest decline in more than five years. Put another way, two-thirds of the drop in the labor force stemmed from people choosing not to enter in the first place. Normally a decline takes place when workers exit the labor force.

According to the BLS, there are 3.452 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 3.739 in March. This is trending down, but is still very high. And it does not mean that 300,000 long term unemployed workers found jobs; they just stopped being counted.

And there is still quite a bit of slack in the labor market, with approximately 7.5 million workers employed part-time for economic reasons; people who have had their hours cut back or people working part-time because they can’t find full-time work. When you add in those under-utilized workers, you get a different measurement known as U-6, which dropped to 12.3% from 12.7% in March. The number of people holding multiple jobs jumped by 133,000 from April 2013 to April 2014. Women almost entirely led this statistic, with the number of employed single mothers increased 1.4% over the past year.

Hiring was widespread and it doesn’t look like there was any one industry or sector that had an unusual jump. Professional services added 75,000 jobs, but about one-third were temporary positions. Employment and temporary help services added 28,000 jobs. Retailers added 35,000 jobs, bars and restaurants added 33,000 and the construction industry hired 32,000 workers. Industries where minimum-wage employment is most prevalent in the economy, accounted for 40% of total new private-sector job creation in April, excluding health care. Manufacturers generated 12,000 jobs, but this was disappointing in light of recent economic data pointing to increased manufacturing activity; yesterday, the ISM reported it manufacturing index had increased to 54.9 last month, up from 53.7 in March. Government also added 15,000 jobs, with state and local governments adding 18,000 jobs and federal cutting 3,000 positions.

Average hourly wages were unchanged at $24.31, reducing the year-over-year gain to just 1.9%. Consumer spending has been outpacing income growth, resulting in low saving rates, meaning workers have less discretionary funds, meaning a dwindling likelihood they will go out and spend at an increasing rate. Paychecks have actually become leaner since the recession officially ended. Real median weekly earnings for full-time wage and salary workers during the first three months of this year were down 3% from the end of the recession.

Looking at the types of jobs making up employment also provides a cause for concern. Among 13 industries that make up total US private-sector employment, the 5 with the lowest nominal average weekly earnings represented about 52% of private-sector employment gains over the past year. Leisure and hospitality employment showed the strongest growth among low-earning industries, added 412,000 jobs over the year through April, representing about 17% of total private-sector job gains.

Middle-earning industries, professional and business services, construction and manufacturing, represented about 40% of annual job gains. While higher-earning industries made up about 8% of added employment. Among the five industries with the highest weekly earnings, private-sector employers added about 194,000 of these jobs over the past year. Longer-term trends show lopsided jobs growth, with lower-wage employment ramping up in recent years. During the recession, lower-wage industries made up 22% of job losses. But over the past four years, these jobs made up 44% of employment growth, according to a recently released report from the National Employment Law Project. One indication that workers aren’t particularly confident is that quitting is below pre-recession levels, signaling that many workers are unwilling to trade some job stability and security to advance their careers.

Today’s jobs report was good, one of the best months we’ve seen in a long time, and we have a 58 month trend of job gains, which is a heck of a lot better than bleeding jobs, but the trend is still not strong enough. Nearly five years since the economy began expanding, the labor market continues improving, but at a frustrating pace for the 10 million unemployed workers and 3 million people not counted as unemployed who still currently want a job. Ongoing elevated unemployment is not only a serious drag for those families enduring it, but it will continue to drag on the overall economy until lawmakers get serious about full employment and creating quality jobs that deepen and secure the middle class. 

Friday, April 04, 2014 - The March Jobs Report

The March Jobs Report
by Sinclair Noe

DOW – 159 = 16,412
SPX – 23 = 1865
NAS – 110 = 4127 (-2.6%)
10 YR YLD - .06 = 2.73%
OIL + .77 = 101.06
GOLD + 15.50 = 1303.30
SILV + .14 = 20.06

Today is a jobs report Friday. Let’s get geeky.

The Labor Department reported nonfarm payrolls increased by 192,000 jobs last month after rising by 197,000 in February (that’s revised from 175,000). The prior 2 months were revised to show 37,000 more jobs than previously estimated; the revisions indicate that the bad winter weather was not a huge problem for the labor market; it did have an effect but not huge, and we certainly shouldn’t hear any more weather related excuses. The unemployment rate was unchanged at 6.7% as more people were looking for jobs. The consensus estimate was 200,000 jobs, so the figures were a little below expectations.

Private employment rose to 116.09 million, finally moving beyond the previous high of 115.98 million recorded at the very start of the recession in January 2008.Total employment is just a little below the pre-financial crisis days; we still have about 437,000 fewer jobs than the peak in 2008, but private employment is now above the peak by 110,000 and at a new all-time high; the difference is that more than a half million government jobs have been cut during that time; also, the population and the labor force has grown over the past 6 years, so the unemployment rate remains fairly high. And the idea is not just to get back to where we were, but to get back to where we should be. Keep in mind, we have 15 million more people now than we did then.

The economy added 533 thousand jobs in Q1 this year compared to 618 thousand in Q1 2013; the bad weather is the excuse for the weaker performance. Still the unemployment rate has dropped from 8.2% in March 2012 to 6.7% now.

The Labor Force Participation Rate was increased in March to 63.2%. This is the percentage of the working age population in the labor force.  And while the participation rate is still low compared to the past 20 years, it is a positive sign that more people are looking for jobs, suggesting they were lured back into the job hunt as openings began to appear. Or possibly, more long-term unemployed were pushed back into the job market as benefits were cut. The number of long-term unemployed fell by 110,000, and over the past year, the ranks of the long-term jobless have dropped by 837,000; meanwhile, the ratio of the population reporting they had a job ticked up to 58.9% from 58.8%. Much has been made of the multiyear slide in the labor force participation rate since the financial crisis of 2008. In the last few months, however, the labor force participation rate has actually stabilized.

Anyway, about a half million people jumped back into the labor pool and about that many found jobs; if it were not for the increase in the size of the labor force, the unemployment rate would have fallen to 6.5%. It also means that the unemployment rate is unlikely to keep falling as sharply as it has in the last two years, because people who are again looking for work are counted as unemployed, while those who have given up and dropped out of the labor force are not.

There are 7.4 million people working part-time who would prefer to work full-time, or they are part time because their hours have been cut back, or they have given up looking for a job. There is a separate measure for them, known as the U-6 unemployment rate, which comes in at 12.7%; up from 12.6% in February, but down from 13.8% a year ago. The headline unemployment rate of 6.7% is known as U-3. The U-6 includes all those people in U-3 plus all the underutilized and discouraged workers. In healthier job markets, the gap between U-3 and U-6 is closer to 3% or 4%.

After months of declines in the part-time labor force, the BLS reported a spike of 414,000 new part-time workers in March, which was the largest monthly increase in nearly two years. This could just as well be an aberration, as it was a year ago, but the part-time picture in the American workforce is far from rosy. The financial crisis resulted in a spike in the number of part-time workers as a percentage of the labor force, and this has remained elevated ever since.

The increase in jobs was paced by gains in construction, retail and professional services. Government employment over all remained flat, with federal and state governments cutting 11,000 jobs even as local governments added 9,000 positions. Over the past 12 months, total federal employment has fallen by 85,000. That's pretty much how it has gone throughout the grinding recovery; private hiring has been slow but steady, while austerity has led to government job cuts that have helped keep the recovery frustratingly slow.

The health care sector added 19,000 jobs. Business services added 57,000 jobs. Food services employment increased by 30,000, bringing the sector’s gain over the past year to 323,000. The manufacturing sector lost 1,000 jobs.

While average hourly earnings were basically flat, the length of the average workweek edged higher. The average work week for private employees edged up to 34.5 hours, offsetting a net decline over the prior three months; as a consequence of the bad weather, many people lost time on the job, but it was made up in March. Average weekly hours, at 34.5 per worker, aren't far off of the 34.7 hours per worker recorded six years ago, but when you add up a fifth of an hour across more than 100 million workers, it makes a very big difference in the amount of time Americans actually spent on the job.

Average hourly earnings for private employees fell by 1 cent to $24.30 from a month earlier. Over the year, average hourly earnings have risen by 49 cents, or 2.1%. The average weekly wage rose to $838.55 from $833.83. The reason for this anomaly: a 12-minute increase in the average amount of time worked each week.  Conclusion: Bargaining power for workers is still subdued. But their services are more in demand.

The jobs report also provides details about who is benefiting from recovery and who is not. The recovery has been good for college educated workers and whites. It has been much more difficult for the long-term unemployed, young adults without a college education, and African Americans. Among adults 25 and older who have a bachelor’s degree the unemployment rate is just 3.4%, about half the over-all rate.

The unemployment rate for college graduates never went above five per cent in the downturn. At the other end of the educational spectrum, things were very different. For adults 25 and older without a high-school diploma, the jobless rate hit 15.6% in 2010. Last month, it stood at 9.6%.

Among white men aged 20 and over, the unemployment rate is now 5.3%; for African-American men over 20, it is 12.1%. The gap between white and black females is also very large, 5.3% of white women aged twenty and over are out of work (the same as the rate for white men), but 11% of black women in the same age group are jobless. Hispanics also have substantially higher rates of unemployment than whites, but the differences aren’t as large. Among Hispanic men aged twenty and over, the jobless rate in March was 6.9%; among Hispanic women aged twenty and over, the rate was 8.4%.

For teenagers between the ages of 16 and 19 who aren’t in school or college, the unemployment rate is 20.9%. That’s down from 23.3% a year ago. It’s still a very high figure, and, among minority teenagers, it’s even higher.

The stock market moved a little higher this morning following the jobs report. It wasn’t a bad jobs report that sank the market today. Most of the stories I read had a theme of not too hot, not too cold, a Goldilocks report. The Fed uses the jobs report to help determine the timing and pace of further cuts to its monthly bond-buying program. The central bank also looks to the unemployment rate as a factor in deciding when to raise its benchmark interest rate. This report did not sway the Fed one way or the other.

What went wrong on Wall Street? It’s always dangerous to lay an exact cause on any singular event, but the big damage today was in the Nasdaq and the tech and biotechs. There’s a little bit of nervousness about some of the high multiples in the biotech area and computer and Internet-related stocks. You’re having another wave of selling in that very high-momentum group. When you’re at record high levels, people start to get a little tentative going into weekends.

Thursday, April 03, 2014 - Tomorrow, Tomorrow, It’s Only a Day Away

Tomorrow, Tomorrow, It’s Only a Day Away

by Sinclair Noe

DOW – 0.45 = 16,572
SPX – 2 = 1888
NAS – 38 = 4237
10 YR YLD - .01 = 2.79%
OIL + .73 = 100.35
GOLD – 3.10 = 1287.80
SILV - .16 = 19.92

Forget about today; at least in terms of Wall Street trading. Tomorrow is more important. The first Friday of each month is always a big day because of the monthly jobs report; tomorrow, maybe more than most. The consensus estimates called for 200,000 net new jobs in March and the unemployment rate is expected to drop to 6.6% from 6.7%. Then there is the whisper number. Many people believe the harsh winter weather has held back hiring, like a balloon trapped under water by a thin sheet of ice, and when the ice melts, as it did in March, the balloon will jump out of the water like a salmon swimming upstream. Weather sensitive industries such as retail, construction and manufacturing might be especially strong performers.

A March jobs report that shows a broad increase in hiring across most or all industries would show the economy is recovering and everything, including the Fed, is on track. A disappointing number, though, would bolster the case of the increasingly famished Wall Street bears that bad weather alone is not the source of weak economic growth so far in 2014.

And if the number comes in right at expectations, we’ll have to go to the tiebreakers. We will look at the number of hours worked, In February, inclement weather kept people from getting to work, at least for a few days. The result: The average workweek slipped by 0.1 hour to 34.2 hours in February, the lowest level since January 2011. Fewer hours mean less take-home pay for many, translating into weaker consumer demand and slower economic growth. The wintry mix continued to hit parts of the country in March but the effect shouldn’t be as bad as earlier in the winter. Even a partial reversal of the weather distortion should generate a rebound in average weekly hours worked, which have slumped from 34.5 last November.

We’ll also look at the U-6 underutilization rate. Federal Reserve Chairwoman Janet Yellen this week highlighted the 7.2 million people who would like a full-time job but instead are working only part time. It’s a sign of slack in the labor market and one reason the Fed is likely to keep rates low for a long time. “This number is much larger than we would expect at 6.7% unemployment, based on past experience, and the existence of such a large pool of ‘partly unemployed’ workers is a sign that labor conditions are worse than indicated by the unemployment rate.”

And we’ll look at the participation rate, the share of working-age adults who have a job or are looking for work, held steady at 63% in February, near a 35-year low. That’s partly because baby boomers are retiring in greater numbers but may also indicate some people are frustrated with their job prospects and have dropped out of the labor force. Greater labor-force participation would be welcome, even if that keeps the unemployment rate from falling further.

Of course, that 200k jobs figure is just a guess, an arbitrary number pulled out of a hat. Total private employment reached 115,848,000 in February, close to the seasonally adjusted record of 115,977,000 from January 2008. If the private sector added more than 129,000 payroll jobs in March, the US will be back to its peak level of private-sector employment. Of course, a lot has changed since the prior peak. State local and federal governments have shed more than half a million jobs, leaving total employment still shy of its all-time high. The population is bigger: The civilian labor force has expanded by 1.6 million since then. And the mix of private-sector jobs has changed. For example, more people work in temp and health care jobs, while fewer are in construction and manufacturing.

With the Federal Reserve in the process of tapering down its bond purchases, big surprises on either side of the forecasts could upend expectations about the pace of the Fed’s stimulus withdrawal and the timing of eventual rate hikes. As important as the jobs figure is, it is also important to remember that, as Fed Chairwoman Janet Yellen has noted, unemployment isn’t the only number policy makers will consider.

It would take a really big number to move the bond market, but something north of 250,000 jobs could push the yield on the 10 year Treasury note above 2.8%. Market expectations appear to be biased toward higher yields.

A strong jobs report would also be bullish for the dollar. Today the dollar moved higher against the Euro as European Central Bank President Mario Draghi said policy makers were discussing the possibility of using quantitative easing and other unconventional stimulus measures to counteract extremely low inflation.

The ECB's governing council held its key interest rates unchanged for the fifth month in a row, despite an unexpected slowdown in area-wide inflation and worries about deflation.  Of course, Draghi has been trying to jawbone the Eurozone into economic growth for a couple of years, vowing to do whatever it takes but never actually doing whatever it takes, even as the destructive spiral of falling prices pushes consumers to put off purchases, thus destroying salaries, jobs and investment.

Meanwhile, International Monetary Fund Director Christine Lagarde was railing against the deflation ogre again, and warning the ECB about the dangers of “low-flation”, which is apparently a freshly minted economic term, and calling for more monetary easing by the ECB and the Bank of Japan. Draghi said the IMF has been “extremely generous” in suggesting what the ECB should or shouldn’t do. In fact, he urged the IMF to share the generosity “with other monetary policy jurisdictions, like for example issuing statements just the day before a (Fed) meeting.”

Which also means the ECB will not do whatever it takes to stoke the economic engine. And Lagarde was wrong; they don’t face “low-flation”; prices are falling.  The European Central Bank has let it happen. Deflation has been running at an annual rate of -1.5% in the Eurozone over the past five months, when adjusted for austerity taxes. Prices have dropped more than 6% in Greece, more than 5% in Italy, more than 4% in Spain and Portugal, 3% in Slovenia, and 2% in Holland. A little bit of stimulus would push the currency lower and goose exports and economic activity, but Draghi does nothing but jawbone; his constant promises to do whatever ring hollow.

Deflation can create some serious conundrums for debt. When a country’s debt burden rises faster than nominal GDP, it could engulf the private sector as well; tightening the vice on households and companies with fixed-rate debts; it would erode bank assets; risk fresh bank failures and hit life insurers through a mismatch in maturities.

An International Monetary Fund study detailed this week, that there's still a running assumption that governments would again rescue the biggest banks in the event of another panic. The IMF found that at least through 2012 the euro zone's biggest banks still benefited from an implicit taxpayer subsidy of $90 billion to $300 billion. Subsidies for UK and Japanese banks may have been as high as $110 billion and they ranged from $20 billion to $70 billion in the United States. So the risk, you might assume, is still loaded on the government's tab. Yet government borrowing costs across the western world and beyond have rarely, if ever, been lower.

Eurozone loans to businesses are contracting at a rate of 3%. The ECB is missing its 2% inflation target by 150 basis points, and will continue to miss it badly in 2015 and 2016 based on its own forecasts. Despite Draghi’s incessant and unbelievable jawboning, the ECB has consistently refused to offset the contractionary effects of austerity with enough monetary stimulus to keep GDP growing faster than the debt of the southern nations; and the more austerity the more the debt burden to GDP ratio has climbed. In Italy the debt climbed from 119% to 133% since 2010 despite harsh fiscal policy.

Say what you will about the Fed, and I have said plenty; their QE policy has been misdirected and has led to greater inequality, but at least the US maintains its global position as the cleanest shirt in the dirty clothes hamper because we weren’t hit with the double whammy of tight monetary policy and draconian fiscal austerity. (just the fiscal part)

The ECB insists that the latest dip in Euro inflation is due to falling energy costs, and therefore transient. That could all change if Russia decides to ramp up the use of natural gas as an economic weapon, and a precedent was set earlier this week. Rising energy prices in combination with falling prices for almost everything else would make for a really ugly mess in Euroland, and might force Draghi to stop sitting on his hands.

While offering her advice on “low-flation” to the ECB today, IMF chief Lagarde also spoke about other threats to global growth. Another threat is high corporate leverage in emerging economies, which if not adequately addressed will be worsened by the turmoil from eventual monetary tightening in advanced economies, especially the US. Yet another obstacle is the rise of geopolitical tensions, which could cloud the global economic outlook. "The situation in Ukraine is one which, if not well managed, could have broader spillover implications."

Wednesday, March 19, 2014 - Behind the Curtain of the Mysterious Central Bankers

Behind the Curtain of the Mysterious Central Bankers

by Sinclair Noe

DOW – 114 = 16,222
SPX – 11 = 1860
NAS – 25 = 4307
10 YR YLD + .09 = 2.77%
OIL + .67 = 100.37
GOLD – 24.90 = 1331.60
SILV - .20 = 20.71

Sometimes the stock market is a grand mystery, a riddle wrapped in a mystery inside an enigma. Sometimes the stock market is simple. Wall Street loves it when the Federal Reserve is throwing bags of money out of the helicopter that hovers over Wall Street. The traders get a little nervous when it looks like the free money might stop raining down on them. That doesn’t mean the Fed is stopping throwing money at Wall Street, just that traders are nervous.

Today, the Fed FOMC wrapped up a two day meeting; they issued a statement; then Chairwoman Janet Yellen delivered a prepared statement; then she answered questions.

The Fed statement indicated the Fed could and likely would continue with its low interest rate policy even after they reach their goals of full employment and 2% inflation. The central bank proceeded with its well-telegraphed reductions to its massive bond-buying stimulus, announcing it would cut its monthly purchases of Treasuries and mortgage-backed securities to $55 billion from $65 billion per month.

I will now attempt to translate the Fed statement from Fedspeak to English. The statement said: the labor market is getting better but unemployment is still too high, household and business spending is decent but the housing market is weak, the politicians in Washington keep messing up the economy but they haven’t been adding on new mistakes lately so we should be able to work around them, inflation is too low and that might cause problems, even as they cut purchases to $25 billion a month in mortgage backed securities and $30 billion a month in Treasuries – that is still a heck of a lot of paper they are buying, the Fed analysts will keep an eye on economic conditions and at some point they will raise rates but not today and not based on a 6.5% target for unemployment, and the analysts think the economy is better than the  public thinks, and the only reason the economy is so bad is because the weather has just been horrible this winter.

Then, Janet Yellen held a press conference. Back in December the Fed forecasts called for unemployment falling to between 5.8% and 6.1% by the fourth quarter of 2015. The new forecasts show Fed officials see unemployment dropping slightly faster, to between 5.6% and 5.9% by the end of 2015. So, that ratchets up forward guidance on rates. Fed officials see slightly sharper increases than they did in December, with rates ending 2015 at 1% and ending 2016 at 2.25%, according to the median of forecasts. In December, Fed officials expected short-term rates to be just 1.75% by the end of 2016. Of course, that’s all dependent on economic data over the next year or more, and we could have another unexpected snowstorm or 2 or 20, but it was enough to make Wall Street traders nervous that the Federal Reserve won’t always provide a super low interest rate subsidy to the bankers.

The nervousness only grew as Yellen entered the Question and Answer phase of the press conference. She was asked how long the Fed would wait after the tapering ends before it begins to raise interest rates. She answered: “So the language that we used in the statement is ‘considerable period.’ So I, you know, this is the kind of term it’s hard to define. But, you know, probably means something on the order of around six months, that type of thing.”

So, let’s do the math. The Fed continues to taper asset purchases by $10 billion a month; announcing incremental cuts at each of the next 6 FOMC meetings; so maybe around October, they finish the buying; then 6 months pass and now we’re looking at April 2015, which is more or less when everybody knew the Fed might start to consider raising rates, if everything goes according to plan…, and we don’t have any more surprise snow storms.

And that is a big change for trying to figure out when the Fed will raise rates. It’s no more quantitative easing, based on a hard, quantitative number like 6.5% unemployment rate. Now the Wall Street traders actually have to look at the economy and try to guess the qualitative factors. Translation: the Fed is looking at when the economy improves, and the economy comprises a giant number of measures and statistics. If Wall Street wants Cliffs Notes, it will have to look elsewhere.

Interest rates matter to the Wall Street traders because it determines the profits for the Wall Street banks that trade Treasuries and mortgages and such, and they want the data spoon fed, kind of like the kid taking a test with an open book.

Part of the problem with the old 6.5% rule was that the unemployment rate didn’t do a good job of measuring the real employment picture; the unemployment rate was dropping, getting close to the 6.5% target, but that’s because more people were dropping out of the workforce. The unemployment rate only measures people who are still in the workforce and can’t find jobs; it ignores those who have given up.

Yellen just ended the “open book” testing. No longer will the Fed promise to raise interest rates at 6.5% unemployment. Instead, the Fed will raise interest rates when the economy is strong enough to justify it. Wall Street will have to actually pay more attention to the strength of the economy than they pay to filling out their basketball brackets.

Telling Wall Street traders to think is tricky business; they don’t think, they trade. The Fed, under Yellen, wants to keep market expectations aligned with their own forecasts. If traders start to price in earlier rate hikes, the result would be tighter financial conditions that could deter the very investment and hiring that the Fed wants to promote.

The only thing traders heard today was “around six months”. Did Yellen mean to be that specific? No, the Fed has always loosely defined “considerable period” as about half a year. It’s supposed to be a little vague. She probably didn’t intend to give any hints about timing beyond what the “dot plot” said. No Fed chair is going to confidently tell markets that it’s going to raise rates in 14 months. But now that she’s leading the Fed, the markets will react to what she said, not what she means. And this is where it gets interesting. Will Yellen and her Fed colleagues try to “walk back” her statements, or will they leave them out there as they stand. It could be a defining moment in the early stages of the Yellen-led Fed.

Meanwhile, there are some new definitions in on central banks role in the process of printing money, and that came from the Bank of England a few days ago. In a paper called “Money Creation in the Modern Economy”  co-authored by 3 economists on behalf of the  Bank of England, they state that most common assumptions of how banking works are simply wrong, and the entire theoretical basis for austerity is wrong.

Consider the old, conventional view, which continues to be the basis of most of the debate on public policy and the framework for austerity. People put their money in banks. Banks then lend that money out at interest – either to consumers, or to entrepreneurs willing to invest it in some profitable enterprise. True, the fractional reserve system does allow banks to lend out considerably more than they hold in reserve, and true, if savings don't suffice, private banks can seek to borrow more from the central bank.

The central bank can print as much money as it wishes. But it is also careful not to print too much. In fact, we are often told this is why independent central banks exist in the first place. If governments could print money themselves, they would surely put out too much of it, and the resulting inflation would throw the economy into chaos. Institutions such as the Bank of England or US Federal Reserve were created to carefully regulate the money supply to prevent inflation.

Under this old, conventional definition, money is a finite resource; there are limits. What the Bank of England admitted this week is that none of this is really true. To quote from its own initial summary: "Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits" … "In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money 'multiplied up' into more loans and deposits."

In other words, everything we know is not just wrong – it's backwards. When banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognize as legal tender by its willingness to accept them in payment of taxes. There's really no limit on how much banks could create, provided they can find someone willing to borrow it.

What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. Government spending is the main driver in all this. So, there's no question of public spending "crowding out" private investment. It's exactly the opposite.

Some of us have known this for quite some time, but this was the first time a major central bank has admitted it. Why did they admit it? Probably because that whole austerity thing hasn’t been working out.

Friday, February 07, 2014 - Jobs Report Friday

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

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. 

Friday, January 10, 2014 - Jobs Report Friday

Jobs Report Friday

by Sinclair Noe

DOW – 7 = 16,437
SPX + 4 = 1842
NAS + 18 = 4174
10 YR YLD - .10 = 2.86%
OIL + 1.23 = 92.89
GOLD + 20.90 = 1248.60
SILV + .63 = 20.27

Jobs report Friday. The US economy created only 74,000 net new jobs in December. The number of jobs created was the lowest in 3 years and was well short of expectations for about 195,000 jobs. In the four months before December, the average number of jobs created in the US was 214,000 a month. The Labor Department said 38,000 more jobs in November were created than the 203,000 previously reported.

And the unemployment rate dropped from 7% to 6.7%.

If that doesn't seem to add up, you are correct. The headline news that the unemployment rate dropped to 6.7% is not good. The problem is that a bunch of people fell out of the labor force, 347,000, to be exact. They stopped looking for work, which made them no longer "unemployed" in the eyes of the Bureau of Labor Statistics; they just become invisible.

The Labor Force Participation Rate dropped from 63% in November to 62.8% in December. This is a measure of the working age population in the labor force. The participation rate is well below the 66% to 67% range that had been considered typical over the past 20 to 30 years. The participation rate has been dropping for the past 12 years.

Part of the reason for the drop in the participation rate is due to the Baby Boomers retiring, but that's just part of it; and actually many boomers are staying in the work force, unable to retire after the financial crisis of 2008. The bigger problem is that the economy is not strong enough to create enough jobs to keep or bring people into the labor force. Not just boomers, but also younger people are leaving the labor force, or never getting in. Many younger people are in school and not counted as part of the labor force, while others are probably just hanging out, plotting how to overtake this flawed economic system that has failed them.

So, when we look past the young people who can't get a job and the older people who are retiring whether they can afford to or not, we turn to the 25 to 54 year olds, the meat and potatoes of the labor force; The 25 to 54 participation rate declined in December to 80.7% from 80.9%, and the 25 to 54 employment population ratio increased to 76.1% from 76.0%. So, for many people in their prime earning years, there just isn't work to be found. And if they find work, it takes a while to get up to speed on wages. It now takes the average worker until age 30 to earn the national median salary; young workers in 1980 reached that point in their careers at age 26. This has significant implications for financial prosperity later in life.

So, we had very weak growth in new jobs, just 74,000 and the unemployment rate dropped significantly from 7% to 6.7%.

Women gained, on net, 75,000 jobs in December; men lost, on net, 1,000 jobs. This was the first time since December 2007 that a month’s job gains were captured entirely by women. Women represented 56% of the net gain in the 12 months. Women also suffered far fewer job losses during the downturn, partly because men are more likely to work in industries very sensitive to the business cycle. Also, because women are generally paid less than men to begin with. Women’s recent job gains have been concentrated in low-wage sectors, though not exclusively.

As a side note, we learn today that American workers tend to stick to the same job longer today than they did 10, or 20, or 30 years ago. Workers had an average job tenure of 4.6 years in 2012, the last year for which figures are available, that’s up from 3.7 years in 2002 and 3.5 in 1983. And that holds for all age and gender categories.

American workers are stuck in a rut, and they’re staying in their jobs longer rather than seeking new opportunities. A high “churn” rate is typically seen as a reflection of a healthy economy. People are holding on to their jobs not because they want to, but because they don’t have as much opportunity as they once did. There were about 4.2 million so-called separations in October 2013, the latest month for which data are available; this is still down from 5.1 million in 2006, but a significant improvement on 3.9 million separations in 2011.

The leisure, manufacturing and services sectors added jobs in December, but construction cut 16,000 jobs, the biggest drop in the industry in 20 months. Some of the cuts in construction might be weather related. Retailers hired 176,000 workers in December; much of that is seasonal hiring but it was the highest level of seasonal hiring since 1999. The net gain for retailers was 55,000 jobs.

Health care cut 6,000 jobs, for the first cut in 10 years; I'm not sure what that says about the implementation of Obamacare. Transportation and warehousing lost a small number of jobs; this might suggest that shippers hired fewer workers for the holidays; UPS should have hired more. Factories added 9,000 jobs for a fifth straight monthly gain, however that was down from 31,000 in November.

Involuntary part-time workers, or people working part time because they can't find full time work, held steady at 7.8 million. These workers are counted in an alternate measure known as U-6, which measures unemployed as well as under-utilized workers. The U-6 was unchanged at 13.1% for December.

Long term unemployment remains a problem, with more than 3.8 million workers unemployed for 26 weeks or more and still wanting a job; that number was down from just over 4 million in November. Last month, 37.7% of the unemployed had been so for at least six months (2.5 percent of the labor force), an average that fell only slightly over the year, down about one percentage point. These long-term unemployment measures remain highly elevated, both in historical terms and most importantly relative to times in the past when Congress allowed extended benefits to expire.

State and local governments lost jobs for 4 straight years, but actually added about 54,000 jobs for 2013; however for the month of December, local government jobs dropped by 11,000. Federal government jobs continued to drop, of course.

The private sector has added jobs for 46 consecutive months, increasing by 8.2 million over that period. For 2013 the economy added 2,186,000 jobs; down slightly from 2012; up slightly from 2011; much better than 2008 and 2009, when we lost a combined 8.6 million jobs. The unemployment rate has dropped from 7.9% in December 2012 to 6.7% in December 2013, but again, much of that was due to people leaving the work force. The share of Americans with jobs did not increase in 2013. The economy added about 182,000 jobs a month, just enough to keep pace with population growth.

At the end of 2006, 63.4% of American adults had jobs; for 2013 the employment rate had dropped to 58.6%. The unemployment rate doesn't measure the share of American adults who don't have jobs, it only counts people who are seeking work, and the unemployment rate has been dropping because fewer people are seeking jobs.

This weak report is just one month, and that is not enough to form a trend. There will be revisions in coming months. The BLS director said that cold weather may have distorted the figures a little, maybe not.

Today's jobs report may have some important policy implications. The decline in unemployment may limit the Federal Reserve’s ability, or at least its willingness, to stimulate the economy. St. Louis Fed Bank President James Bullard said today the central bank is likely to continue to reduce its bond purchases and not be swayed by the weak December job report. "I would be disinclined to react to one month's numbers," Bullard told reporters after a speech in Indianapolis. "For now we are on a program where we are likely to continue to taper at subsequent meetings," he said. Starting this month, the Fed reduced its monthly bond purchases to $75 billion from $85 billion. The Fed rate-policy committee meets again on Jan. 28-29.

This morning's report suggests the economy is recovering in starts and fits; what it should tell the Fed is that their QE never really trickled down to the average American family. The Fed may claim that the wealth effect from artificially stimulated housing markets and QE juiced stock markets has been a rising tide that lifts all boats, but the reality is that it only lifted yachts. And the problem, or one of the problems, is that the rich spend a far smaller proportion of their earnings than the middle class and poor; who tend to live paycheck to paycheck or even hand to mouth. This is why the Fed's reliance on the wealth effect has resulted in a demand deficit, and ever-slowing velocity of money. The rich save, the poor spend, and when money is spent, it circulates through the economy, creating demand, and to meet demand businesses hire people, or people take entrepreneurial incentive; and this is how jobs are created – by demand.

It’s the job market, not the stock market, that most people depend on for their economic well-being, and as long as the former remains below full employment and with a declining share of participants, the benefits of growth will not reach far beyond the top echelons and the economy will not get out of second gear.