A Solid Jobs Report
Financial Review by Sinclair Noe for 11-06-2015
DOW + 46 = 17,910
SPX – 0.73 = 2099
NAS + 19 = 5147
10 YR YLD + .09 = 2.33%
OIL – .68 = 44.52
The economy added 271,000 jobs in October, beating expectations of 180,000. The unemployment rate fell from 5.1% to 5%, a 7-1/2 year low. The U.S. has added an average of 206,000 jobs a month in 2015. In the past 12 months the economy has added 2.8 million jobs. The U-6 unemployment rate, which includes discouraged and under-utilized workers, dropped to 9.8% in October, the first time it’s fallen below 10% since May 2008. The number of Americans working part-time because of a weak economy fell to 5.7 million in October. Revisions to prior reports added a total of 12,000 jobs to payrolls in the previous two months. August was revised higher from 136k to 153k but September was revised lower from 142k to 137k. Still, employment only averaged 145,000 in August and September.
Now, this raises questions about why the numbers were so weak in August and September, and why the numbers for October were so strong. Was there a big shift in the labor market? Probably not; more likely this is statistical noise. It is difficult to track the labor market; it is impossible to track it with absolute precision. This does not mean the numbers are wrong. It’s always tricky to read too much into one jobs report but when you combine August, September, and October you have 187k for the 3 month average. Not bad.
Average hourly earnings rose by 0.4 percent from the prior month, up 9 cents to $25.20 an hour. Worker pay increased 2.5 percent over the 12 months ended in October, the most in more than six years. They had been stuck around near 2 percent on average since the current expansion began in mid-2009. Wage growth means more money in peoples’ pockets, which means more spending, which means more demand, which means more business activity, which means more jobs at higher wages, which means more people getting back in the labor pool. Indeed, the labor force grew by more than 300,000 in October.
White-collar businesses added 78,000 professional jobs. Health care added 45,000 positions. Restaurants hired 42,000 people. Builders built up employment by 31,000, reflecting an upturn in construction over the past year. Retailers took on 44,000 new workers; retailers typically add workers in October, and even more in November, for the holiday shopping season. There is usually a link between retail hiring and holiday sales; so this shows retailers are optimistic about a strong holiday shopping season.
State and local governments added 5 thousand jobs. State and local government employment is now up 212,000 from the bottom, but still 546,000 below the peak. Federal government payrolls dropped by 2,000 in October. So, basically all the job growth we have seen from the bottom in 2008 is private sector job growth. We might see some increase in government jobs in 2016 because of the recent passage of the budget bill which undoes some of the sequestration caps; also, the possible passage of a highway funding bill.
The Labor Force Participation Rate was unchanged in October at 62.4%, a 38-year low. This is the percentage of the working age population in the labor force. The average number of weeks of unemployment rose slightly to 28. The employment rate stands at 59.3%. The employment rate measures the number actually working compared to the number who could work. After 185,000 full-time jobs were created in October, the total number of positions rose to 122.02 million. That tops the 121.61 million mark in December 2007, the start date for the recession. The recovery has, despite popular conceptions, been led by gains in full-time positions. In the last 12 months, for example, 2.34 million full-time jobs have been added, while 507,000 part-time jobs have been lost.
Still, the high Labor Force Participation Rate and the low employment rate is troubling. Certainly part of it is demographics, as the Boomer Generation continues its march into retirement, willingly or not. So we turn to workers in their prime working years. The 25 to 54 participation rate increased in October to 80.7%, and the 25 to 54 employment population ratio was unchanged at 77.2%. Roughly one in five workers, in their prime working years, are sitting on the sidelines; more women than men are sitting on the sidelines. It is generally very difficult to be unemployed. France, Germany, and Japan all offer far more benefits for unemployed people but they have far fewer working age people out of work. American workers don’t make enough to survive comfortably off welfare largesse.
A possible explanation is that labor market flexibility allows employers to substitute the young and the old for prime-aged workers. The US has relatively high participation rates for people aged 15 to 24. It has also experienced a big rise in the participation rate for people over 65, from 13 per cent in 2000 to 19 per cent in 2014. And so many workers in their prime working years, just aren’t in the labor pool, and 85% of those prime age workers without jobs do not have a bachelor’s degree. Many of those unemployed workers have skills not gained with a college degree. The recovery has been uneven. Geography plays a part; rural America has been left behind in the shift to technology. We are no longer an agrarian society, and the worst unemployment and the lowest participation rates are in rural areas, or areas that once had strong manufacturing presence.
There is a big divergence between the industrial sector, where companies that are exposed to a strong dollar, slowing economies in emerging markets and low oil prices are being hammered, and the broader job market and consumer economy in the United States, which is pretty much fine. Foreign competition and technological advances have eliminated many of the jobs in which high school graduates once could earn $40 an hour, or more.
This is a massive shift in the workforce. Sitting on the sidelines might be a refusal to take work that won’t pay a living wage rather than face the harsh reality of accepting a job that can’t support one’s family. In other words, people who have been downsized, sometimes multiple times, just refuse to admit how desperate their situation really is. And even though the economy has added jobs, the slack in the labor market has not been enough to create wage push inflation; employers have not been pushed to pay higher wages to lure workers off the sideline. The Fed is concerned that once the slack comes out of the labor market there will be a corresponding jump in wage inflation.
Maybe higher wages would lure workers off the sidelines, but the recovery has dragged out for so long that many of those workers have lost their skills. Many have also lost their health, physical and mental. Earlier in the week we reported on a new study by Nobel Economist Angus Deaton and his wife, Dr. Anne Case showing that from 1999 to 2013, the death rate among non-Hispanic whites aged 45 to 54 with a high school education or less rose 22%, while they actually fell for those with a college education. There seems to be a direct link between decent paying jobs and health, between the labor force participation rate and survival.
The economy added 271,000 jobs and any gain above roughly 150,000 was expected to keep Fed policymakers on track to raise interest rates from record lows at their Dec. 15-16 meeting, though the Fed will have one more jobs report, to digest before then. At 5 percent, the unemployment rate is very close to what would normally be considered the threshold for full employment by the Fed. Chair Janet Yellen and other leading Fed officials have said that the economy is generally healthy and that the December meeting is a “live possibility” for a rate hike. This morning, James Bullard, head of the St. Louis Federal Reserve, said that the global fears that caused the Fed to delay the rate hike have “largely dissipated”.
Treasuries dropped after the jobs report was published. Traders see a 70 percent chance the Fed will boost interest rates from near zero at its December meeting, up from 56 percent odds before the release of the labor data. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after the first increase, compared with the current range of zero to 0.25 percent. In other words, everybody expects any interest rate hikes to be small and gradual. The yield on the 10-year Treasury note climbed to 2.33%. The two-year note reached as high as 0.95 percent, a 5-year high.
The dollar surged past this year’s high. The greenback gained against all of its 16 major peers. European shares erased losses as the weak euro bolstered exporters. Emerging-market assets tumbled. You’re seeing a real-time adjustment to the yield curve, and that’s quite sensitive to all risk markets. There will also be an earnings drag as rate speculation leads to a stronger dollar, which will likely weigh on corporate top-line growth.
Needless to say, the Fed will pay a lot of attention to forthcoming economic numbers including, of course, the November employment report that will be released in a month’s time. Although the numbers are unlikely to be as strong as the October figures, they probably will reinforce perceptions that the U.S. economy continues to heal. And beyond the economic numbers they will be watching for a breakdown in emerging market economies, or any possible breakdown on Wall Street, or an exogenous event – the ever-fearful Black Swan.
Remember it’s the last interest rate hike from the Fed that halts a bull market, not the first one.