The Goldilocks Job Report
by Sinclair Noe
DOW + 198 = 16,020
SPX + 20 = 1805
NAS + 29 = 4062
10 YR YLD – .02 = 2.85%
OIL + .27 = 97.65
GOLD + 5.60 = 1231.70
SILV + .11 = 19.64
Big gains on Wall Street, the best in about a month. The monthly jobs report came out this morning. It was just a little better than expected; nothing earth shattering but decent. The economy generated 203,000 net new jobs. The unemployment rate dropped to 7.0% from 7.3%. The unemployment rate is now at the lowest level since November 2008. So, this was a Goldilocks report, just good enough to indicate some strength but not so strong as to push the Federal Reserve to taper, to cut back on its monthly bond purchase program. Really, the Wall Street traders got the best possible report today. There is still a slight risk of a Fed taper in December, and we’ll talk about that more in a moment.
Let’s dig into the numbers.
Hiring in November was strong in most industries, including transportation and warehousing, professional occupations, manufacturing, health care, construction and retail. And there was a shift toward more well-paying jobs compared with October.
The number of businesspeople and professionals who found work rose by 35,000 to lead the way. It has been the fastest-growing category over the past year. Companies that warehouse and deliver goods, meanwhile, hired 31,000 new workers; some of that gain may be seasonal. Manufacturers added 27,000 jobs, the biggest increase since March. Construction companies added 17,000 jobs, slightly above the industry’s 12-month average.
Typically retail companies start hiring for the holiday season in October, and really increase hiring in November; however, retail employment slowed, adding 22,300 last month compared to 45,800 in October.
State and local governments added 14,000 jobs. The only area of the economy posting job cuts was the federal government, which was not surprising, because the federal government has been cutting jobs every month this year.
The bigger surprise in this release was a three-tick decline in the unemployment rate to 7.0%, as furloughed government workers coming back into the labor force contributed to a sharp rise in household employment and participation failed to recoup all of the decline seen in the previous month. Most of the employment impact from the government shutdown was reversed in the November report.
The Labor Force Participation Rate increased in November to 63.0% from 62.8% in October (October decline was partially related to shutdown). This is the percentage of the working age population in the labor force, looking for a job or actually working. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although a significant portion of the recent decline is due to demographics.
The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) fell by 331,000 to 7.7 million in November. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job. These workers are included in the alternate measure of labor utilization known as the U-6, which decreased to 13.2% in November from 13.8% in October.
There are 4.066 million workers who have been unemployed for more than 26 weeks and still want a job. This was up slightly from 4.063 million in October. This is generally trending down, but is still very high. Long term unemployment remains one of the key labor problems in the US. After a while, these people are no longer considered to be actively seeking work, and they just sort of disappear from the data.
Employment gains for October and September were little changed overall. The number of new jobs created in October was trimmed to 200,000 from 204,000, while September’s figure was raised to 175,000 from 163,000.
The higher concentration of good-paying jobs created last month helped to push up average hourly wages by 4 cents to $24.15. Over the past year hourly earnings have climbed a mild 2%. The average workweek edged up 0.1 hour to 34.5 hours, which remains near a post-recession high. Hours usually increase when the economy strengthens.
Since June 2009, real average weekly earnings have increased 0.3% per year, even as productivity has increase by 1.5% per year. Most of the gains in income have gone to the highest income earners, and real median weekly wages have declined by 0.8% per year since 2009. Stagnant or declining wages are nothing new; that trend has been in place for more than 30 years. The other day we reported that corporate profits remain near record highs as a share of national income, but workers’ share has dropped to the lowest level in nearly 60 years. The problem of stagnant wages has created a new niche in what was once considered the vast middle class; that new group is called ALICE, asset limited income constrained employed; but they’re not the only ones affected by stagnant wages. Slow wage growth is the rule for the bottom 75%. Almost everybody is falling behind the top 5% to 10%.
Surely, the weakness in wages will be a consideration for the Fed when they consider the prospects of taper. The unemployment rate at 7.0% might lead the Fed to taper. Employment was up 2.293 million year-over-year in November; that might be enough for the Fed to consider taper. One month of figures doesn’t necessarily mean much: there’s a lot statistical noise in the employment update. Still, we’ve now seen three months of solid employment growth, with payroll gains averaging more than a hundred and ninety thousand since September. Given that during this period the economy was subjected to a government shutdown and the uncertainty of a debt-ceiling crisis, the strength in hiring is doubly reassuring. The longer-term trend is also encouraging: since the recovery began, in 2009, the monthly payroll figure has averaged about a hundred and seventy-five thousand. So there does seem to have been a bit of a pickup recently.
But there is still extensive economic weakness and other concerns. Yesterday’s 3Q GDP report showed the economy growing at a 3.6% pace, but that number was an upward revision largely due to inventory stacking, which could act as a drag on 4Q or 1Q GDP. That would indicate a wait and see position from the Fed.
The Fed will also consider inflation, and the most recent consumer price index, prices at the retail level were steady in October (the last report). Over the past 12 months, prices rose 0.7%, the smallest gain since October 2009. Disinflation remains a concern, and the thought of breaking through to deflation probably gives Fed policymakers nightmares.
The Fed will also be wary of dialing back bond purchases before lawmakers strike a deal to fund the federal government. That could come as soon as next week. Congressional aides have said negotiators were down to the final details. Still, we have to look beyond the budget committee, and even if the committee comes up with a deal, the Congress might not be able to take that beyond a one year continuing resolution to fund the government, and that wouldn’t happen until January. Again, reason for the Fed to delay a taper.
Beyond the possibility of a budget agreement is content of any such agreement. For years, Bernanke has been begging for fiscal help to stimulate the economy; and while a budget deal might staunch the fiscal bloodletting, that’s not the same as fiscal stimulus. Fiscal stimulus would involve actual spending programs, infrastructure projects, an increase in minimum wages, and much, much more. Don’t hold your breath. Again, that would be reason for the Fed to delay taper.
In the course of the recovery, the decline in the jobless rate has accelerated. In October, 2009, it peaked, at ten per cent. Then it took nearly two years to fall below nine per cent. In the past couple of years, it has fallen by another two percentage points. This is partly because job growth has picked up, but it also reflects the fact that the labor force isn’t growing as fast as it has in the past. A few years ago, the rule of thumb was that the economy needed to generate a hundred and fifty thousand jobs every month to keep the unemployment rate flat. Now, according to Administration economists, the break-even rate is closer to a hundred thousand. When the job numbers come in above that figure, as they did this month, the unemployment rate tends to fall.
Again, this has been a long, slow, slog of a recovery. You should think, and I think the Fed believes that the recovery is still vulnerable, and just looking at the headline number of the unemployment rate masks broader weakness in the labor market and the economy.
On Wall Street, the big question is whether this report will be enough to persuade the Federal Reserve Board, which meets later this month, to start withdrawing one of the extraordinary measures it has been taking to support the economy; namely, QE, the policy of creating $85 billion dollars each month to buy Treasury bonds and mortgage backed securities, and put downward pressure on long-term interest rates, especially mortgage rates.
Both Bernanke and Yellen have stressed the need to look beyond the headline employment rate; a taper announcement at the December FOMC meeting certainly has not been communicated, and it is unlikely the Fed will play the role of Scrooge heading into the holidays. So this report today was about as good as Wall Street could hope for; not too hot, not too cold, as Goldilocks would say – just about right.