Financial Review

Jobs Friday

Everything you need to know about the April 2016 Non-Farm Payroll Report.

Financial Review by Sinclair Noe for 05-06-2016

DOW + 79 = 17,740
SPX + 6 = 2057
NAS + 19 = 4736
10 Y + .03 = 1.78%
OIL + .29 = 44.61
GOLD + 10.10 = 1288.70
The economy added 160,000 new jobs in April, missing expectations of about 200,000. The unemployment rate held steady at 5%. Employment gains for March and February, meanwhile, were reduced by a combined 19,000. The government said 208,000 new jobs were created in March instead of 215,000. February’s gain was trimmed to 233,000 from 245,000.

 

In a bit of good news, average wages climbed 0.3% to $25.53 an hour; a gain of 8 cents, up from a gain of 6 cents per hour in March. Hourly pay rose 2.5% in the past 12 months, up from 2.3%, reflecting a tighter labor market. Inflation has been running at about 2%, so workers are seeing real wage growth.

 

Next week, the Labor Department will announce that it’s doubling the salary threshold under which virtually all workers will be eligible for overtime. (The current threshold is $23,660.) As far back as 1940 it was common for presidential administrations to update the wage thresholds, with 6 revisions over 35 years. The outgoing Carter administration issued a rule to raise the threshold in 1980, but when Reagan took over “revisions to increase the salary levels in 1981 were stayed indefinitely”. It wasn’t until 2004 – 23 years later – that the Labor Department next raised the threshold, and then only slightly, to $23,660. Now the Labor Department plans to double the threshold to about $47,000 and to raise it automatically thereafter with inflation, restoring the status quo that existed before the only US president ever to serve as a union leader took office.

 

Since the start of the year we have started to see new minimum wage laws; most notably California, Colorado, Michigan and Massachusetts increased their minimum wages at the start of 2016, while Maryland and the District of Columbia are set to enact raises on July 1. In a first-of-its-kind report, researchers at the National Employment Law Project pore over employment data from every federal increase since the minimum wage was first established, making “simple before-and-after comparisons of job-growth trends 12 months after each minimum-wage increase.” What did the researchers find? The paper’s title says it all: “Raise Wages, Kill Jobs? Seven Decades of Historical Data Find No Correlation Between Minimum Wage Increases and Employment Levels.” They found that 68 percent of the time, total jobs went up across the economy. Retail jobs increased 73 percent of the time. Hospitality employment rose 82 percent of the time. The researchers say business cycles explain the instances when employment fell: Each of those times, they write, the economy had entered or just come out of a recession, or was about to enter one.

 

While there is some structural change for wages, these really tend to have a very small impact on the overall wage story. A bigger impact is expected if and when we start to get to full employment and possibly start seeing labor shortages, but we are not there yet.

 

The U-6 unemployment rate came in at 9.7%, down one-tenth of a point. The U-6 rate is defined as all unemployed as well as “persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the labor force.” That means the unemployed, the underemployed and the discouraged. Gains in general were tilted toward part-time work, with full-time workers declining by 253,000 and part-time workers also dropping, but by just 21,000. The number of people working part-time for economic reasons, at just over 6 million, remains 50 percent above what it was before the 2007-2009 financial crisis and recession. But it has been stuck around that level for more than half a year, a sign that progress may have stopped or that employers have shifted some jobs permanently away from full-time status.

 

The number of long-term unemployed (those jobless for 27 weeks or more) declined by 150,000 to 2.1 million in April. These individuals accounted for 25.7 percent of the unemployed.

 

Job growth was concentrated in the business and professional services sector, which added 65,000 positions. Health care was up 44,000, while financial institutions added 20,000 despite some high-profile layoff announcements on Wall Street. Mining lost another 7,000; this category includes energy-related jobs in the oil patch. Companies that drill for oil and natural gas or mine for coal and other metals have cut almost 200,000 jobs since the fall of 2014. Energy firms have reduced payrolls for 18 straight months. Retail lost about 3,000 jobs. Construction added about 1,000 jobs. Government continued to shed jobs, 11,000 last month. When roughly 40,000 Verizon workers went on strike last month, it was right in the middle of the week that government number crunchers analyze to gauge the strength of the job market. Over all, the muted tone of April’s report wasn’t because of a big drop in any particular industry.

 

If you are looking for positive trends in the report, consider that this marks the 74th consecutive month of job gains. Private employment is now 5.8 million above the pre-recession peak. Private employment is up 14.6 million from the recession low. In April, the year-over-year change was 2.69 million jobs. Over the last 12 months, employment growth averaged 232,000 jobs per month.
For Fed watchers the jobs report was a red flag and the thinking is that a drop of 48,000 jobs might stop the Fed from raising interest rates at their June meeting. Futures tied to the Fed’s benchmark policy rate now put the next interest rate hike into next year, but that might be a disconnect from what Fed policymakers have in store. The rise in wages still might push the Fed closer to hiking rates; if not June, maybe September. And the simple fact is that employment was not going to continue rising at 200,000 a month indefinitely. Monthly gains of about 100,000 jobs would be enough to maintain the rate of economic growth and absorb new job entrants as the population increases; especially as boomers continue retiring in a huge demographic shift.

 

The labor force participation rate, which had been on the rise in recent months, fell to 62.8 percent, down two-tenths of a point and its lowest level since January. The total labor force contracted by 362,000. Analysts are divided on whether the decline is “structural”, in other words due to big, long-term shifts in the economy, like baby boomers retiring; or “cyclical”, driven primarily by shorter-term moves in hiring due to the business cycle. It’s an important question.  If it is structural, it means that the labor pool is smaller and most of the slack is already out of the labor market. If it is cyclical, it means that there are still plenty of potential workers on the sidelines, waiting to get back into the labor pool. A third option is that we are nearing some sort of equilibrium where fewer people are leaving the workforce rather than people re-entering. If that is the case, then we might expect the labor force participation rate to trend sideways or lower from here.

 

The labor force participation rate edged down, consistent with what Fed policymakers feel is a longer-term trend given the country’s aging population. Since 2008, the labor participation rate has fallen from a high of 67.3% in 2000 to 62.8%, which is near a 38 year low. It seems that most, not all, of the sidelined workers have come back to the labor pool. We are getting closer to full employment – not there yet – but at least wringing some of the slack from the labor market.

 

Still, most people don’t think this feels like a robust labor market. According to the US Bureau of Labor, workers are considered “employed” even if they are working a couple of part-time jobs to scrape by, even if they work just a couple of hours a week. Many of the jobs created in the recovery are low-paying or part-time; many of the jobs are part of the 1099 economy or the gig economy – temp jobs, freelance, or contracted jobs – in other words, jobs without benefits. The number of Americans working in this capacity grew from 10.1% in 2005 to 15.8% in 2015.

 

After decades of stagnant wages, 73 million Americans — nearly one quarter of our population — now live in households eligible for the Earned Income Tax Credit, a benefit exclusively available to the working poor. And according to a 2014 report from the Organization for Economic Cooperation and Development, rising income inequality (and the reduced consumer demand that comes with it) knocked 6% to 9% off US economic growth over the previous two decades. If the US economy were 9% bigger than it is today, it would have created about 11 million additional jobs. Working people and their families are keenly aware of the fact that strong wage growth continues to be the lagging indicator in this recovery.

 

The Fed raised rates in December and its current projections call for another two hikes this year. But you have to wonder if the Fed really has incentive to hike rates in June. Perhaps the Fed will look at the possible inflationary impact of wage gains, but Yellen has said she is not yet convinced that recent signs of rising prices are evidence of a durable trend. There will be one more jobs report before the Fed FOMC meeting in June. Today’s report was not enough to take a rate increase off the table, but it was enough to make the policymakers think twice.

 

Stocks bounced back from earlier weakness to close higher on Friday but logged their second straight week of losses. Treasury yields rose today, after plunging early in the session to a nearly one-month low. Treasury prices rose for the second week in a row, pushing yields to their largest two-week decline in a month.

 

 

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