Financial Review

Jobs Report Friday

Financial Review by Sinclair Noe

DOW – 278 = 17,856
SPX – 29 = 2071
NAS – 55 = 4927
10 YR YLD + .13 = 2.24%
OIL – 1.02 = 49.74
The first Friday of the month is all about jobs.
The Bureau of Labor Statistics reports the economy added 295,000 new jobs in February. The unemployment rate dropped from 5.7% to 5.5%. The results topped estimates of 235,000 jobs, and also beats the revised 239,000 reported for January (revised down from 257,000); and also up from 188,000 a year ago.


The estimates were lower, mainly because most of the country has been experiencing harsh winter weather, and on the West Coast there was a shutdown and a slowdown at the ports. None of that seemed to matter, and if you are thinking ahead, you might imagine that the economy will just keep getting stronger as the weather gets better.


Now, you might look at how Wall Street responded to this very good news about jobs and you might be scratching your head, you might even think Wall Street is opposed to honest, hardworking Americans. Well, maybe a little, but the reason for the sell-off is that a stronger economy means higher interest rates. Investors are looking and focusing entirely on what the Federal Reserve will do in the coming months. Effectively good news in this data point supports the notion that they will raise rates in the not-too-distant future. Wall Street and corporate America have been enjoying a long run of free or at least very cheap money.


The Fed says any interest rate increase decision will be data dependent, but it should not be just that the unemployment rate drops to a given level. Disinflation leaves some wiggle room. And the Fed should also consider the long-term damage suffered by workers who have dropped out of the labor force or are long-term unemployed. Better to grow a little faster than desired rather than stamp out a recovery that is just approaching escape velocity.


Wages rose 0.1%, or .03 cents to $24.78. Average hourly wages for private-sector workers have been rising slowly, at around a 2% annual pace, for the last few years. There was a 0.5% increase in wages in January, but that now looks like a “one off” month. The Consumer Price Index, or inflation at the retail level, fell 0.1% in January compared to a year earlier; so that means “real” wages actually grew.


The US economy added over one million jobs between November and January, and it looks like the labor market is getting stronger and stronger. February was the 53rd straight month of employment gains, and the 12th straight month payrolls have increased by at least 200,000, the best run since a 19-month stretch that ended in March 1995. Payrolls rose 3.1 million in 2014, the most in 15 years. And payrolls are up 3.3 million year-over-year in February.


Most industries added workers to their payrolls. Bars and restaurants led the way by adding 59,000 jobs. It looks like people who are saving a few dollars at the gas pump are spending a few dollars for dining out. Unfortunately, bars and restaurants are not typically high paying jobs. Education and health services added 54,000 jobs. White-collar business and professional firms hired 51,000 employees, while cutting back on their use of temporary workers. The number of temp workers fell for the second month in a row for the first time since 2011. A cut back in temp jobs may indicate that temp workers are getting permanent positions.


Retailers added 32,000 workers. Construction companies created 29,000 jobs in February despite poor weather in much of the eastern half of the country. Transportation and warehousing added 18,000 jobs; financial activities added 10,000 jobs; and Information added 7,000.


Manufacturers created 9,000 new jobs, the smallest amount in 18 months. A few factors hit manufacturing, including a stronger dollar and weak global growth that has curtailed demand for American-made goods. In a separate report this morning the Commerce Department said exports fell 2.9% in January to a seasonally adjusted $189.4 billion, marking the third decline in a row. Imports decreased 3.9% to $231.2 billion, resulting in a lower trade gap of $41.8 billion for December.


Government added 7,000 jobs last month; those were state and local jobs, not federal. State and local government jobs are slowly posting gains – now up 138,000 from the bottom but still 620,000 below the peak.


There are still 6.6 million workers who are underutilized, working part-time even though they would prefer full-time work; that’s down slightly from 6.8 million in January. If you add underutilized workers with unemployed workers, you come up with a different measure called U-6, which figures the unemployment rate at 11%, down from 11.3% in January, and the lowest U-6 since September 2008.


And let’s be clear when we look at U-6 compared to the U-3 unemployment rate, which is the headline number at 5.5%. Sometimes, some people say the U-6 is the real unemployment number, and it usually goes in line with some theory that the government is trying to hide the real numbers. No, these are two separate numbers. And you should not try to compare apples to oranges. The U-6 number can help us get a better understanding of slack in the labor market, which goes a long way to understanding why wages remain stagnant.


Another reason for stagnant wage growth is that many people have been sitting on the sidelines, sometimes discouraged from looking for work, sometimes they have gone to school for training, and in the case of the boomer population, many have retired, even if it was involuntary. According to the BLS, there are 2.7 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 2.8 in January. And this was reflected in the participation rate, which dropped from 62.9% to 62.8%. The participation rate is the percentage of the working age population in the labor force. What we see here is that some long-term unemployed have moved back into the labor pool, while the massive demographic shift persists, and others have walked away from the pool. The drop in the jobless rate reflected both an increase in hiring and a decline in the number of people in the labor force.


When people get back in the labor pool after a long bout with unemployment, they typically return for lower wages. Also, part-time workers have very little power in negotiating higher wages; usually their best hope is for more hours. This puts a downward bias on wages.  There is growing evidence that an improvement is underway. One indication is the growing number of younger workers changing jobs as they gain more confidence in their prospects. There were 2.7 million quits in December; you have to quit a job before you get a new job. And you don’t quit unless you are fairly confident about a new job. On average, workers who switch jobs get a 14% pay increase in their new salaries.


Job openings now top 5 million, the highest level since January 2001. The number of job openings is seen a measure of labor market slack, with more job openings indicating the balance of power in the labor market shifting towards workers looking for jobs and away from employers looking to hire.


We have seen strikes at oil refineries and a slowdown at the West Coast ports; that indicates that workers feel they have enough bargaining power and confidence to demand higher wages. At the same time, we heard that Walmart is raising wages for workers to $9 an hour, and up to $10 an hour next year; a move that is slowly and surely being repeated at other retailers. This indicates that it is cheaper to retain workers at higher wages than it is to find new workers.

Labor advocates say retailers should be focusing on adding hours as well as lifting pay for some workers. Retail workers make up 11% of working adults but that 18% of those who are working part time would rather be employed full time. Many who want more hours are women from minority groups.


Whenever we hear about stagnant wage growth we hear the argument of the “skills gap”; this is the idea that businesses can’t find the workers they need because American workers do not have the skills or education to perform. And it is always a little difficult to counter that argument without sounding anti-education. So don’t take this wrong. Education is still a great way to get a good paying job. Highly educated workers generally have a higher rate of employment and generally higher wages. But that doesn’t tell the whole story.


If businesses were desperate for workers with certain skills, they would presumably be offering premium wages to attract such workers. So where are these fortunate professions? You can find some examples here and there. Interestingly, some of the biggest recent wage gains are for skilled manual labor — sewing machine operators,boilermakers — as some manufacturing production moves back to America. But the notion that highly skilled workers are generally in demand is just false.


Meanwhile, the inflation-adjusted earnings of highly educated Americans have gone nowhere since the late 1990s; their wages are just as stagnant as everybody else. The premium to higher education has plateaued over the last 10 years. We see evidence highly skilled workers have less rapid career trajectories and are moving into less skill occupations if anything. Productivity is not growing very rapidly, and a lot of the employment growth we’ve seen in the past 15 years has been in relatively low education, in-person service occupations.  Wage inflation in the United States is 2%. It has not gone up in five years. There are not 3% of the economy where there’s any evidence of hyper wage inflation of a kind that would go with worker shortages. The idea that you can just have better training and then there are all these jobs that will magically appear, all these places where there are shortages and we just need to train people is fundamentally an evasion.


The simple reality is that demand creates jobs. If someone has a job, they spend their paychecks and that creates demand, and businesses then hire someone to meet the demand rather than lose the business. Unless you’re doing things that have things that are effecting the demand for jobs, more training and more education just means you’re helping people win a race to get a finite number of jobs. The core problem is that there aren’t enough jobs.











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