Lousy Good Friday Jobs Report
Financial Review by Sinclair Noe
The New York Stock Exchange and the Nasdaq were closed in observance of Good Friday. The Chicago Mercantile Exchange was open, for a holiday shortened session, so there was some trading in equity index futures, and interest-rate and forex futures, and also some light trading in the bond markets. Good Friday is not a federally recognized holiday, and so the monthly jobs report was issued on schedule. We’ll just have to wait until Monday to see how the markets react.
It was a lousy jobs report. The economy generated just 126,000 new jobs last month, marking the smallest gain since the end of 2013; estimates had been calling for twice as many new jobs. The unemployment rate was unchanged at 5.5%. Employment gains for February and January were revised lower by a combined 69,000. The result: The increase in hiring in the first three months of 2015 has slowed dramatically to an average of 197,000. While the pace of hiring this year is still fairly decent, it doesn’t come close to matching average job gains of 289,000 in the fourth quarter.
This was just one lousy jobs report, and that does not constitute a trend but it might reflect a slowdown that we’ve been seeing in other economic data, including consumer spending patterns, a slowdown in the energy sector, sluggish business investment; and don’t forget the bad weather. The energy sector has responded to lower oil prices by cutting the number of active oil rigs and laying off workers. Lower oil prices have been a boon for most consumers, but it hasn’t resulted in more spending; instead consumers are saving more.
With companies hiring at a slower pace, some 96,000 Americans dropped out of the labor force in March. The labor-force participation rate fell a tick to 62.7%, once again matching the lowest level in 37 years. This indicates that we are now realizing the demographic shift of the boomer population moving into retirement; 37 years ago, back in the late 1970s, the boomers were just moving into the jobs and careers – that pushed the participation rate higher. Right now the participation rate for 25 to 54 year olds, or people in their prime working years, is at 80.9%. For people older than 55 the participation rate is 39%. That’s because as people age, they retire and drop out of the labor force. And get this… in 2000, the 25-to-54-year-old group made up 42% of the population, while the 55-and-over group made up 20%. Today, the over-55 group makes up 27%, while the younger group has declined to 39%. Certainly some people dropped out of the labor force because they were discouraged, and some discouraged workers retired; but more and more we are seeing a massive demographic shift with boomers retiring. The demographic shift can play havoc with economic growth, lopping off more than a half a percentage point in economic growth per year.
Long-term unemployment also remains a problem for older workers even as more seniors are hanging on to their jobs well into their 60s. A report issued by the AARP Policy Institute this week noted that last year, on average, 45 percent of job seekers aged 55 and older were out of work for 27 weeks or more. The number of long-term unemployed was little changed at 2.6 million in March.
That said, we are not at full employment. We’re not even certain what full employment is anymore. The Fed guesstimates that it is around 5% to 5.2%, but that is a guess. There are still 6.7 million workers employed part-time for economic reasons; that means they want a good full-time job, but they can’t get one or because their hours were cut back. These workers are included in the alternate measure known as U-6, which measures unemployment and underutilization. The U-6 decreased to 10.9% in March from 11% in February. This is the lowest U-6 since the summer of 2008.
Slack in the labor market shows up in the wage numbers. If we were at full employment, workers should be demanding and getting higher wages. We are starting to see a little improvement, but still not enough to stoke wage push inflation. McDonald’s and Walmart each announced this week that they would start raising wages for low wage workers; this was not part of this month’s jobs report but it will start showing up over the next few months. Think of slack as who has leverage, employers or workers. Right now, employers still call the shots. Wages are starting to move higher because the leverage is starting to shift, just starting.
Average hourly wages rose a solid 0.3% in March, or 7 cents to $24.86; though how much employees get paid hasn’t shown much change despite the biggest increase in hiring in 2014 in 15 years. The increase in wages over the past 12 months was 2.1%.Year-over-year increases have stuck to a tight range of 1.9% to 2.2% for the past three years. And wage gains have averaged about 2% since 2010, just two-thirds as fast as they normally grow. Still, wage growth is now running just a little ahead of inflation, so the gains are real… except, the amount of time people worked each week slipped 0.1 hours to 34.5 hours after hovering at a post-recession high for months. So, wages up, hours down – it’s a wash.
Total employment increased 126,000 from February to March and is now 2.8 million above the previous peak. Total employment is up 11.5 million from the employment recession low. Private payroll employment increased 129,000 from February to March, and private employment is now 3.3 million above the previous peak. Private employment is up 12.1 million from the recession low. And that is one of the unique things about the jobs recovery, it has happened without a boost from government jobs; to the contrary, government jobs have been cut since the recession and that has served as a drag on recovery in the labor market.
Breaking it down by industries: government lost 3,000 jobs last month, manufacturing and logging each lost 1,000 jobs, the mining and logging sector lost 11,000 jobs – this includes jobs in the oil exploration and drilling industries. We saw 2,000 jobs added in the information sector, 5,800 new jobs in wholesale trades, 8,000 new jobs in financial activities, a gain of 9,500 in transportation and warehousing, almost 30,000 jobs in retail, and 13,000 new jobs in hospitality and leisure (we saw a big jump in restaurant jobs – 88,000 in February – but that might be tapering off now), education and health services added 38,000 jobs, and professional and business services added 40,000.
So, what does this mean for the economy and the markets? Well, first of all, this is one month, it is not a trend. One year ago, we were just coming out of a harsh winter, and the economy was down, and then the economy bounced back very strong in the second and third quarters with a sharp uptick in new jobs. If you think you know what the economy is doing right now, you are probably delusional. About the only thing I can say with confidence is that these are uncertain times. I have no idea how the markets will respond on Monday. The dollar moved a little lower but it is still strong. Commodity prices moved lower despite a weaker dollar. The yield on the 10-year Treasury note slipped 7 basis points to 1.84%. Stocks could move up Monday on the idea that bad news is good; meaning the weak jobs numbers will restrain the Fed from raising rates in June or maybe even this year; or stocks might drop next week on the idea that bad news is bad; the economy is weak and that will hurt sales and profits.
I don’t think the Fed knows either. Speaking at a conference in San Francisco last week, Janet L. Yellen, the Fed’s chairwoman, warned that the recovery was fragile, despite steady progress on the jobs front. The Fed went from being “patient” about raising rates to being data dependent.
I do think this lousy jobs report means there is almost no chance the Fed will raise rates in June. My thinking is that the Fed does not want to make the mistake of shocking the markets, because markets tend to fall down when they are shocked. So they will want to see next month’s jobs numbers (because they are data dependent) and then they will want to communicate their position to the markets, and then they will want to communicate again (just to make sure everybody knows what they think without any equivocation), and that pushes a rate hike back to August at the earliest, and only if we see a strong rebound in economic data and an improving labor market. If the data remains squishy or turns a bit nasty, we might not see a rate increase this year.
We’ve made it through the first quarter and we still don’t know where we’re headed. Maybe the cold weather in the Northeast and the drought in the West hurt the economy; maybe the West Coast port slowdown was a factor; maybe the stronger dollar is hurting profits for multinationals, but the rest of the world’s economies are acting as a drag on the US. And then we need to remember that the economy still added jobs. It’s not like we lost 800,000 jobs; this is not 2008. The unusual thing about recent labor market data is the consistency of positive news. Over the last 30 years we’ve had just four calendar years in which we didn’t have at least one month with net private sector job creation of less than 100,000. Those years were 1987, 1994, 2013 and 2014. Prior to the relatively weak results for March, we had a streak of 12 consecutive months with private sector job gains exceeding 200,000. That was the first time that has happened since 1977. The trend is still up…, for now.