Financial Review

November Jobs Report

…Economy adds 155,000 jobs in November. Unemployment rate unchanged at 3.7%. U6 jumps to 7.6%. slightly weak report but not enough to change Fed.

Financial Review by Sinclair Noe for 12-07-2018

DOW – 558 = 24,388
SPX – 62 = 2633
NAS -219 = 6969
RUT – 29 = 1448
10 Y – .03 = 2.85%
OIL + .86 = 52.35
GOLD + 10.80 = 1249.00


The Bureau of Labor Statistics reported the economy added 155,000 jobs in November, with the unemployment rate unchanged at 3.7 percent. With a modest downward revision to the job growth reported for the prior two months (down 12,000 combined), the average over the last three months was 170,000, a clear slowing from the 204,000-average rate over the last year. Payroll growth in 2018 is still on track to beat the previous year’s average monthly gains of 182,000 positions and could surpass 2016’s average monthly increase of 195,000. What’s more, the economy is on track to produce the most new jobs since 2015. November was the 98th month of job creation in a row, a record.


And while 155,000 new jobs missed estimates and was a bit disappointing, it isn’t really a problem. Even if the U.S. were just adding 150,000 jobs a month, it’s a lot more than the country needs to supply everyone entering the labor force with a job: high school and college grads, immigrants, moms returning after an extended absence, retirees looking for side work.


Average hourly earnings, a closely watched sign of whether inflation pressures are building, again rose at a 3.1 percent pace from a year ago, but that’s the biggest advance since 2009. The monthly earnings gain of 0.2 percent fell short of estimates for a 0.3 percent increase. The average work week edged lower by 0.1 hours to 34.4 hours. At the same time, the flush of new jobs is contributing to the fastest pay gains for workers in nine years. The amount of money the average worker earns rose 6 cents to $27.35 an hour last month. The annualized rate for the last three months (September, October, November) compared with the prior three months (June, July, and August) is up 3.3 percent. With inflation likely falling back to near its core rate of 2.0 percent due to lower energy prices, this allows for modest real wage gains. On the flip side, there was a modest drop in the length of the average workweek in November, so the average weekly wage actually dipped slightly.


A separate gauge that includes discouraged workers and those holding part-time jobs for economic reasons, the U6 unemployment rate, sometimes called the real unemployment rate, rose from 7.4 percent to 7.6 percent. On the negative side, the number of involuntary part-time workers rose by 181,000, putting it 423,000 above the low reported in August. Voluntary part-time employment fell by 604,000, putting it below year-ago levels.


Other data in the household survey were mixed. The duration measures of unemployment all fell, with the median duration, at 8.9 weeks, tying its low for the recovery. The percentage of unemployment due to voluntary quits also edged downward to 11.8 percent. This measure of workers’ confidence in their job prospects is inconsistent with the low overall unemployment rate. It was over 14 percent in 2000 and peaked at 15.2 percent in April of that year. On the whole, this is a mostly positive report indicating a decent pace of job growth, but items like the low share of voluntary quits and drop in hours provide some evidence of weakness.


The Labor Force Participation Rate was unchanged in November at 62.9%. This is the percentage of the working age population in the labor force.  Both the overall and prime age (ages 25–54) employment-to-population ratios (EPOP) were unchanged in November at their highs for the recovery. Within the prime-age population there have been notable differences in employment patterns over the last year. Overall, the EPOP is up by 0.7 percentage points over the year. Monthly data are erratic for subgroups, so taking three-month averages finds the sharpest increase is for men and women between the ages of 25–34, with a rise of 1.0 percentage points for both.


The employment gains in the establishment survey were broadly based. Health care added 32,100, a bit more than its average of 27,400 over the last year. Professional firms beefed up staff by 32,000. Manufacturing added 27,000 jobs. Employment in the sector is up by 288,000 (2.3 percent) from year-ago levels. Restaurants added 21,200 jobs, while retail added 18,200, the first increase in three months. And employment in the transportation industry climbed by 25,000 as delivery companies like Fedex and UPS geared up for holiday shopping.


Job growth in construction was weak at just 5,000, which is consistent with falling housing starts. There was also a drop of 8,200 in the number of workers in state and local education. Employment in public education is up by just over 0.1 percent over the last year. Employment fell slightly in government and an energy industry coping with lower oil prices.


Stocks dropped today. This morning, as the jobs numbers were announced, the futures markets initially bounced just a little. The thinking, perhaps, was that the report was a little disappointing and might allow the Fed to take a more dovish stance toward tightening monetary policy in 2019. In this scenario, bad news is good news. That pretzel logic didn’t last long. Until recently, American stocks had been something of a standout performer among global markets. The S&P 500-stock index was up 9.6 percent well into September. But over the last few months those gains have disappeared as investors began to assess the potential fallout from a trade war between the United States and China, rising interest rates, and slowing corporate profits. Gains evaporated as the issue of a trade war resurfaced later Friday morning. Peter Navarro, the director of the White House trade office, said that the United States would increase tariffs on Chinese imports if the two countries could not reach an agreement on trade by the end of a 90-day negotiating period. Trump and President Xi Jinping of China had agreed on Saturday to the standstill on new tariffs, but confusion about the nature of the agreement has only added to recent volatility in the stock markets. At any rate, it is unlikely the US and China can forge a new trade deal in less than 90 days. Investors worry that the trade war between the United States and China could start to pinch corporate earnings and economic activity more than it has to date. But that conflict has been building throughout 2018.


Moving forward, it will be hard for companies to match their earnings results from earlier in the year. The tax cut that has lifted corporate earnings and economic growth in 2018 won’t be repeated in 2019, meaning a harder slog for companies seeking higher profits. Growth will slow unless companies develop ways to extract greater productivity from their work force, which would be great for long-term economic prospects, but isn’t the kind of thing you want to count on.


The markets are also focused on the Fed tightening. Three years’ worth of interest rate increases by the Federal Reserve are finally starting to pinch interest-rate-sensitive sectors, particularly housing, the auto industry and companies with heavy debt loads. After years in which the economy has become heavily tilted toward industries that depend on low interest rates, a potentially painful rebalancing is underway. Many investors fear the Fed underestimated risks to the markets and that policymakers now have an ordained path for monetary policy – playing catch up. Whether the Fed is openminded and flexible and data driven, or if the Fed is rigidly determined to raise rates – it really doesn’t matter. The Fed has a difficult and dangerous path ahead. Unfortunately, “soft landings” after rate hike cycles are as rare as unicorns and virtually all modern rate hike cycles have resulted in a recession, financial, or banking crisis. There is no reason to believe that this time will be any different.


When central banks set interest rates and hold them at low levels in order to create an economic boom after a recession (as our Federal Reserve does), they interfere with the organic functioning of the economy and financial markets, which has serious consequences including the creation of distortions and imbalances. By holding interest rates at artificially low levels, the Fed creates “false signals” that encourage the undertaking of businesses and other endeavors that would not be profitable or viable in a normal interest rate environment.


The businesses or other investments that are made due to artificial credit conditions are known as “malinvestments” and typically fail once interest rates rise to normal levels again. Some examples of malinvestments are dot-com companies in the late-1990s tech bubble, failed housing developments during the mid-2000s U.S. housing bubble, and unfinished skyscrapers in Dubai and other emerging markets after the global financial crisis.


Though it can be difficult to tell precisely which investments or businesses are malinvestments in a central bank-distorted economy, a quote by Warren Buffett is extremely applicable: “only when the tide goes out do you learn who’s been swimming naked.”


For the week, the Dow fell 4.5%, the S&P 500 retreated 4.6%, and Nasdaq tumbled 4.9%. It was the biggest weekly percentage decline for all three benchmarks since March, while also marking the worst start to a December since 2008

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