Category Archives: Employment Situation report

Harrisburg, PA, the state capital, declared bankruptcy yesterday

October 13, 2011 By in Current Market Thoughts, employment, Employment Situation report, Recent Market Action, Strategy Tags: , , , , , , , , , Leave a comment

the Harrisburg incinerator project

Years ago, Harrisburg, a town of under 50,000 in population, decided to borrow heavily to build a gigantic trash incinerator.  The contraption was supposed to turn a big profit for the municipality by generating energy it could sell.  The project was a big roll of the dice for a small town.

The incinerator quickly needed an expensive overhaul and it never worked as planned.  That left Harrisburg, as guarantor of over $300 million in municipal bond financing, at least nominally on the hook for loans it can’t possibly repay (the entire town budget, including transfer payments from the state, is around $60,000). What were they thinking?

The bonds are insured, however, and as Harrisburg has fallen behind on payments, the insurance company has been taking up the slack.

why Chapter 9 bankruptcy?

Why the Chapter 9 filing, then?  The state legislature apparently decided that Harrisburg hasn’t taken enough austerity measures.  So it was preparing to take control away from the town fathers and cut town services to get more money for debt repayment.  But as government bodies do, the legislature decided it needed a rest and recessed for a few days in the middle of  considering the enabling bill.  That gave the Harrisburg Town Council time to vote, 4 to 3, to enter bankruptcy.

legal questions

Legal issues abound.  For example. the town’s attorney says the council vote isn’t binding because town rules require him to review council measures before a vote, and he didn’t get to do so.  The state legislature already has a law on the books telling Harrisburg it can’t enter Chapter 9.  Is that law constitutional?

equity investment implications

I wrote about this topic in more detail late last year, when former brokerage house bank analyst Meredith Whitney predicted massive municipal bankruptcies in 2011.  Virtually nothing so far, though.

Two points to remember:

—states, which have lots more debt than towns, can’t declare bankruptcy

–in some states, municipalities aren’t allowed to declare bankruptcy; in others, state government permission is required first.  We’ll eventually learn whether Pennsylvania is one of the latter sort.

Also, the Harrisburg situation has been clear for years.  While the actual filing may be news, the town’s predicament isn’t.

thinking about pensions?

It’s not clear to me that the Harrisburg town council actually has a plan for what it wants to do in Chapter 9, other than just to foil the state’s effort to take over the town.  In Chapter 9, the town can try to renegotiate the incinerator project debt.  But it can also open the issue of municipal employee pensions that it is committed to but can’t afford.

There’s no indication yet that it wants to do the latter.  But if it does and is successful we can imagine a rash of follow-on Chapter 9 filings by other financially strapped Pennsylvania cities and towns.

That could have a counterintuitive positive economic effect, since it would reduce the need to lay off current employees to get the money to pay retirees.  The monthly BLS Employment Situation reports clearly show that the biggest negative factor in the current labor situation in the US is the constant stream of state and local government layoffs.

conclusion

I think the Harrisburg situation is one to watch out of the corner of your eye, but one that–in my view–holds no big plusses or minuses for equity investors.

the US Employment Situation, September 2011

October 9, 2011 By in Current Market Thoughts, economics, employment, Employment Situation report, Portfolio management, Recent Market Action, Strategy Tags: , , , , , , , , , , , Leave a comment

the report

On Friday morning, October 7, the Bureau of Labor Statistics released its Employment Situation report for September 2011.

The headline number:

–the economy added +103,000 new jobs last month, substantially more than economists had been expecting (not that they’ve been any great shakes recently in forecasting employment recently).

The figures break out into +137,000 positions added in the private sector, with–as has become commonplace in 2011–a net loss of jobs in state and local governments.  The September decline there was -34,000 jobs.

revisions were positive

The BLS Establishment Survey that generates the official employment figures consists mostly in data from large domestic companies.  The initial figures are revised in each of the two months following their first publication, as additional company reports are submitted.

The August figures, which created a sense of panic on Wall Street when they showed a net change in jobs of zero for the month, were revised up.

The original numbers were:

a gain of +17,000 jobs in the private sector (after subtracting the 45,000 Verizon workers who went on strike for a short while), offset by a loss of -17,000 in state/municipal.

The revised figures are:

+42,000 for the private sector, +15,000 for government, for a total gain of +57,000 jobs.  Add the 45,000 Verizon workers who went back on the job in September and grand total for the month is +102,000.  While that’s not enough to absorb all the new workers entering the labor force–to say nothing of draining anything from the large pool of the unemployed–it’s still an ok number by 2011 standards.  And it signals much better economic health than the goose egg initially posted.

July was initially reported as a +117,000 month, and broke out into +154,000 positions for the private sector and -37,000 for state and local government.  The first revision in August trimmed the headline number to +85,000, due totally to the government sector.  Private job additions were actually revised up a bit to +156,000.  But government layoffs were increased by -34,000 to -71,000.

The second revision in September boosts the headline figures to +127,000.   That consists of an addition of +173,000 new jobs in the private sector, offset by a loss of -46,000 jobs by government.

the bottom line

Based on the data we have now, the very negative August Employment Situation report appears to have been a statistical aberration.

By the modest standards of the current economic recovery, July was a blockbuster time for hiring in the private sector.  And during the three most recent months the economy added a total of +352,000 jobs, an average of +117,000 in each period.  The recent positive trend in domestic retail sales  (up more than 5% year on year in September for major retailers) seems to me to reinforce this mildly bullish view.

Running to counter to this trend is the experience of state and local governments, which have together been averaging layoffs of -20,000 a month recently.  The problem here, I think, is that governments were very quick to spend the windfall tax gains achieved during the early-decade housing boom, regarding these years of extraordinarily high income as the “new normal” level of tax receipts.  We still have some way to go, in my opinion, before governments will have shrunk back down to a size that revenues can support.

implications for stocks

It now looks to me like the Wall Street selloff that the August Employment Situation prompted was a mistake–and that the US economy is in considerably healthier shape than bears would have us think.

If so, this realization creates a dilemma for portfolio managers who reacted so negatively to that report.  They have doubtless “explained” to their clients that they acted heroically in dumping out stocks when they did.  Can they now buy back the stocks they panicked out of a few weeks ago at the same or higher prices?  No, not without looking very foolish if their customers notice what they’re doing.   From a client retention point of view, their best strategy is to wait a few weeks and perhaps dub their buybacks as portfolio positioning for 2012.

Therefore, while I expect the September Employment Situation to have a positive effect on stocks, particularly in the Consumer Discretionary sector, that effect may be delayed until later in the year.

the August 2011 Employment Situation

September 4, 2011 By in Current Market Thoughts, economics, employment, Employment Situation report, Portfolio management, Strategy Tags: , , , , , , , Leave a comment

the employment situation

On Friday morning, September 2nd, before the start of trading on Wall Street, the Bureau of Labor Statistics released its monthly Employment Situation report for August 2011.  The figures showed a disappointing gain of 17,000 net new jobs in the private sector, which were offset exactly by 17,000 net losses by state and local governments for a net job change vs. July of zero.  This is the weakest job change showing for the economy in the past eleven months.

two adjustments

A strike (since ended) by 45,000 workers from Verizon’s loss making fixed-line telephone business reduced the private payroll figure from what otherwise would have been a gain of 62,000 jobs.   Not great, but better than +17,000.

On the other hand, the return of 22,000 workers from a partial government shutdown in Minnesota raised the government layoff figure from -39,000.  The latter figure is more in keeping with the recent trend, which has seen the government sector lose 550,000 jobs since September 2008.

Ex these two non-recurring items, the net figure would have been +23,000.  This compares with a gain of 117,000 jobs in July (+154,000 private, -37,000 government).

Business economists had been projecting a gain of from 55,000-80,000 jobs.  It’s unclear, however, whether forecasters had factored in either of the one-time adjustments into their estimates.  You’d think everyone would have known about the two, but you never can tell.

revisions

The BLS revises its initial monthly figures in the subsequent two months, as more contributors send in data.

The July numbers were initially reported as +117,000 (+154,000 private, -37,000 government).  They’ve been revised down to +85,000 (+156,000,-71,000).

The June figures were initially  reported as +18,000 (+57,000, -39,000).  They were revised to +46,000 (+80,000, -34,000) in July and back to +20,000 (+75,000,-55,000) this month.

The private sector had been doing pretty well until August, and revisions have generally been positive.  If there’s anything surprising about the BLS numbers, it’s the extent of the weakness in the state/local government job sector as these entities struggle to eliminate budget deficits–where revisions have generally been negative.  In contrast, during 2005-2006, when tax revenues were rising, state and local governments were adding about 20,000 new employees monthly.  Over the past quarter, they’ve averaged job losses of about 55,000 monthly–a negative swing of 75,000 positions.

investment implications

The August BLS report is more evidence that the present high unemployment is a structural phenomenon, not a cyclical one.  We know the US needs to create at least 100,000 new jobs monthly to absorb new entrants to the workforce.  So, if the August figures were to be the beginning of a new lower trend, the unemployment rate, now 9.1%, would gradually rise, doubtless increasing social and political pressure for change.

On the surface at least, the overall BLS data run contrary to recent reports by publicly listed retailers of strong consumer spending.  In reality, this is just another aspect of the current economic situation.  In over-simple terms, the top 25% of Americans by wealth do half of the discretionary spending in the country, and the middle 50% do almost all the rest.  The bottom quarter, where chronic unemployment is concentrated, has very little money to spend.  Also, an increasing proportion of this quartile’s outlays is trading down to local products/stores from companies that don’t have the size and financial strength to list.  Focus on wealthier Americans and trading down by the less affluent are two reasons why Tiffany’s or Macy’s comps are rising and Wal-Mart’s are falling.

Continuing high unemployment is, of course, an urgent social problem.  It need not be a stock market one, however, since the profits of publicly listed companies are concentrated outside areas of unemployment-linked weakness.  In addition, the remedies for long-term unemployment–retraining and continuing financial assistance during career transition–are well-understood.

To date, Washington seems to me to be uninterested in either understanding the issue or taking steps to address it.  Instead, politicians of all stripes appear consumed with either avoiding blame for the current condition or affixing blame to their political opponents.  That attitude has doubtless frightened at least some consumers.  So it’s at least possible that common sense won’t prevail and that Washington will continue to bungle and depress economic activity by its actions–transforming a political problem into a stock market one.

I think this worry is part of what Wall Street is reflecting through the current period of high volatility.

My experience is that the worst possible outcome seldom occurs.  At this point, I see no need to become ultra-defensive.  But I do think the best we can hope for is a sideways market until we have more clarity on the political situation.

the July 2001 Employment Situation report

August 7, 2011 By in Constructing a Portfolio, Current Market Thoughts, economics, employment, Employment Situation report, Portfolio management, Recent Market Action, Shaping a portfolio for 2011, Strategy Tags: , , , , , , , , Leave a comment

the July Employment Situation

the report

The Bureau of Labor Statistics released its monthly Employment Situation last Friday, before the start of stock trading in New York.  The report shows the economy added 117,000 new jobs last month, up from the surprisingly low figure of 18,000 new positions tallied in May.

Interest in the report was great enough that the BLS site that publishes it crashed under the weight of the large number of eager clicks.

revisions to prior data

As you probably know, the  monthly “establishment” data that make up  the new jobs figures in the Employment Situation report are revised twice, once each in the two months after their initial announcement. That’s because the firms whose information makes up the report don’t all send it to the BLS in a timely way.

May revisions were negative, reinforcing the gloomy news from the headline number.  June revisions, on the other hand, are positive. 

May employment gains were first reported as +54,000 jobs.  That figure was revised down to +25,000 in the June report, but revised up again to +53,000 this month.  The June figures were upped as well–to +46,000.  Neither change is earth-shattering.  But one of the discouraging aspects of the June report was that not only was the current-month number an ugly one, the revisions were–contrary to our experience for most of the recovery–pointing in a negative direction, as well.  That tendency may be reversing.  We’ll have potentially confirming data next month.

private sector job creation isn’t that bad

True, the figures for the private sector haven’t attained the post recovery highs of earlier this year, when monthly gains were coming in at 200,000+ jobs.  But the (final) results for private sector job additions in May are +99,000 positions, the (one-more-revision-coming) figures for June are +80,000.  The initial tally for Jul is +154,000.

Given the supply chain disruptions after the Fukushima earthquake/tsunamis in Japan and the almost palpable fear during the past couple of months that Washington’s callous power jockeying over the debt ceiling would inflict serious harm on the economy, it’s surprising that businesses hired anyone at all–let alone 50% more people than industry added at this time last year.

governments continue to shed labor

No surprise here, since state and local governments have been struggling for a long while to balance their budgets.

The government job figures in the July report for the months of May-July are -46,000, -34,000 and -37,000.  The May number was originally reported as -29,000; the June one hasn’t changed that much from the original -39,000.  I don’t see a pattern to the revisions that I’d care to bet the farm on, but, if anything, there’s been a mild tendency for them to drift further into the negative column by the time the adjustment period is over.

long-term unemployment continues to be a problem

Again, not new news, although it has become a focus of recent media comment.  This part of the ES report continues to show that the US economy is making almost no progress in whittling down the number of potential workers hurt by recession (unemployed + discouraged workers + involuntary part-timers).  That figure has only dropped from 16.5% of the workforce to 16.1% since last July.

What’s new, I think, is the debate over the debt ceiling.   That made it more apparent that:

–unemployment is nowhere on the radar screens of Washington insiders of all stripes–Democrat or Republican, elected or appointed, and

–Washington has the potential to do a great deal of harm to the economy as actors on both sides of the aisle elbow for electoral advantage.

stock market implications

I see this as a mildly positive Employment Situation report.

It underlines the fact that, although recovery is slow, it is happening.  The 85% or so of the workforce that have jobs are working more, and at higher pay, than a year ago.  At the same time, each monthly report makes it clearer, I think, that the US has a serious structural unemployment problem à la 1980s Europe than we care to recognize.  (What the country needs to do is clear:  financial support and retraining for the unemployed, better education.  Not on Washington’s agenda, though.)

Among other indicators, recent retail sales reflect this fact.  Mid-market and upscale retailers continue to do well; those that focus on below-average earners continue to struggle.

This is a serious social/political problem.  But, taking off my hat as a human being and donning my hat as an investor, I don;t think it needs to be a stock market one.  From an equity strategy point of view, I think today’s situation implies a continuing focus on global firms and on those domestic companies that cater to more affluent customers.

 

 

the June 2011 Employment Situation report

July 10, 2011 By in economics, employment, Employment Situation report, Portfolio management, Recent Market Action, Strategy, Technical Analysis, Trading Tags: , , , , , , , , , , Leave a comment

The Bureau of Labor Statistics released its June 2011 Employment Situation report just before the start of New York trading on Friday.  In essence, the data confirm the message from the May report that job creation in the US has slowed dramatically from the 200,000+ per month clip of February-April.

the data

The June report indicates that the domestic economy created 18,000 new jobs during the month.  The private sector chipped in 57,000 positions, 53,000 of them in services and the remaining 4,000 in goods production.  Governments laid off a net 39,000 workers.

Also, April and May figures were revised down.    For May, reported private sector hiring dropped from the original +83,000 to +73,000; government layoffs increased from 29,000 to 48,000.  April private sector gains fell by 10,000 to +241,000; government layoffs increased by 5,000 to 24,000.

The May and June Employmnet Situation reports are similar in three respects:

–hiring in goods-producing industries has dropped from a 40,000 monthly pace earlier in the year to just above zero;

–service industries, which had been adding over 200,000 new workers a month, have dropped to under a third of that, and

–government layoffs have accelerated by 10,000-15,000 jobs a month.

why the slowdown?

No one really knows.  It’s possible that part of the jobs falloff is due to supply-chain disruptions caused by the devastation in Fukushima in March.  But that would account for at the very most for a third of the decline.  It’s also possible that employers are worried about the parlous state of politics at home or in the EU.  Or the current state of affairs may simply be the standard pattern of recovery after a devastating financial crisis.

As I observed a month ago, the Employment Situation numbers conflict with more positive employment data from private sources.  Since then, we’ve seen June retail sales figures, which were surprisingly strong. And in its admittedly highly volatile employment report, payroll company ADP said a few days ago that it thinks the US economy added 157,000 jobs in June–most of the gain due to a surge in service sector hiring.

the stock market meaning?

There was a lot of hand wringing by TV commentators on Friday morning about the BLS announcement.  The lack of job growth in the US also made the Saturday front page of all the newspapers I read.  This is partly because bad news sells, partly because the bullish EDP report fooled many economic “experts” into substantially raising their BLS estimates at the last minute, leaving them with egg on their faces.  True to their usual form, although the BLS report was a disappointment, pundits made it seem that the whole problem was the economy and not their estimates.

To my mind, Wall Street trading tells a somewhat different story than the media.  Specifically,

–on Thursday, the S&P reacted to the positive ADP report by gaining 1%.  On Friday, the market rallied from session lows just after 11:00 am to close down .7% on the day.  In other words, for the two days the New York market was up.  That wasn’t the very negative result one might have expected, based either on the poor BLS report or the palpable anguish of talking heads.

–I hold ten US stocks in the actively-managed portion of my taxable stock portfolio.  Four of them were up on Friday, and by enough to put the collection of ten in the positive column for the day.  Admittedly, one of my main objectives over the past couple of years has been to find US-listed companies with substantial exposure outside the US.  Still, it seems to me that the selloff on Friday was much less across-the-board than the one that greeted the May BLS report.

–add to this the fact that the rally came on a Friday afternoon, when (very) short-term traders are deciding whether to hold positions over the weekend.  A late afternoon selloff–not a rally–would have been the more natural outcome if traders were feeling bearish.

We’ll see more when trading resumes on Monday.  But so far it seems to me Wall Street has shrugged off the BLS news to a greater extent than I would have expected.  It may be that Wall Street is beginning to make two distinctions I think are important to understanding the profit potential of US-listed stocks.  They are:

–the difference between the structural social/political/ethical problem of having an extra 5% of the workforce unemployed for an extended period of time, and the stock market issue of the spending behavior of the 90%+ of a (growing) workforce that is beginning to get compensation increases for the first time in a few years; and

–the difference between a domestic bond market whose performance is dependent on the strength or weakness of the US economy, and a stock market, half of whose earnings come from outside the US and whose domestic half has virtually no exposure to housing, real estate, construction or autos.  (By the way, this stock market structure is the norm for every other major equity market in the world.)