Category Archives: employment

Gavyn Davies on Bernanke’s change of heart

September 19, 2012 By in Derivative instruments, economics, employment, Recent Market Action, Strategy Tags: , , , , , , , , Leave a comment

keeping inflation low

Since the tenure of Paul Volcker began over thirty years ago, the mantra of the Federal Reserve has been to do what is necessary to keep inflation under control.  Over time, this morphed into the narrower target of keeping inflation under 2%, but the intent has always been to drive inflation lower.  Yes, the Fed has a “dual mandate,” both to conduct monetary policy in a way to achieve maximum sustainable GDP growth and to promote employment.  But the former has invariably trumped the latter.

…until now

In the September 12th pronouncement from its Open Market Committee, the Fed unveiled new monetary stimulus measures targeted at reducing unemployment.  For the first time, they are open-ended both in terms of time and of money.

Why?  

…especially when there’s a lively debate, even within the Fed, over whether we are in fact already at full employment.  If so, the new measures won’t create any new jobs.  It will only ignite wage inflation, as companies poach employees from rivals in order to expand.

Personally, I don’t know.  I think that if the Fed decision has any immediate implications for financial markets, they’re positive for stocks and neutral (at best) for bonds.  So arguably as an equity investor, I don’t need to know.

Still, I’m curious.  The best I can do is to fall back on the old saw that inflation is better than deflation, since the world’s central bankers have plenty of experience dealing with the former but have gone 0-for when confronted with the latter.

the Davies answer

Gavyn Davies, former chief economist for Goldman Sachs and now a blogger for the Financial Times, has a better answer in his 9/16 post for the newspaper.  It’s worth reading.

The thrust of the post is that, in Davies’ view, Mr. Bernanke’s QE3 decision implies he believes the US is at a tipping point with the chronically unemployed.

As workers remain out of the workforce, the theory goes, their skills gradually erode–and, with them, their chances of finding new employment.  At the same time, former workers’ enthusiasm for the job search effort also wanes.  Eventually, they drop out of the workforce permanently–becoming unfulfilled as persons, burdens on the rest of society for decades and–crucially–inhibitors of future GDP growth.

Recent surveys by the Labor Department suggest the “dropout” rate in the US is starting to accelerate, putting into motion the downward spiral just described.  In Davies’s view, this is what has changed the balance of risks in the Fed’s mind.

the Employment Situation report for August 2012

September 10, 2012 By in Constructing a Portfolio, economics, employment, Employment Situation report, Portfolio management, Strategy Tags: , , , , , , , , , , , Leave a comment

the report

On Friday September 7th at 8:30 EDT, the Bureau of Labor Statistics, part of the Labor Department, released its monthly Employment Situation report for August 2012.  The headline figure is that the US economy gained 96,000 jobs last month.

That’s disappointing in several respects:

–it’s below the economists’ consensus of +120,000-140,000 new positions

–it’s considerably less than the +201,000 job additions reported by ADT earlier in the week

–it’s under the 150,000 or so new jobs needed each month to absorb new entrants into the labor force–meaning it’s not enough to eat into the number of long-term unemployed

–it suggests that the more favorable report for July (+163,000 jobs) is as much an outlier as the much weaker numbers from May and June.

the details

The 96,000 jobs consist of 103,000 new hires in the private sector, offset by -7,000 layoffs by state and local governments.  The service sector continues to be a strong generator of new jobs.  Construction seems to be bottoming.   But for the first time in a while, the manufacturing sector is beginning to shed jobs.

the revisions

As regular PSI readers know, the ES report is revised in each of the two months following its initial release.

The initial figures for July were +163,000 jobs (+172,000 in the private sector, -9,000 state and local government layoffs).  That has been revised down in the August report to +141,000 (+162,000, -21,000).

The figures initially reported for June were +80,000 (+84,000, -4,000).  They were revised down in the July report to +64,000 (+73,000, -9,000).  In the August report, the numbers were revised down again to +45,000 (+63,000, -18,000).

my take

the surprising thing about this report is that the S&P went up on the news.

After all, it seems to dash hopes that the US economy is going to accelerate from the current lackluster pace.  To the contrary, it suggests that what we are seeing now is as good as things are going to get for employment–and chronic high unemployment is going to be a fact of life.

At the same time, the US stock market is holding above the 1420 line that has represented a very substantial barrier to advance.

What could this mean?

On the most elementary level, investors appear to have returned from the Hamptons with their buying shoes on.

I don’t think anyone can possibly believe that additional Fed action will make any substantial positive difference for the US economy.  Nor do I think that current economic conditions domestically or in the EU or China or Latin America are a cause for joy.

It could be that investors have suddenly awakened to the fact that bonds are very expensive and stocks very cheap.  But that’s been the situation for a very long while.

What I think is going on is that sentiment is changing.  Investors appear to be starting to believe that the worst is over in world economies.  Two implications of this belief:  stocks aren’t going to get much cheaper, and it’s okay to buy at today’s prices anticipated earnings improvement in 2013-14.

The big imponderable is how long the current bullish mood will last.

my bottom line:

We should enjoy the ride–which might represent a crucial, positive, turning point for stocks–but be very wary for signs that the curent mood change is just a passing fancy.

 

 

the Employment Situation report for July 2012

August 6, 2012 By in employment, Employment Situation report, Portfolio management, Recent Market Action, Strategy Tags: , , , , , , , , Leave a comment

the report

On Friday August 3rd at 8:30am EDT, the Bureau of Labor Statistics of the Labor Department in Washington released its Employment Situation report for July 2012.  According to the BLS, the US economy added a net +163,000 new jobs during the month–the best showing since February.  The private sector created 172,000 positions;  state and local governments laid off -9,000 workers.

the revisions

As regular readers are well aware, the employment figures come from a BLS survey of large corporations and state/local government bodies.  Respondents have three months to get their data in.  As a result of differences in reporting speeds, each monthly figure compiled by the BLS  is revised twice, once each in the two months following the initial report, before it is considered final.

The May ES figures were initially reported as +69,000 jobs, consisting of +82,000 in the private sector and -13,000 layoffs by state and local governments.  These numbers were revised up in June to +77,000 (+105,000 private, -28,000 government).  The final tally, reported on Friday, is another upward revision, to +87,000 jobs (+116,000 private, -29,000 government).

The June figures were initially reported as +80,000 (+84,000 in the private sector, -4,000 government).  In the July ES, they’re revised down to +64,000 (+73,000 private, -9,000 government).  

Between the two months, revisions clip -6,000 positions from the total in July, all the decline coming from to state and local government layoffs.  (Despite the large May government layoff figure, the rate of shrinkage of state and local government employment is slowing.  Two reasons:  state/local revenues, rising rapidly as the economy recovers, are now approaching their previous 2007 peak; and, balanced budget rules have already been forcing trimming for a number of years.)

what makes this ES important

background

Employment in the domestic economy hit its low point about three years ago.  At that time there were about 9 million fewer people working than at the (overheated) peak of 2007, and maybe 7.5 million people fewer than normal.  Since then, due to a combination of natural healing and the Fed dropping interest rates to an emergency low of zero, the economy has added back over 4 million jobs.

It’s tempting to do simple subtraction and say that there are still at least 3.5 million out of work due to the recession.  It’s not that simple, however.  Students are constantly finishing school and looking for their first post-education jobs.  Older workers retire–though at a below normal rate at present–freeing up positions for new workers to take.

How big is this movement in net terms?  Economists estimate that the US needs to create an average of 125,000-150,000 new jobs each month just to absorb net new entrants into the workforce.

Therefore, the big army of unemployed only starts to get whittled down when the economy generates more than 125,000-150,000 jobs a month.

the recent past

Over last winter, job creation suddenly accelerated to around 250,000 new positions a month.  Wall Street was elated!  The economy appeared to have not only absorbed all the new school-leavers but also reduced the ranks of the long-term unemployed by 10%.  Maybe a 1970s-, 1980s-style (read: faster) recovery was finally underway.  And this during a period when bad weather tends to slow hiring.

Then came the March figures, which were slightly below 150,000 job adds.    …and the April figures   …and the May figures   …and the June figures–all sub-100,000 job creation months.  Wall Street was deflated!

Initially, investors read the apparent slowdown as mild winter weather pulling forward into February construction work that usually comes only in April.  But as the sub-100,000 months began to pile up–and, at the same time the EU economy was turning out to be worse than expected and slowdown in China was deepening–investors began to fear that simple seasonality wasn’t the culprit.  Wall Street began to think that the job figures were signaling the US was beginning to be dragged back into recession by economic woes elsewhere.

At least for the moment–and for good, I think–the July ES has restored seasonality as the most likely reason for the poor job numbers posted during the spring.  We’re back to the idea that the domestic economy is growing just enough to absorb new entrants–but not to make any appreciable dent in the large number of chronically employed.

stock market implications

1.  Having several million “extra” unemployed is a calamity for the unemployed themselves.  It’s also a key long-term social and political problem.  It isn’t necessarily as big an issue for publicly traded companies, however.

The long-term unemployed represent maybe 3% of the workforce.  When working, they represented far less than that percentage of total consumption spending–1% would be a generous estimate.  Corporate profits would be dented severely by a global recession.  But, sad to say, ex materials companies, failure of Washington to ease chronic unemployment won’t make very much difference to S&P 500 earnings.

2.  In the manic, black-or-white, all-or-nothing view of short-term traders, Wall Street is again a safe place to be long.  This doesn’t necessarily mean that stocks are going to go up a lot from here.  But it does, in my view, lower the odds of a protracted slide in the S&P 500.

3.  If, as I think they will, the July ES figures do prove indicative of what August and beyond will bring, it may well also be that the world will see the upcoming US presidential election as not as crucial as it does now.  The belief that neither major party candidate is competent would be less threatening if the economy is, although admittedly slowly, healing itself.  Wall Street would then probably default to its traditional stance that, after all, gridlock is the best one can hope for from politicians.

Again, this doesn’t mean that stocks will go up–or that Washington will do anything for the chronically unemployed.  It does mean, however, that some growth is possible without helpful/needed fiscal policy changes the government refuses to make.  The magnitude of another worry is reduced.

the Federal Reserve on US family finances, 2007-2010

June 14, 2012 By in economics, employment, Portfolio management Tags: , , , 1 Comment

US family finances, 2007-2010

Early this week the Fed released a report on its triennial survey of consumer finances.  The 80-page, densely written document covers the period from 2007-2010–the heart of the Great Recession.  The main conclusions, as I see them:

income

After remaining flattish over the earlier part of the decade, median (that is, list incomes in size order and pick the middle one) family income in the US fell by 7.7% to $45,800 during 20070-2010.

For the 40% of families headed by a person aged 55 or older, however, median income actually rose during the period.

The decline in income was especially sharp for highly educated families, and for those living in the South or West.

Mean income (that is, add incomes all up and divide by the number of families) dropped by 11.1%, meaning that higher than average incomes dropped the most.  The highest-income 10% of families was hit the hardest, as were the best educated and wealthiest.  So, too, the self-employed, who tend to be the highest compensated Americans.  Oddly, income for high school dropouts–not a group anyone would wish to be in–was up a bit during the period.

Median incomes were unchanged in the East and Midwest, but fell sharply in the South and West.  This reversed the pattern of relative prosperity during the first part of the decade.

wealth

This is where the substantial economic damage was done.  Median family net worth fell by 38.8% over the three years.  Mean net worth dropped by 14.7%–implying that the wealthier were hit less hard than ordinary people.

Who was hurt the worst?  …those with most of their money tied up in highly mortgaged housing–typically families headed by someone 35-44–and those living in areas where the bubble was biggest and the collapse greatest (the South and the West).  Median net worth for 35-44 households fell by 54.4% and for families in the West by 55.3%.

In urban areas, the fall in net worth caused by the housing crisis was enough to close most of the widening wealth gap between haves and have nots which had emerged over the past 20 years.

Two anomalies:

–net worth for families headed by someone aged 75+ rose slightly

–median net worth for renters (who tend to have relatively low net worth) fell by a mere $300 between 2007 and 2010, compared with a $71,500 plunge for homeowners.

financial leverage

Net worth, of course, is net in the sense that it’s the value of assets minus the value of liabilities.  Over 2007-2010, family asset values dropped by 19.3%.  Debt stayed basically unchanged.  The negative effect of financial leverage, mostly home mortgages, is what turned the fall in asset value into a decline in net worth of twice the size.

For the worst-off decile, the fall in house prices has pushed net worth into the minus column.

my take

The decline in net worth for middle-income Americans is eye-popping.  And that’s what has caught all the media attention.  But that’s the past.  It makes for interesting cocktail party conversation, but little else.

If we look at the situation as an investment problem, the main issue is that many people placed a big, highly leveraged bet on residential real estate. It hasn’t worked out.  Carrying costs aren’t the main worry, given the dramatic decline in interest rates.  Rather, it’s how holders of too much real estate extract themselves from a highly illiquid asset and redeploy their money into something more economically productive.

The Fed data are from 18 months ago.  Over recent months, the housing market in places like Miami, southern California and Arizona has shown signs of stabilizing.  So properties may be salable for the first time in several years. The more astute or pragmatic should have started to reposition themselves already, which should imply gradually better economic performance over the coming year.

One other thing.  I’m struck by the Fed’s table showing median and mean income for families by age of head of household.  Here are the figures:

less than 35          median income = $35,100       mean income = $47,700          median net worth = $9,300

35-44          median = $53,900     mean = $81,000          median net worth = $42,100

45-54          median = $61,000     mean = $102,200          median net worth = $117,900

55-64          median = $55,100     mean = $105,800         median net worth = $179,400

65-74          median – $42,700     mean = $75,800          median net worth = $206,700

75 and over          median =$29,100     mean = $46,100          median net worth = $216,800.

Average net worth for those approaching retirement age is $880,500.  But half have saved less than $200,000.  That isn’t a lot to live on if you expect (as you should) to live another 25 years.

the May 2012 Employment Situation report

June 4, 2012 By in Current Market Thoughts, economics, employment, Employment Situation report, Recent Market Action, Strategy Tags: , , , , , , , 1 Comment

the report

The Bureau of Labor Statistics, a part of the Labor Department, released its monthly Employment Situation report last Friday before the opening of equity trading in New York.  The stock market was in an ugly mood before the data release–and the tone became even less pleasant after traders saw the tepid numbers being reported.

According to the BLS, the US economy added 69,000 net new jobs during May.  As has been the case over the past couple of years, that figure consists in gains from private sector employment (+82,000 jobs) and losses from state and municipal governments trying to balance their budgets (-13,000).

revisions didn’t help

The Employment Situation is a survey of a large number of big employers, both private and public.  Data don’t come in all at once, so the Labor Department revises the initial figure in each of the subsequent two months.

In May, the April figure, originally set at +115,000 new positions, was revised down to +77,000.  The March figure, originally set at +120,000 and revised up in April to +154,000, was trimmed back to +143,000.

where did 1Q12 job strength go?

The ES reports for 12/11 through 2/12 showed monthly job gains of +223,000, +275,000 and +259,000.  These figures sent bullish sentiment soaring on Wall Street.  For one thing, it was a marked acceleration from the prior monthly rate of +100,000 or so new jobs.  Also, since the economy needs 100,000+ new positions a month just to absorb new entrants to the workforce, it appeared GDP growth was finally becoming strong enough to help rescue the millions left unemployed by the Great Recession.

At the time, bears said that the apparent acceleration was simply due to the fact that an unusually warm winter was shifting springtime hiring forward by a few months and that it would soon fade away.  I didn’t think so then, but it’s looking more and more like they were right.

reviewing the overall employment numbers

Employment in the US peaked at 138.0 million in January 2008.  By the low point in February 2010, that had fallen to 129.2 million, a loss of 8.8 million jobs (I’m using seasonally adjusted numbers;  the raw data show a virtually identical pattern, but the timing is slightly different).

Figure that the high schools and colleges churned out another 2 million potential workers during that period and you get a better sense of the depth of the employment problem.

The latest ES report says 133.0 million people are employed today, 3.8 million more than at the low.  Except during the summer of 2010, when month-to-month comparisons took a mild dip, the employment rolls have shown steady gains each month for the past two years.  Remember, though, that over those two years another 2 million or so new graduates have started to look for work.

to summarize

If we look at employment, we’re almost half the way back to the all-time peak of 2008.  This has positive implications for GDP growth.

From an unemployment perspective, however, we haven’t made much progress.

stock market implications

Taking a very simple-minded point of view (which is the best I can do–but which is sometimes surprisingly effective), Wall Street ran up during the first quarter on the idea that  economic recovery was accelerating.  It dragged the rest of the world up along with it, in the hope that US vigor would mitigate some of the economic slowdown being experienced by other countries.

Of the past two months, global equity markets have run back down to where they were before, as it become more likely that the hefty early year job gains were transitory.  From a social and political angle, we’re back thinking that there isn’t going to be a magic solution to US unemployment, which remains a severe problem.

Nevertheless, there are about two million more people in the US today working than there were a year ago.  Many of the 133.7 million total jobholders have paid back much of their excessive debt.  Increasing retail sales are saying they’re much more confident now that their jobs are safe.

It’s not only the level of the US stock market that has changed, but also the evolving economic storyline.

At some point, we’ll have finished discounting the fact that the weather shifted job gains from spring into winter and the stock market will stabilize. The baby-and-bathwater panic I read in recent trading says we’re much closer to the end of this process than the beginning.

Just as important, investors will continue to rotate their portfolios into companies that appeal to a broad range of consumers, not just the wealthy.  Since there may not be enough growth to make the profits of all firms go up, the earnings growth story will likely be one where strong firms take market share from the weak.  iPhone and Android take market share from Blackberry; Apple, Samsung, Acer and Asus take share from Dell and HP…