the November 2014 Employment Situation

the Employment Situation

The Bureau of Labor Statistics of the Labor Department released its monthly Employment Situation report at 8:30 this morning.  I had intended to igrnore the report and continue laying out my Strategy for stocks next year.  But the news is surprisingly good–despite the apparent indifference in futures markets as I’m writing this.

lots of new jobs

The economy added 321.000 new jobs in November, all but 7,000 of them in the private sector.  That’s way above the average jobs gain over the past year, as well as miles ahead of economists’ forecasts (which may say as much about the forecasts as about the economic reality).  In addition, revisions to the two prior months reported were also positive, totalling an extra 44,000 positions.  Final job gains for September stand at +271,000; the current October estimate is +243,000.

To put the figures in perspective, the economy needs to create 125,000 – 150,000 new jobs each month to absorb first-time job seekers leaving school.  Anything over that eats into long-term unemployment.  Over the past three months, then, close to half a million people have shifted from being unemployed to having work.

unemployment

The unemployment rate remained at 5.8% despite the large job gains.  This is mostly, I think, because the workforce expanded by about a half million as better job prospects caused people who had given up the search for work starting to look again. That’s what usually happens.  At least some part, however, is due to the fact that job gains/losses and the unemployment rate are determined using two different surveys–and two different sets of data.

JOLTS

The latest JOLTS (Job Openings and Labor Turnover Survey) report, about a month ago, from the BLS offers similar encouragement.  There are now 4.7 million unfilled jobs in the economy.   More important, the quits rate–that is, the number of people voluntarily leaving their jobs, presumably for better employment elsewhere–is rising.  This is a sign that present jobholders have increasing confidence in their skills and employability.

economic ointment fly:  wage growth

The only fly in the employment ointment is that wages are still only rising at a 2% annual rate, or basically no growth in real (inflation-adjusted) terms.

From a stock market perspective, it’s hard to know if this is good or bad.  Higher wages would presumably mean more consumer spending and therefore accelerating earnings growth for publicly traded companies.  That’s a plus.  On the other hand, accelerating wage growth can be an early indicator of inflation to come–and might cause the Fed to speed up the pace at which it will be raising interest rates in 2015.  That would surely make the ride for stocks bumpier, and would most likely cause prices to decline.

My bottom line:  despite Wall Street’s current indifference, this report is surprisingly good news.

Back to strategy on Monday.

the Employment Situation–now scanning the horizon for wage increases

the Employment Situation

Last Friday morning the Bureau of Labor Statistics of the Labor Department released its monthly Employment Situation report for September.  The numbers were good– +248,000 new jobs added in the economy, +236,000 of them in the private sector.

Revisions were also favorable.  July figures were boosted from +212,000 to +243,000, and the worrisome +142,000 number posted for August was revised up to +180,000.

With last month’s poor employment gain showing now being interpreted as simply a hiccup in the reporting system rather than an indicator of a slowdown in hiring, the stock market’s attention is beginning to turn toward the wage gain information in the ES, rather than the employment numbers themselves.

wage gains?

what counts aw wages in the ES?

The figure itself appears to me to be pretty solid.  It’s derived from actual gross wage figures reported by the large number of substantial private sector firms who are participants in the BLS Establishment survey.  There is some government estimation, in the sense that the participating firms are thought to be representative of the economy as a whole.  But the data aren’t estimations.  They’re the real, complete salary figures.

The figures are gross, in the sense that they are before any deduction for taxes or benefits.

They’re salary figures only.  They don’t include payroll taxes that employers pay.  They also don;t include health or retirement benefits that employees may receive.

the current rate of wage gains…

…is 2% per year.

In one sense, this suits the Fed just fine.  The absence of sharp upward pressure on wages means the central bank doesn’t have to hurry to raise interest rates to stave off potentially runaway inflation (in the US, inflation is almost completely about wage gains).  The low number implies that employers can easily find all the qualified workers they need to grow their businesses either from new entrants into the labor market or from the currently unemployed.  They don’t need to poach new hires from rivals by offering very large pay increases.

On the other, it’s kind of eerie that the Fed can have had the monetary stimulus taps more wide open than ever before for over five years and not have wages be rising faster than this.

The wage gain numbers will increase in importance to Wall Street in the coming months, I think, as the Fed prepares to start raising the Federal Funds rate from the current level of zero.

My sense of the consensus belief is that:

–rates will being to rise next Spring,

–the “normal” rate is not the 4.0%-4.5% the Fed was talking about in 2012-13, but rather 2.5%-3.0%, and

–the Fed Funds rate could be halfway back to normal by the end of 2015–meaning five or six quarter-percent moves next year.

 

household income and the substitution effect

Yesterday, the Census Bureau released its 2013 annual report on Income and Poverty in the United States.

It showed that median household income in the US was an estimated $51,959 last year, up $180 (whoa, baby!) from the median in 2012.  The 2013 figure is still about 8% lower than the pre-recession level and 8.7% below the all-time peak in household earnings in 1999.

Not a pretty picture, but it brings home how long the period of structural change the US is experiencing has been going on.  Personally (meaning I think so but I wouldn’t bet the farm on being correct), I think it’s no accident that the current wage stagnation began with the emergence of the internet as a major economic force.

In economic theory, and also in practice, people can increase their economic well-being in one of two ways:

(1) they can earn more income, or

(2) they can “upgrade” the basket of goods and services they consume by substituting lower-cost equivalents for the stuff they have typically purchased in the past.

The Census Bureau figures show that door #1 has been closed, on average, for a long period of time.  Therefore, to the degree that people want a higher standard of living, they have had to become adept at strategy #2.

In my experience, during economic expansions people typically try to keep up appearances and hesitate to substitute lower-priced items.   It’s only during recessions that it becomes acceptable to, say, substitute a Hyundai for your Lexus or store brand staples for national brands.

investment significance

It seems to me that in the US stock market, we’ve only begun to see the substitution effect expressed in stock prices in earnest during  the past year (for example, teen retailers, soda and food companies)..  I think there’s lots more to come.  It’s probably easier to identify potential losers than winners.  Just look for high gross and operating margins.  Such companies have the most to lose from price competition; they also may have created “price umbrellas” that allow rivals to undercut them.

 

The Census Bureau report has two other figures that caught my eye.

–The 5% of American households headed by 15-24 year-olds saw their incomes jump by 10.5% last year to $34,311.  A proxy for Millennials?

–The median income for over 65 year-olds is $35,611.  That’s up by 3.7%, year on year.  But it’s also less than two-thirds of the $57,538 median for 55 – 64 year-olds.  The future for Baby Boom purchasing power?

 

 

the August 2014 Employment Situation

Last Friday, the Bureau of Labor Statistics released its monthly Employment Situation report at 8:30 am Eastern time.  The figures were at least mildly disappointing.

The country added +142,000 new positions during the month, +134,000 of them in the private sector, +8,000 in government.  That broke the string of extremely positive, over-+200,000 months of job gains.  Revisions to prior months’ data were also negative, subtracting a net of -28,000 positions from the reports for June/July.

Other statistics, like the unemployment rate, the work week, the pace of wage gains…, were basically unchanged.

Although the figures weren’t great, they weren’t horrible, either.  And, of course, they’re subject to possibly large revisions over the coming two months.

For equity investors, the most interesting aspect of the report is that, despite its elevated level, the US stock market shrugged off the so-so news and ended the day higher.  This would have been the perfect excuse for a selloff had short-term traders been feeling bearish.  However, just the opposite happened.

why the Fed is looking at/for wage gains

This is Jackson Hole week, when the world’s central bankers convene in Grand Teton National Park in Wyoming to compare notes.  From their meetings, we’ll get a better sense of what the architects of the current emergency-easy money policy are thinking and planning.

Conventional wisdom  is that in times of economic stress the central bank should lower interest rates to a point significantly below the rate of inflation–and keep them there until people and companies borrow the “free” money and invest in large enough amounts to launch an economic rebound.

One indicator that the Fed is watching carefully is the rate at which wages are rising.  In theory, employers only raise wages a lot when they’ve run out of available unemployed workers and can expand only by headhunting away people who are already employed elsewhere.  So wage increases at a faster clip than inflation mean it’s high time to tighten money policy;  sub-inflation wage gains–the kind we have now–mean there’s no rush.

Policymakers appear to be giving this rule of thumb a rethink, however.

For one thing, short-term interest rates have been at effectively zero for over half a decade.  You’d think unequivocal signs of economic strength should have been evident long before now.

There’s no sign I can see that central bankers have any sympathy for the plight of savers (read: the Baby Boom and the elderly), whose desire for safe and stable fixed income investments has been the chief casualty of the economic rescue effort.  However, they do seem to be concerned that the search for yield in a zero-interest-rate world has caused savers to buy exotic instruments (hundred-year bonds, contingent convertibles, for instance) that will likely suffer wicked losses as rates begin to eventually rise toward a normal 3.5% or so.  Is the cure worse than the disease, at this point?

Lately, the money authorities seem to be expressing a second worry.  Suppose the emergence of inflation-beating wage gains isn’t the reliable indicator it’s thought to be.  If so, the Fed may be distorting the fixed income market–and buying trouble down the road–for no good reason.

Why would sub-inflation wage gains be the norm, even in an expanding economy?

Maybe in past economic cycles, high wage gains were caused mostly by the tendency of union contracts to index wages for inflation, not by overworking headhunters.  Maybe the psychology of managements penciling in inflation-plus or simply inflation-matching annual wage increases for the workforce has gone by the boards in a world that has experienced two ugly recessions–the more recent one an epic decline–since the turn of the century.  …sort of in the way inflationary expectations have disappeared from the minds of current workers.  Again, if so, maybe interest-rate normalization should happen at a faster pace than currently planned.

We’ll likely hear more on this topic as this week’s meeting gets under way.