Category Archives: employment

the July 2014 Employment Situation

August 6, 2014 By in employment, Employment Situation report Tags: , , , , , , Leave a comment

Last Friday, the Bureau of Labor Statistics of the Labor Department released its monthly Employment Situation report for July.   Total Employment gains for the month came in at +209,000 new positions, of which +198,000 were private sector job gains and +11,000 in government.

As media commentators immediately pointed out, the US has now had the longest string of +200,000 job gain months in almost two decades.  True, the figure came in below the economists’ consensus of +230,000 new positions, but no one seemed to care.  After all, the number was good,–nd it’s the result of subtracting the 3-4 million people who leave their jobs every month from the 3-4 million who take up new ones.  So a difference of 20,000 jobs is an error of 0.5% in either of the two numbers.  The BLS itself says that differences of less than 100,000 aren’t significant.

Revisions to prior months’ data were also positive.  The May figures were revised up by +5,000 to +229,000′ the June tally was boosted by +10,000 to +298,000.

The unemployment rate went up by 0.1% to 6.2%.  But that’s also a good thing.  The unemployment figures are highly politicized.  When unemployed workers become so discouraged that they figure looking for a job is futile and stop trying, they’re not classified as super-unemployed.  Instead, they’re erased from the figures.  All other things being equal, their reclassification makes the unemployment rate fall.  

When conditions improve, the reverse happens.  When people regain hope and start looking for work again, all other things being equal, the unemployment rate rises.  That’s what’s happening now.

What’s left to monitor in the ES?

…wage gains.

In developed economies, inflation is predominantly caused by rising wages.  Because of this, the timing of the Fed moving interest rates out up from intensive care levels and back to normal will be strongly influenced by signs of wage inflation.  So far, the ES shows overall wages rising at a 2.3% annual clip.  There continues to be upward pressure on IT compensation; the same is just beginning to emerge in the construction industry.

Again, this isn’t a bad thing.  In fact, the scarier idea would be that we’ve had the monetary taps wide open for six years without being able to get the economy to perk up to the point where there aren’t tons of unemployed.  What we’re seeing now is nothing more than the economy having a pulse again.

On the one hand, scattered wage gains give the Fed the go-ahead to start to raise short=term rates.  On the other, they’re telling the Fed not to rush.

the watershed June 2014 Employment SItuation report

July 10, 2014 By in employment, Employment Situation report, Uncategorized Tags: Leave a comment

The Bureau of Labor Statistics of the Labor Department issued its monthly Employment Situation last Thursday, a day earlier than usual because of the Fourth of July holiday.

The results were very good news for the economy.  A whopping 288,000 new positions were created during the month; job gains were widespread; inflation–meaning wage gains–remained low.  This was everything the country’s economic managers could have asked for.

In addition, revisions to prior months’ data were positive.  The final number for April rose by +22,000 to +304,000; May job gains were revised up by +7,000 to +214,000.

Over the past three months, then, the US economy added jobs at the rate of +272,000 a month.  If we figure that the economy needs +125,000 new positions to absorb new workers leaving school and entering the workforce for the first time, then the US is currently eating into the pool of workers left unemployed by the Great Recession at the rate of about +150,000 a month.  At this clip, the economy would be pretty much back to normal employment-wise in a it over a year–at least according to the official statistics.  

For the stock market , this is a good news – bad news situation.  On the one hand, the economy appears to have finally turned the corner.  On the other, stocks barely budged on the day of the report and are down since–meaning that, although the good news may have come earlier than most had expected, its arrival had already been fully discounted into today’s stock prices. 

My guess is that in the strange way the mind of Wall Street works, from now on the ES can’t be a positive for stocks.  It can only be a negative.  Market-moving news will either be that job growth is flagging or that wage inflation is becoming significant.  Continuance of job growth at a +200,000+ monthly rate will be greeted wit ha yawn.

If I’m correct, I can imagine two investment consequences for stocks, assuming professionals can tear themselves away from their vacationing in the Hamptons:

–investors will begin to pay much more attention to the EU and China as sources of economic strength/weakness, and

–thinking that the current domestic situation is about as good as it gets, the market will begin to look much more carefully at the PE multiple being paid for owning a piece of it.  This would imply that while there will continue to be less brass tacks and more “dream” in the pricing of foreign-sourced earnings, the opposite will hold true for US-base profits.  In simpler language, the overall market multiple will likely contract a bit as investors absorb the implications of this ES.  I also have to figure out whether it makes sense for PSI to monitor this report so closely from now on.

 

“New World Order”: Foreign Affairs

June 30, 2014 By in book value, Capital-intensive firms, cloud services, Current Market Thoughts, economics, employment, growth vs value, Industrials, return on equity, return on equity vs. return on capital, robots, software, Stock ideas, Strategy, Technology Tags: , , , , , , 1 Comment

The July/August 2104 issue of Foreign Affairs contains an interesting conceptual economics article titled “New World Order.”  It’s written by three professors–Erik Brynjolfsson (MIT) , Andrew McAfee (MIT) and Michael Spence (NYU)–and outlines what the authors believe are the major long-term trends influencing global employment and economic growth.  I’m not sure I agree 100%, but I think it’s a reasonable roadmap to start with.

Here’s what the article says:

the past

Globalization has allowed companies to exploit wide wage differentials between countries by moving production from high-cost labor markets close to consumers to low labor cost areas in the developing world.  Former manufacturing workers in high-cost areas enter the service sector to seek employment, depressing wages there.

This period is now ending, as relative wage differentials have narrowed.

now

Relative labor costs are at the point where manufacturing plant location is determined by other factors.  These include:  transportation cost, turnaround time for new orders and required finished goods inventory.  This implies that manufacturing can be located closer to the end uses it serves.  However, globally higher labor costs also imply that new factories will be much more highly mechanized than before.  Robots replace humans.

As a result, wage growth will remain unusually subdued.

the future 

Although returns to capital have avoided the erosion that has befallen labor over the past generation, this situation won’t last.  Long-lived physical capital is being replaced by software (note:  the majority of investment spending done by US companies is already on software).

Software doesn’t have either the total cost or the permanence of capital invested in physical things.  Software can be moved, it can be duplicated at virtually zero extra expense.  To the extent that software replaces physical capital as a competitive differentiator, it makes the latter obsolete.  It, in turn, can be made obsolete by the innovative activity of a small number of clever coders.

Therefore, the authors conclude, returns on invested capital (especially physical capital) are already beginning to enter secular decline.

Where will future high returns be found?

…in the innovative activity of talented, well-educated entrepreneurs.

education

This brings us to a major problem the US faces.  It’s the relative slippage of the domestic education system vs. the rest of the world, and an increased emphasis on rote learning (No Child Left Behind?).

The trio dodge this politically charged issue–they do observe that there’s a direction relationship between the quality of a community’s schools and the affluence of its citizens–by asserting that online learning will come to the rescue.  A child stuck in a weak school system will, they think, be able to in a sense “home-school” himself to acquire the skills he needs to succeed in the future they envision.

my take

What I find most interesting is the presumed speed at which the authors seem to think transition will occur.

–Is it possible that we’ve reached the point where there’s no available low-cost labor left in the world?  If so, this is a dood news/bad news story for low-skill workers.  On the one hand, downward wage pressure will stop.  On the other, robotization is going to take place at warp speed, making it harder to find a job.

Relocation of factories will also have implications for transportation companies, warehousing and even the amount of raw materials tied up in company inventories.

–Does software begin to undermine hardware so quickly?  Certainly this the case with online retailing and strip malls.  But how much wider is this model applicable?

–If the key to future growth is young entrepreneurs, then the sooner we as investors reject the Baby Boom and embrace Millennials the better.  This, I think, is the safest way to benefit in the stock market if the New World Order thesis proves correct.

 

 

the Employment Situation, May 2014

June 9, 2014 By in economics, employment, Employment Situation report Tags: , , , , , , Leave a comment

Last Friday, as usual, the Bureau of Labor Statistics of the Labor Department published its monthly Employment Situation for May 2014.

The numbers were good.  The economy added 217,000 net new jobs during May, made up of +215,000 in the private sector and +1,000 in government.  There was no revision to the March 2014 figure of +203,000 new positions.  April’s gigantic +288,000 new job gain was revised down by -6,000, but that’s not significant.

The strong figures reported by the BLS each month since February appear to have convinced Wall Street that the weakness seen in December and January was due to bad weather, not a reversal of the economic progress of the past year.

As a result, investors have shifted their attention away from employment gains to second-level issues, namely:

–annual wage increases are running at about +2%, a relatively low figure that indicates there still is considerable slack in the economy.  This is a good news/bad news thing.  Inflation in advanced economies is all about wages; +2% means employers feel labor is still plentiful.  Therefore, rising interest rates aren’t just around the corner.

On the other hand, given the half-decade-plus that the Fed has been applying enormous monetary stimulus in the US, you’d think there’d be a stronger pulse.

–the situation for the long-term unemployed, those doing part-time work because they can’t find full-time jobs, discouraged workers who have dropped out of the workforce, and Millennials looking for jobs hasn’t improved over the past year or so.

my take

The recent series of strong job gains show that the US economy is out of intensive care and is continuing to heal itself someplace else in the hospital.  Without help from fiscal policy–which is highly unlikely to come–this is as good as it gets.  As a result, I don’t think the employment figures will continue to play as important a role in stock market movements as it has from the beginning of the recovery until now.

From this point, the key will be wage gains.  A pickup from the current rate will be a strong indicator for the Fed to withdraw more of the emergency economic stimulus it has been applying.  In other words, wage gains will be a signal that interest rates are about to rise.

 

April 2014 Employment Situation

May 5, 2014 By in economics, employment, Employment Situation report, Portfolio management, Recent Market Action Tags: , , , , , , , 1 Comment

Last Friday at 8:30am est, as usual, the Bureau of Labor Statistics released its monthly Employment Situation.  The figures for April were, I think, unadulterated good economic news.  The country added +288,000 jobs last month, +273,000 in the private sector and 15,000 in government.  Revisions to estimates of job gains for February and March were upped by a total of +36,000, as late submissions from participants in the government’s elaborate Establishment Survey were tallied.

These figures seem to me to show that the horrible winter had a much greater negative effect on hiring (and consumer spending) than the consensus had thought.

Maybe “unadulterated” was an overstatement, though.  In addition to its Establishment Survey, a set of regular reports from a group of companies and government agencies that generate the job gain numbers, the BLS also does a Household Survey.  It’s a set of interviews with randomly selected individuals, from which, among other things, the BLS determines the unemployment rate.  The Household Survey numbers tend to bounce all over the place from month to month.  Last month, for example, the HS indicated that about a half million people stopped being discouraged workers and rejoined the workforce; this month the HS indicated all of them, plus another 300,000 got discouraged again and moved out of the workforce.

Why these people would go looking for work in the freezing cold and then stay home once the sun came out is unclear.  But that’s what the HS said they did.  And the lost 800,000–the reason the unemployment rate dropped to 6.3%–is the datum (like the word?) market pundits have seized on.

“They can’t be serious, can they?” is my first thought.  Then I remember the mind-dulling irrelevance of most financial tv/radio and conclude, sadly, that they can.

Why isn’t Wall Street greeting the Employment Situation more warmly?  I think it has nothing to do with the “lost” 800,000 workers.  Rather, I think investors know the ES numbers are strong–and are evidence in favor of the Fed’s belief that the domestic economy is swell enough to leave intensive care.  This implies that the slow move to higher interest rates will continue apace.

stock market implications

Potential acquirers have a new reason to speed up their activity to lock in financing for their acquisitions at low rates.  So M&A will pick up.

We’ll have more days like Friday–flattish overall market action, with strong moves, both up and down, in individual stocks based on company-specific news, especially the quality of their earnings reports.