the July 2001 Employment Situation report

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.

 

 

sizing the coming fiscal contraction in the US–effect on equities?

raising the debt ceiling

As I’m writing this, the House has already passed a bill that authorizes an increase in the permitted level of Federal government borrowing–one that’s big enough to get the country through the 2012 election; the Senate appears very likely to do the same at noon.  Mr. Obama will presumably sign the legislation into law before the end of the day.  That, in turn, will allow the Treasury to borrow enough to pay all of the $300+ billion in bills that come due this month, not just the $175 billion or so that the government’s income will cover.

addressing the budget deficit

The bill’s provisions (no, I haven’t read the legislation itself, just press accounts) appear to be guided by the usual congressional principle of deflecting blame from the legislators themselves.  It calls for $900 billion in immediate spending reductions.  A bipartisan panel, soon to be appointed, will find $1.5 trillion more over the coming months that Congress will vote on before yearend.  Congress will have no ability to change any of the panel’s recommendations, but must simply say yes or no.  If this second bill doesn’t pass, a pre-determined set of budget cuts, heavily weighted toward the military (which, after all, is the largest item in the budget at 25% of outlays) and entitlement spending (not far behind) will go into effect.

In addition to raising the debt ceiling, today’s bill marks the first step toward addressing two important macroeconomic problems:

–the reemergence of spending in excess of government receipts by Washington after several years of restraint during the second Clinton administration, and

–the resulting sharp rise in the amount of federal debt outstanding.

sizing the issue

GDP in the US is around $15 trillion.  The federal government is currently taking in about $2.5 trillion a year and spending $4 trillion.  See my post last week for a list of the major categories of government spending.

Outstanding federal debt is $14.3 trillion (the debt ceiling).  Of that, about $9 trillion is in public hands; the rest is held by government trusts, predominantly Social Security.

The annual budget deficit is currently about $1.5 trillion.  To cover today’s spending levels, government receipts would have to rise by 60%.   Government spending would have to drop by about a third to be funded by income.

The excess government spending over income is equal to 10% of GDP.

Two conclusions:

–the problem is too big to fix all at once,

–the problem is too big to “grow” out of.  If we assume that tax receipts increase by 5% annually, it would take almost a decade for government income to rise to the current spending level.  Government debt would be about $7 billion higher at that point than it is today.

effect on the economy

The federal budget deficit represents a very large stimulus to the economy, one that in effect shifts economic growth from the future to the present.  Shrinking the deficit means reversing this process. Eventually–and probably sooner than later–we end up with a healthier country.  But while the process is going on, the removal of stimulus will make economic growth lower than it would otherwise be.  …a loss of .5% a year?  Given that the long-term growth rate of the economy is maybe 2.5%, that’s a sizable chunk.

investment implications

Interest rates in the US are likely to stay low for much longer than most people (including me) thought a year or two ago.

This suggests that the appeal of fixed income instruments, especially short-term ones, as yield vehicles will remain limited.  By default, stocks become more attractive.

The recipe for stock market success in the US won’t change much:

–growth stocks over value

–foreign, especially Asian, exposure over domestic

–domestic consumer over domestic capital-intensive

–upscale consumer over the broad market.

the Manpower global employment survey: a tale of two (maybe three) worlds

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the Manpower survey

Over the past two years, most of my attention, and the attention of the majority of investors in the US, has been on the employment situation domestically.  Reports like the Department of Labor Statistics’ monthly Employment Situation or the equivalent from private payroll company ADP have been scrutinized carefully for signs that a moribund labor market might be showing signs of revival.

The picture that has most recently emerged is of an economy slowly mending, but now generating enough new jobs to not only absorb new entrants into the labor force but also to chip away at the unemployment rate by about 1 one percent per year.

The international employment agency Manpower, in contrast, has for the past half century been producing an increasingly global employment report whose emerging markets content the firm boosted significantly in 2005.  Manpower research focuses on corporate hiring intentions over the coming quarter, rather than chronicling the firms’ actions in the recent past.  As a result of these emphases, the Manpower survey gives an interesting–and different–perspective for assessing the health of the world’s economies.

a diffusion index

One other factor to note before we begin.  Manpower presents its results in the form of what’s called a diffusion index. The company asks all the HR professionals it surveys whether their firms will be hiring, keeping a stable workforce or firing in the coming three months.  It takes the percentage of respondents hiring and subtracts the percentage firing.  This difference is diffusion index.

If, for example, 60% of respondents expect to be hiring and 30% expect to be firing (with 10% remaining stable), the diffusion index is +30.  If 49% are hiring and 50% firing, the diffusion index reading is -1.

the 2Q11 survey results

Here’s what the latest survey has to say:

Asia Pacific

In the Pacific region, Manpower covers eight countries. The lowest reading comes from Japan, at +10.  The highest two are India at +51 and Taiwan at +45.  The median reading is +23.  (Remember, +23 means that companies hiring outnumber those firing by about 3/2.)

The Indian reading is the highest in the six years Manpower has been surveying that country.

China peaked at around +50 in the December quarter and has fallen to +36 now.

EMEA (Europe, Middle East and Africa)

What a contrast!

Of the 21 EMEA countries Manpower follows, only Turkey (+34) and Belgium (+12) score higher than Japan.  Six countries–Austria (-1), Switzerland (-1), Italy (-2), Ireland (-3), Spain (-5) and Greece (-10) are in the minus column.  About the best you can say about these results is that they’re an improvement over the figures this region has been posting over the past two years.

the Americas

Here again, the tale is one of two regions.  The median reading for the ten countries surveyed is about +19.

The stars of the region are Brazil, which appears to be overheating at +40, Panama (+22), Argentina (+22), Peru (+20) and Costa Rica (+17).

Only two nations, Guatemala (+6) and the US (+8), are in single digits.

my thoughts

1.  Among developed countries, patterns in prospective hiring clearly illustrate the difference in the approaches–accommodation vs. austerity
of the US and EU governments in dealing with fiscal deficits generated by the financial crisis.  The healthiest country in the EU other than Belgium is Germany at +9, which falls one point below the developed world’s multi-decade growth doormat, Japan.  Everyone else, ex Greece, is flirting with one side of zero of the other.

The risk to the US is that the country won’t have the political will to rein in stimulus when the time is right.  The worry about the EU is that the cure will prove worse than the disease.  The near-term growth story, however, appears to favor the US.

2. The contrast the Manpower survey draws between the developed and developing world is very stark.  The developed countries of the globe barely break into double digits on the Manpower hiring index, meaning that almost as many employers are laying off workers as are looking to add to their staffs.  In the developing world, on the other hand, Manpower scores are soaring.  Asia ex Japan is averaging roughly 30.  Latin America is close to the same number.  Both imply that about twice as many employers are looking to hire as are looking to lay off.

Over the past several months, emerging markets have been underperforming those of the developed world.   The idea has been that governments of the former have begun to temper economic growth while those in the latter, especially the US, are still applying extraordinary stimulus.  Therefore, on a relative basis stock, markets in the developed world should be emphasized over those in developing ones.

To me the Manpower numbers argue that the preference for the US over emerging markets is a counter-trend movement that can’t last for long.

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I’ve posted my second update to Current Market Tactics

I’ve written the second part of my update to Current Market Tactics.   If you’re on the blog, you can also reach the post by clicking the tab at the top of the page.

I’ve just updated Current Market Tactics

This is the first of two updates of Current Market Tactics (the second will come on Sunday).  If you’re on the blog, you can also click the tab at the top of the page.

Shaping a Portfolio for 2011 (V–and last): sectors

There are only two sectors I want to comment about–utilities and technology.

utilities

Utilities in emerging markets can be attractive growth companies.  Demand for their output typically rises quickly as a country industrializes and as a nascent consumer sector becomes more affluent and wants/is able to pay for more services.  All this growth requires near-constant expansion of plant and equipment, which the utility can, most times, only pay for by issuing new capital.  This implies rate-setters must establish a rate structure that’s profitable enough for the utility that investors are willing to keep on buying the company’s stock and bonds.

In a mature environment, the story changes radically.  Demand growth becomes a function of changes, up or down, in the population.  No new plant is required, so the main source of pressure on the regulators is from the votors, who want their utility bills to be as small as possible.    So rate increases are harder to come by.

Since the utilities can’t pick up and move, they effectively become price takers, growing at the rate of inflation–if that.  So they begin, more or less well, to diversify into non-regulated businesses.

My point?  …utilities in developed economies don’t do well when interest rates are rising or when investors are woried about inflation.  For the reasons I’ve described above, their cash flows–and as a result their dividend payouts–from the regulated businesses can’t rise much.  And regulators will drag their feet in allowing recovery of higher costs, as well.  So they can’t keep pace with competing fixed income investments.

I don’t buy the inflation fear story that has been circulating on Wall Street recently.  But worries about deflation–which would arguably be good for utilities–seem to be a thing of the past for this cycle.  That alone is probably enough to ensure utilities in the US will continue to underperform.

technology

We’re in the midst of a technology revolution, which is seeing an explosion in demand for wireless, social networking and cloud computing.  Yet IT was an underperforming sector in 2010.  Yes, there was a large selloff in January as investors who had nursed their 2009 winners into the next tax year took profits.  But still…

The easiest way to see what’s going on is to look at the largest tech stocks by market capitalization–the ones with the greatest contribution to the sector’s performance.  They are, in order:

Apple     $300 billion+

Microsoft     $250 billion-

Google     $200 billion-

IBM     $185 billion+

Oracle     $150 billion+

Cisco     $115 billion+

Intel     $115 billion+

Hewlett Packard     $100 billion+

Amazon     $80 billion+

Qualcomm     $80 billion+.

The ten make up about $1,575 billion in market cap.

Okay, AAPL, GOOG, AMZN and QCOM are relevant to the current technology revolution.  But they make up only $610 billion of the total, or about 40%.  The rest are pretty much companies of the past, and as such, dead weight.

This implies to me that you can’t get effective stock market exposure to the current tech revolution through a technology index.  It seems to me that you either have to pick individual stocks or look for an actively managed fund.  Personally, I’d take my chances with one or two individual stocks.