Employment Situation, March 2017

The Bureau of Labor Statistics released its monthly Employment Situation report earlier this morning.

With an addition of +98,000 jobs, the figures were a little more than half the rate of gain or recent months.  Revisions to data from the prior two months clipped another -38,000 positions from the total.

Although the report isn’t great reading for stock market bulls, we’ve seen over the past eight years of economic recovery that bad months occasionally occur, even in the midst of a sharply upsloping trend.  In addition, although the monthly figures are seasonally adjusted, the weather during 1Q17 has been so unusual in the populated regions of the US–unusually mild in January-February, ugly in March–that the first two months probably look better than they should and March worse.

The only really eyebrow-raising aspect of this report, in my view, is that despite the unemployment rate being at a very low 4.5%, there is still no sign of acceleration in wages.  This implies no urgency for the Fed to raise interest rates aggressively.

The Employment Situation, November 2016

The Bureau of Labor Statistics of the Labor Department released its monthly Employment  Situation report at 8:30 est this morning, as usual.

The results were good.  178,000 net new positions were filled during the month, which is right at the average monthly gain so far this year.  Net revisions were slightly negative, subtracting -2000 positions from prior months’ employment estimates.  The BLS also said wages made no upward progress during November, after having jumped a lot the month before.

The only out-of-the-ordinary figure was the unemployment rate, which fell to 4.6% from 4.9% in October.  We’ll likely find next month that the November figure comes from transitory statistical strangeness that will have already disappeared.

What to make of this ES?

Nothing, really.  In fact, I think that as stock market investors, we should no longer be monitoring the ES for signs of potential labor market weakness.  Instead, we should be on the lookout for indications of surprising strength, possibly in the number of new hires, but more likely in the rate of wage gains.

That’s because I think we’re well past the point where we’ve got to guard against economic weakness.  Instead, we’ve got to be alert for signs of the more likely threat–that the pace of interest rate rises will accelerate from the currently anticipated once-in-a-long-while pace..

The first step in adopting this new mindset, I think, is to consider what the endpoint for increases in the Fed Funds rate–and the resulting terminal interest rate point for 10-year Treasuries, which is the closer substitute for stocks in long-term investors’ portfolios–will be.

More on this topic on Monday.

labor force participation in the US

A little more than a week ago, the government released a report by the President’s Council of Economic Advisers on the declining labor force participation among prime-age men.  “Prime-age” is defined as being between 24 and 54.

The gist of the report:

–the US has seen a continuing, steady falloff in labor force participation by prime-age men since the 1960s

–the trend is similar in other advanced countries, but more severe in the the US than anywhere other than in Italy

–the decline comes across all age groups and ethnicities, although the worst experience is among black men

–education plays a part.  In 1964, labor participation among men with a college degree was 98%; last year the figure was 94%.  In 1964, the rate among men with less education was 97%; last year it was 83%

–relative wages for less-educated men have fallen as well, from 80% of the college graduate wage in the 1970s to 60% now

–the mechanism for the decline in participation appears to be that jobs are eliminated during recession, with only some of the positions restored during the ensuing recovery

Two other points:

–the average country in the OECD (Organization for Economic Cooperation and Development = advanced nations) spends 6x the percentage of GDP that the US does on job search and job retraining for people out of work.  That puts the US at the bottom of the OECD pile.  If the unemployment people are anything like the VA, the situation is even worse than the figures imply.

–an unusually large number of US males have been in jail at one time or another in their lives.  They have a particularly hard time finding jobs afterward.

My thoughts:

–the situation described in the report is obviously not new, but worldwide, we may have reached a tipping point in voter discontent

–economic theory maintains that the best position for a country is to allow free trade.  It stresses, however, that for this openness to create real benefits, governments must step in when globalization causes job losses to retrain displaced workers and reintegrate them into the workforce.  That’s the part Washington seems to have systematically ignored.

The poor employment situation for large chunks of the population is not going to go away by itself.  The solution is probably not to elect a latter-day Ned Ludd, however.  The government shakeup in the UK that appears to be happening in the wake of the “Leave” vote on Brexit may end up being a template for the US as well.

 

unemployment and robots

robots are everywhere

Like just about everyone else (except my wife, who is a former president of the local chamber of commerce in our small home town), for years I’ve gone to the ATM instead of a bank teller. I don’t photo checks into our account, however, although close to 10% of American check volume is now processed this way.

I see the car commercials where computer-controlled cutting and welding machines are the ultimate symbols of manufacturing excellence.

I saw IBM’s Watson trounce those two guys on Jeopardy.

So, yes, I know that robots are taking over some tasks previously done by humans.

jobs at risk

What I didn’t know is how many jobs are potentially at risk.

Then I read an opinion piece by Martin Wolf, the chief economist of the Financial Times. It’s titled “Enslave the Robots and Free the Poor.”   Like anything Mr. Martin writes, the article is worth reading. But I mention it here because it references a paper by two professors from Oxford, Carl Frey and Michael Osborne, “The Future of Employment:  How Susceptible are Jobs to Computerization.”

The answer is “very.”  The paper concludes that 47%–that’s right, just about half, of the jobs now done by humans in the US are likely targets for replacement by robots.

How can this be?

Mssrs. Frey and Osborne divide work tasks into a matrix, according to whether the they require manual or cognitive skills, and whether they are repetitive or are non-repetitive, i.e., require some creativity, judgment or persuasive ability.

What we see in the ATM and the welding machines is repetitive manual tasks already being done by robots. We;re all used to that. The Frey/Osborne assertion is that while robots may increase their penetration of this segment of the matrix, computer scientists have become skillful enough in their algorithm fashioning that robots can now replace humans doing routine cognitive tasks. These include cashiers, waiters, tickettakers, manners of information kiosks, legal writers, medical diagnosers, truck drivers…

Is anyone safe?

Thank goodness, yes. On second thought, “Thank goodness” may not be appropriate.

–one set of “safe” jobs consists of service work that pays so little that savings don’t cover the cost of building the robot. Ouch.

–the other “safe” jobs re the ones that require a high degree of education, or that depend on creativity, or the ability to lead/persuade others, or the flexibility to respond effectively to novel situations.

fending off the robots

In the Frey/Osborne research, the two most effective ways to prevent your own robotization are to have a college degree or to be paid very poorly. Those lucky enough to qualify on both counts can breathe a sigh of relief.

timeframe

The Oxford paper gives no timeframe for this displacement. But even if the authors are off by a mile in their 47% and even if the process they describe takes half a century, substitution of capital for labor will continue to be a drag on job formation for a long while.

Frey and Osborne point out that ten years ago academics maintained that the safest possible job was being the driver of a motor vehicle.  And then along came the Google car.

IBM is refocusing itself to emphasize development of Watson, which is already being used to help make medical diagnoses.

 

Ironically, the current ultra-low interest rate regime in the US lowers the cost of investment capital—and therefore also lowering the breakeven point that must be reached to make the investment in robots.

investment significance?

Mr. Wolf’s op ed imagines the possible long-term societal implications of further mass replacement of humans by robots.  As an investor, my thought is that it may be wrong to look for the usual cyclical signs of vigor returning to the economy–signs that may never come.  Safer to focus on secular growth ideas,

 

 

today’s potential inflation threat

Yesterday I wrote about inflation in general.  My two-post idea has morphed into three, though.  Today I’ll write about the current situation.  Tomorrow, I’ll write about what happened during the last bout of runaway inflation the US experienced, in the late 1970s.

why are the money taps wide open?

It’s partly because we’re wrapping up the fourth year of recovery from the economic lows of 2009 and still have about three million people (2% of the workforce) unemployed.  In those workers lives, today is a repeat of the depression of the 1930s.

As Fed Chairman Bernanke has been saying in testimony to Congress with increasing force, the Fed is not well-equipped to prevent them from becoming part of a European-style permanent underclass.  That’s a job for fiscal policy shaped by the administration and for Congress–stuff like reforming the tax code to stimulate new business formation, or infrastructure spending, or retraining.

But Washington has no interest, leaving the Fed money policy, which is legally obligated through its “dual mandate” to try to maintain full employment, as the only option.  (The Fed’s other mandate, by the way, is to try to create the highest sustainable–meaning non-inflationary–level of GDP growth.)

unemployment is a bigger economic threat than inflation,

in the Fed’s view.  Therefore it feels justified in maintaining its massive money stimulus.

can the situation change?

Inflation in a developed economy starts up when there are more job openings than there are people to fill them.  Companies then begin to headhunt workers away from rivals with large wage increases.  Fast-rising wage levels–together with newly-flush workers’ relative indifference to paying more for things–are what creates overall inflation to spring up.

monitoring the unemployment rate

One way of keeping an eye out for incipient inflationary impulses is to keep track of changes in working hours and wages.  The Bureau of Labor Statistics does this.  The Fed also uses the unemployment rate as its key leading indicator of wages.  The rationale is that it’s hard for a worker to ask for a big raise while there’s a long line of qualified unemployed eager to do the work for the current wage–or less.

one big assumption

Over the past few years there’s been a continuing debate among economists as to how much of the current unemployment is cyclical and how much is structural.

“Cyclical” means that the workers have skills employers want but business in general isn’t strong enough to justify adding staff.  “Structural” means that a potential worker is unemployed because he doesn’t have the skills employers want.  Maybe he can’t use a computer, for example.

The Bureau of Labor Statistics tries to help measure the difference between cyclical and structural through its JOLTS (Job Openings and Labor Turnover Survey) reports.  These show the number of job openings in the US that are currently unfilled.  A new JOLT report comes out at 10am Eastern time today.  The previous one, from May 24th, shows 3.5 million unfilled jobs in the US.  That’s about 10% below the pre-Great Recession highs.  It’s also 75% above the mid-2009 lows of 2.0 million.

to my mind, the JOLTS reports suggest at least part of the unemployment problem is structural–something loose money can’t do anything about.  But no one knows exactly how much this might be.

What if all the open jobs are from tech firms that want to hire college graduates with IT backgrounds, while the three million “extra” unemployed are all high school grads who used to work in construction and have limited computer literacy.  If that were true, we’re already at full employment.  Continuing Fed easing would already be in the process of igniting an inflationary upward wage spiral.

I’m not aware of anyone who is saying this is the case.  But how close are we?  No one really knows.

That’s the risk the Fed is taking–not because it wants to, but because it sees Washington as giving it no other choice.  It’s the reason the Fed is talking about taking its foot off the monetary gas pedal when the unemployment rate is at 6.5%, even though full employment more likely means 5.0%-5.5%.

It’s also the reason, I think, that the financial markets have decided all by themselves in recent weeks–as they typically have in the past–to start to do the Fed’s tightening work for it.

More tomorrow.