Tag Archives: unemployment

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.

“What Workers Lose by Staying Put,” Enrico Moretti in the Wall Street Journal

May 29, 2012 By in economics, employment Tags: , , , , , , , , 2 Comments

The New Geography of Jobs

“What Workers Lose…” is an article in the Weekend Edition of the WSJ, adapted from Dr. Moretti’s recent book (which I haven’t read) The New Geography of Jobs.  Dr. Moretti was born and grew up in Italy, but now teaches economics at Cal Berkeley.

The thrust of the article is that Americans are unusually mobile in search of work, in contrast with Continental Europeans, who seldom stray from their birthplace.  Dr. Moretti believes that this flexibility is an economic virtue–not necessarily a surprise, given his own career.

His observation is interesting because it runs so counter to the views of prominent 20th century European literary and social critics, who look on American willingness to move as evidence that we’re rootless, soulless wanderers who have no sense of belonging.  Even worse, we eat at McDonalds, vacation at Disneyland and use disposable pens!  That’s all evidence, in their minds, that we’re an inferior brand of humanity–which, by the way, finds its highest and purest expression in the stay-at-home residents of whatever their native country is (read: themselves).

More important from a stock market point of view, the article sheds some light on the problem of the current high level of unemployment in the US.  And it offers a policy prescription for helping to alleviate it.

cyclical or structural?

The key unemployment issue, to my mind, is whether the current high level is

–a cyclical phenomenon, that is, a function of the slow economic rebound from the Great Recession, or

–a structural one, meaning that the unemployed don’t have the skills needed to qualify for jobs in today’s world.  If so, unemployment won’t just go away.

White House and Capitol Hill vs. the Fed

Politicians in Washington seem to adhere to the former view, which, conveniently for them, means that no legislative action is needed.  Time, patience and continuing low interest rates will solve the problem.  The Fed is in the latter camp (where, for what it’s worth, I am, too).  Structural unemployment requires retraining programs, plus continuing unemployment benefits until workers gain skills needed to compete successfully in the job market.

JOLT
The Fed points to the Labor Department’s Job Openings and Labor Turnover (JOLT) studies.  The latest report, from the end of March, shows the private sector has 3.7 million+ unfilled job openings.  Washington replies that workers are trapped in their home towns by houses the can’t sell because the mortgage exceeds the house value.

What does Dr. Moretti bring to the discussion?

He says:

–“willingness to relocate is a large factor in American prosperity”

–“the financial return for geographical mobility keeps increasing”

–the willingness to move is very strongly related to education level.  45% of college graduates will likely move to find better jobs before they’re 30 years old, vs. 17% of high school dropouts.  Dr. Moretti cites research by Prof. Abigail Wozniak of Notre Dame who says education explains most of the willingness to move.

Why the huge difference?

The less educated:

–have less information about the possibility of good work elsewhere

–may lack the skills needed in high-paying jobs

–don’t have the savings needed to finance the trip and support themselves while they look for a job.

Example:  the Motor City, 2009

Dr. Moretti cites the example of Detroit in 2009. Unemployment there was 18%.  Unemployment in Iowa City, 500 miles away, was 4.5%–basically meaning Iowa City firms were crying for workers of all stripes.  But high school dropouts in Detroit didn’t budge.

a policy recommendation

Dr. Moretti suggests that in high unemployment areas government unemployment benefits include vouchers that cover part of the expense of moving to find work.  This doesn’t address the lack-of-marketable-skills problem, but it does address the lack-of-cash one.  Such a program–already being implemented in a small way for workers whose firms have been hurt by foreign competition–would have two benefits.

It would help shift workers who were willing to move to places where they could find work.  And, by starting to drain the pool of unemployed in high unemployment areas, it would make the job search there somewhat easier.

two kinds of structural

All of the commentary–at least all that I’ve seen–about structural unemployment is concentrated on the long-term issue that many young men leave the US school system unequipped to compete for the best-paying jobs.  They’re prime candidates to be chronically unemployed.

Dr. Moretti’s insight is that while we can’t educate these men overnight, we can make them more mobile with the stroke of a pen.  We may also find that removing the structural rigidity of no-money/no-information does much more to relieve unemployment than we might imagine.

the November 2011 Empoyment Situation report: upward revisions show a healing economy

December 4, 2011 By in economics, employment, Employment Situation report, Portfolio management, Strategy Tags: , , , , , , , , , Leave a comment

the report

Before the opening of equity trading in New York on Friday December 2nd, the Bureau of Labor Statistics released its monthly Employment Situation report for November.  The results:

–the establishment survey (of large companies and government agencies) showed that the economy added 120,000 jobs last month;

–the household survey (of 60,000 workers) indicated that the unemployment rate had dropped from 9% of the workforce to 8.6% .

As has been the case for over a year, the job additions are the result of stronger private sector performance— +140,000 jobs –and government sector weakness— -20,000 jobs — as states and municipalities continue to bring their spending back in line with revenues after years of excess.

the revisions

September figures underwent their second, and final, revision.  The initial report two months ago showed a gain of +103,000 jobs (+137,000 in the private sector, -34,000 in the public).  The October ES report revised that up to +158,000 (+191,000 private sector jobs, -33,000 public sector).  The current report revises the figures up again, to +210,000 (+220,000 in the private sector, -10,000 in the public).

October numbers were initially reported as +80,000 jobs (+104,000 private, -24,000 public).  The November ES report also revises October up, to +100,000 jobs (+117,000 private, -17,000 public).

Adding the initial November job gains to the most recent revisions for the prior two months indicates that the US economy has 200,000 more citizens working than we thought a month ago.

Over the past three months the economy has added about a half-million jobs .

economists’ reaction

Comments in the media by professional economists were, to my mind, surprisingly downbeat.

I can see three reasons for this:

–the quirky ADP employment report, which came out on Wednesday, showed the economy added +206,000 private sector jobs last month.  By contrast, the official figure of +140,000 looks a bit tepid.

–the 8.6% unemployment rate isn’t as positive as it seems.  Recent graduates looking for their first jobs aren’t counted as unemployed, nor are “discouraged” workers who have lost their jobs but quit looking for new ones.  Maybe this isn’t ideal. but it’s the way the unemployment rate calculation is designed.  The current drop in the unemployment rate appears mostly due to changes in non-counted groups.

–the monthly job gains need to be 200,000+ to begin to bring the unemployment rate down.

I think economists’ bearishness is overdone.   Today’s US economy is in a lot better shape than it was a year ago.  The private sector numbers are improving, and are at the point where enough new jobs are being created as here are new graduates coming into the workforce.  For some time, companies have been reporting shortages of workers in certain areas. And the most recent BLS report on job openings indicates there are still about three million private sector jobs as yet unfilled.

It could be a lot worse.

stock market reaction

It may sound a little too simple, but I think the stock market is coming to the conclusion that after six months all the money that’s going to be made by being bearish has already been made.

Yes, the future of the Eurozone is still a big issue.  But recent developments suggest that the outlines of a resolution are being sketched out now–and that the end result may not be nearly as bad as the consensus has been expecting.

So, I think the stock market is starting to look for reasons to be bullish.  The November ES report isn’t by itself a sufficient reason to be bullish, but it’s another confirming indicator.  My guess is that despite the negative tone I detect in economists’ and market commentators’ recent remarks Wall Street will continue to move higher.

 

 

 

 

the August 2011 Employment Situation

September 4, 2011 By in Current Market Thoughts, economics, employment, Employment Situation report, Portfolio management, Strategy Tags: , , , , , , , Leave a comment

the employment situation

On Friday morning, September 2nd, before the start of trading on Wall Street, the Bureau of Labor Statistics released its monthly Employment Situation report for August 2011.  The figures showed a disappointing gain of 17,000 net new jobs in the private sector, which were offset exactly by 17,000 net losses by state and local governments for a net job change vs. July of zero.  This is the weakest job change showing for the economy in the past eleven months.

two adjustments

A strike (since ended) by 45,000 workers from Verizon’s loss making fixed-line telephone business reduced the private payroll figure from what otherwise would have been a gain of 62,000 jobs.   Not great, but better than +17,000.

On the other hand, the return of 22,000 workers from a partial government shutdown in Minnesota raised the government layoff figure from -39,000.  The latter figure is more in keeping with the recent trend, which has seen the government sector lose 550,000 jobs since September 2008.

Ex these two non-recurring items, the net figure would have been +23,000.  This compares with a gain of 117,000 jobs in July (+154,000 private, -37,000 government).

Business economists had been projecting a gain of from 55,000-80,000 jobs.  It’s unclear, however, whether forecasters had factored in either of the one-time adjustments into their estimates.  You’d think everyone would have known about the two, but you never can tell.

revisions

The BLS revises its initial monthly figures in the subsequent two months, as more contributors send in data.

The July numbers were initially reported as +117,000 (+154,000 private, -37,000 government).  They’ve been revised down to +85,000 (+156,000,-71,000).

The June figures were initially  reported as +18,000 (+57,000, -39,000).  They were revised to +46,000 (+80,000, -34,000) in July and back to +20,000 (+75,000,-55,000) this month.

The private sector had been doing pretty well until August, and revisions have generally been positive.  If there’s anything surprising about the BLS numbers, it’s the extent of the weakness in the state/local government job sector as these entities struggle to eliminate budget deficits–where revisions have generally been negative.  In contrast, during 2005-2006, when tax revenues were rising, state and local governments were adding about 20,000 new employees monthly.  Over the past quarter, they’ve averaged job losses of about 55,000 monthly–a negative swing of 75,000 positions.

investment implications

The August BLS report is more evidence that the present high unemployment is a structural phenomenon, not a cyclical one.  We know the US needs to create at least 100,000 new jobs monthly to absorb new entrants to the workforce.  So, if the August figures were to be the beginning of a new lower trend, the unemployment rate, now 9.1%, would gradually rise, doubtless increasing social and political pressure for change.

On the surface at least, the overall BLS data run contrary to recent reports by publicly listed retailers of strong consumer spending.  In reality, this is just another aspect of the current economic situation.  In over-simple terms, the top 25% of Americans by wealth do half of the discretionary spending in the country, and the middle 50% do almost all the rest.  The bottom quarter, where chronic unemployment is concentrated, has very little money to spend.  Also, an increasing proportion of this quartile’s outlays is trading down to local products/stores from companies that don’t have the size and financial strength to list.  Focus on wealthier Americans and trading down by the less affluent are two reasons why Tiffany’s or Macy’s comps are rising and Wal-Mart’s are falling.

Continuing high unemployment is, of course, an urgent social problem.  It need not be a stock market one, however, since the profits of publicly listed companies are concentrated outside areas of unemployment-linked weakness.  In addition, the remedies for long-term unemployment–retraining and continuing financial assistance during career transition–are well-understood.

To date, Washington seems to me to be uninterested in either understanding the issue or taking steps to address it.  Instead, politicians of all stripes appear consumed with either avoiding blame for the current condition or affixing blame to their political opponents.  That attitude has doubtless frightened at least some consumers.  So it’s at least possible that common sense won’t prevail and that Washington will continue to bungle and depress economic activity by its actions–transforming a political problem into a stock market one.

I think this worry is part of what Wall Street is reflecting through the current period of high volatility.

My experience is that the worst possible outcome seldom occurs.  At this point, I see no need to become ultra-defensive.  But I do think the best we can hope for is a sideways market until we have more clarity on the political situation.

US unemployment, cyclical or structural?: the latest round

June 21, 2011 By in Constructing a Portfolio, Current Market Thoughts, economics, employment, Strategy Tags: , , , , , , , , Leave a comment

the Siemens interview

Yesterday’s Financial Times contains a report of the paper’s interview with Eric Spiegel, the head of US operations for the German industrial conglomerate, Siemens.

Asked about the employment situation in the US, Mr. Spiegel comes down squarely in the structural camp.  He makes the following comments (some in the video of the interview, but only summarized in the written article):

–Siemens wants to hire 3,200 workers in the US right now

–all of these jobs require at least a college degree, some require more advanced education

–Siemens has recently begun to use recruiters to find workers to fill these jobs (by luring workers from other firms), because the company can’t find what it needs through internet job boards or resume submissions.  “There’s a mismatch between the jobs…and the people that we see out there.”

–in the Carolinas, Siemens is retraining laid-off textile workers to manufacture gas turbines, adapting the traditional manufacturing apprentice program of in-house training the company uses in Germany to do so.

The article also refers to a recent Manpower “Talent Shortage” survey, according to which 52% of US employers queried say they’re having trouble finding job candidates with the skills needed to fill open positions.  A year ago, only 10% were having this problem.  Other recent employment research says that employers are now willing to pay to relocate new employees, since they can’t find suitable local candidates.

implications for stocks

The Siemens interview suggests that the US is much closer to full employment than a 9% unemployment rate would suggest.

If companies want to continue to expand at full employment, the only way to get workers for their new plants is to bid them away from other employers by offering higher wages.  But this is how wage inflation starts.  And in an advanced economy like the US, wage inflation is the crucial component in overall inflation.

The orthodox remedy to nip incipient inflation in the bud is to raise interest rates to a level where expansion becomes financially unattractive.  Doing this is unequivocally bad for bonds.  History shows, however, that stocks can advance modestly while rates are going up.

On the other hand, one of the sectors that will be hit worst by rising rates is construction–one of the few employment sources for the low- or unskilled workers who make up the bulk of the unemployed.  Also, higher rates typically mean lower house prices and higher payments on variable-rate mortgages.  In a perverse way, it’s fortunate that the economy is only moving ahead slowly, so that any rate rises will likely be more modest than has historically been the case (which is a minimum of 175 basis points).

To my mind, all this has two implications for US stocks:

–the forces that have led the bull market to date, that is, non-US exposure + consumption by the more affluent, will likely keep their front-row role, and

–while the already-employed may be on the cusp of enjoying substantial wage increases, the lot of the chronically unemployed may well deteriorate over the coming year or two.  This is a social problem that fiscal policy from Washington is best suited to deal with.