Tag Archives: unemployment

thoughts on the May jobs report (II): stock market implications

June 8, 2011 By in Current Market Thoughts, economics, emerging markets, employment, Portfolio management, Recent Market Action, Strategy Tags: , , , , , , , , , , , Leave a comment

capping the upside

The main conclusion Wall Street seems to be taking from the May jobs report and yesterday’s Bernanke speech (growth is slowing, no new stimulus measures) is, I think, the correct one–that, as investors, we can no longer imagine an unlimited upside to the US economy.  We’re probably not going to be putting 1-2 million now-idle workers back on the job in the coming twelve months.  So the economy won’t be benefiting from a surge in pent-up demand as these extra paychecks are spent.

The reality is that the top 20% of the country by income does the majority of consumer spending, and that another .7% added to the workforce won’t change the GDP numbers in any noticeable way.  It’s the dream that next year’s eps will be at least up x% that’s fading.

looking at the numbers

As I mentioned yesterday, the earnings of the S&P 500 are composed roughly of 50% domestic profits, 25% from the EU and 25% from emerging economies.  If we were to say that US and EU profits will be up by 5% each next year and those from emerging markets will gain 20%, the result is that aggregate S&P earnings would likely rise to $110 from the $100 I’m penciling in for 2011.

If we apply a 13x multiple to these earnings, that would imply that the S&P could be trading at 1430 twelve months from now.  That, in turn, would suggest that at, say, 1250 the S&P is a compelling alternative to other publicly traded asset classes.

imponderables (two of them)

1.  is a 13x multiple the right one?  My guess is that it’s a bit too low.  The counterargument is that the US has lost the special place in the world that it has held since World War II as the economic and political leader of the globe (see Jeffrey Sachs’ op-ed about the IMF in the Financial Times on May 31–“A manifesto for the fund’s new supremo” for an example of what many people, especially outside the US, are thinking).

A slow domestic economy suggests interest rates are going to remain lower than Wall Street has thought, and for longer than expected.  This should imply a higher than usual pe multiple for the stock market.  But the idea that the US is politically adrift and lost in dreams of past glory argues in the opposite direction.

Who knows which factor will dominate?  For lack of any better insight, the consensus may well call them a wash.

2.  can the stock market be strong if the economy isn’t?   We have (at least) two relatively recent examples that address this question:

–Japan post-1989.  During the subsequent “lost decade” in Japan, export-oriented industrial companies went from strength to strength in profit terms while domestically-oriented firms collapsed.  The former were outstanding relative performers in a terrible overall market.  But investors made little actual money by holding them.

–US post-1974.  During the subsequent several years, the market went sideways.  But large stocks went down substantially while smaller companies like Wal-Mart or Toys-R-Us went up like rockets.

The difference in these two cases?  In the first, local investors were unable to distinguish between the fortunes of the overall economy and those of individual companies.  In the second, they were.

Today?  Traditionally, American investors have been highly skilled stock pickers–by far, the best in the world at individual stock analysis.  But the rise of trader-run, commodity/derivative-oriented hedge funds since the turn of the century has refocused the market to some degree.  And the firing of the most experienced brokerage house analysts in cost-cutting moves over the same time frame hasn’t helped.

My bottom line: I think individual stock selection will turn out to be very lucrative in the mildly uptrending market I envision.  But the ride could be unusually bumpy, due to political and hedge fund headwinds.

thoughts on the May jobs report: (I)

June 7, 2011 By in Current Market Thoughts, economics, emerging markets, employment, Employment Situation report, Portfolio management, Recent Market Action, Strategy Tags: , , , , , , , , , , 1 Comment

Yesterday,  I wrote about the bare bones of the May Employment Situation report issued by the Bureau of Labor Statistics.  Job growth for the month dropped from the recent rate of around 200,000 job additions to 54,000.

More data:

Commenting on the May Employment Situation, the BLS says there’s no obvious statistical anomaly that might lead one to think the low job additions number will be revised away in coming months’ reports.  Also, if the slowdown were due to economic disruptions in Japan caused by the Fukushima nuclear disaster in March, we should be seeing a decrease in hours worked, as parts-short factories slow production.  We don’t.

Outplacement agency Challenger reported a couple of weeks ago that job security for those currently employed is rising.  In addition, company plans for layoffs are the lowest they’ve been in over a decade.  The anticipated layoff rate is 80% of what it was a year ago, and only about a quarter of what companies were figuring to do  during early 2009 (the low point for the economy).

I’ve also read a report recently (no citation–I’m writing this from a B&B in Colorado and will post a link when I get back home) indicating that companies were increasingly willing to pay to relocate potential hires because they can’t get the skills they need in the local labor market.

Recent earnings reports seem to indicate that US consumers are increasingly trading up, and are spending more (sometimes, a lot more) on discretionary items.  TIF, for example, just posted very strong results.  The company said it was seeing strength across the country and that each month of the April quarter was stronger than the previous one.  More expensive items are the best sellers.

my thoughts

Looking in rough terms, an unemployment rate of 9% means 91% of the workforce is employed.  An unemployment rate of 5% would be full employment.  So, putting aside questions about the long-term vitality of the US economy, which involves “cosmic” considerations about whether/how our legal and political framework encourages economic growth, the near-term unemployment issue involves about 4% of the workforce.

Given the distribution of incomes and wealth in the US, this 4% represents far less than 1% of potential US consumption.

As far as we can determine (the issue is one of corporate disclosure), half the earnings of the S&P 500 come from outside the US.  We can roughly divide that into 25% from the EU + Japan and 25% from emerging markets.  In other words, whether unemployment in the US is 9% or 7% makes virtually no difference to S&P 500 profits over the next year or two (or three or four).

There are investment issues, however.

They have to do with the multiple placed on earnings whose future course is somewhat less certain, and about sector/industry weightings and individual stock selection.

I think there may also be, for lack of a better word, a “transition” issue, as conventional wisdom about the preeminent position of the US economy in the world, and the relationship between the course of the US economy and the S&P 500, are questioned.

More tomorrow.

May jobs report: a sharp downshift into low

June 6, 2011 By in Current Market Thoughts, economics, employment, Employment Situation report, Portfolio management, Recent Market Action, Strategy Tags: , , , , , , , , , Leave a comment

the Employment Situation report

Last Friday morning the Bureau of Labor Statistics released its Employment Situation report for May 2011.

The numbers showed a sharp deceleration in job growth during the month, from the 200,000 or so pace of job additions seen in recent months to a disappointing +54,000.  That’s well below the pace of around 100,000 additions needed to absorb new entrants into the workforce–to say nothing of absorbing any of the large army of unemployed created by the recent recession.

job growth patterns haven’t changed

The general pattern of job growth in May remained the same as we’ve become used to over the past year:  a larger gain in the private sector (+83,000), offset by job losses in government (-29,000) as states and municipalities cope with budget deficits.  There’s no joy in the monthly revisions, either:  March job gains were revised down by 27,000, April by 12,000.

stock market reaction

Stock market reaction to the news was mildly negative.  But the “mild” part only reflects the fact that a jobs related market selloff began earlier in the week, when the (much more erratic) ADP job survey also signaled a significant cooling off in hiring in the domestic economy.

It’s possible that the May figures are a statistical anomaly and that we’ll be back at 200,000 job gains next month.  I wouldn’t bank on that, however.  There are enough other economic indicators indicating slowdown to make that too optimistic an assumption to safely make.

investment implications

There are two real questions for investors:

–how to interpret the figures.  …are they a consequence of a supply chain slowdown induced by the earthquake/tsunamis in Japan in March? … do they stem from the subsequent weakness in the Japanese economy, which is still one of the largest in the world?  …or is the US just settling back down to a “normal” growth level after a surge in pent-up demand after the recession?

–how to assess their investment significance.  …that is, how is the stock market likely to react if the US unemployment rate remains stuck around the 8%-9% level?  …is there a way to structure an equity portfolio so that the pace of job growth isn’t crucial to investment success?

We’re still in the midst of wedding festivities.  More tomorrow.

the April 2011 Employment Situation report

May 8, 2011 By in Current Market Thoughts, economics, Employment Situation report, Strategy Tags: , , , , , Leave a comment

the report

On Friday May 6th, the Bureau of Labor Statistics released its April 2011 Employment Situation report.  According to the BLS, the economy added 244,000 jobs last month, bettering economists’ estimates of an increase of 185,000 positions.  Private industry gained 268,000 jobs; as has been the case recently while states and municipalities seek to balance their budgets, governments shed 24,000.

Strength came from a variety of sectors–manufacturing, retail, healthcare and leisure and hospitality.

revisions

The official unemployment numbers come from the larger of two surveys the BLS conducts monthly.  Called “Establishment” data, it is compiled from reports from organizations representing about a third of the employees in the US.  Not all the information comes in on time, so the Establishment data are revised twice before being declared final, once in each of the two months following the initial release.  These revisions are themselves a good indicator of the strength of the economy, since they are typically positive in a healthy labor market and negative in a bad one.

The February job additions were initially reported as a gain of 192,000 positions.  That number was revised up to 194,000 in March and 235,000 in April.  The March job gains were initially reported as +216,000.  In the April report, the figure was upped by 5,000 to 221,000.  We’ve seen the same positive pattern for a while.  So far, so good.

the unemployment rate

“discouraged” workers

The April unemployment rate was determined to be 9% of the workforce, up from 8.8% in March.  One might think that this is evidence of a well-known quirk in unemployment statistics that makes itself evident when the job situation is improving.  It’s what the statistics do with “discouraged” workers, that is, unemployed people who are so downcast from repeated failure to find a job that they see no point in continuing to seek work and simply stop looking.

People in this situation are not considered to be unemployed.  They’re classified as not being in the workforce.  As a result, when the discouraged drop out of the ranks of job seekers, they decrease the workforce and thereby make the unemployment rate lower.  In other words, in bad times the unemployment situation is actually worse than the official statistics show. 

Conversely, as the job situation improves, the discouraged take heart and begin looking for work again.  This makes the unemployment rate go up.

Although this is what usually happens, the April figures don’t show discouraged workers reentering the workforce.  Instead, it shows 190,000 fewer workers employed than in March and 205,000 more unemployed in a workforce that’s virtually unchanged in size.

“Household” data and sample size

The unemployment rate isn’t derived from the Establishment data, which are forms companies send in telling about how many people they employ.  The unemployment rate comes from the “Household” data, information gathered from monthly interviews with 60,000 randomly selected households.

This is a much smaller sample size.  In fact, the BLS statisticians calculate that the smallest movement in the month-to-month figures from the Establishment survey that’s statistically meaningful (and not just statistical noise) is 100,000.  For the Household survey, the number is 400,000.  This means that the .2% increase in the unemployment rate may simply be a random variation in the data collected.

investment conclusions

April is the latest in a series of months of strong employment gains for the US economy.  There’s no evidence in the report (compiled around mid-April) of any slowdown in hiring activity due to rising commodity prices.  But even though the data show a significant strengthening of the labor market to well over double the rate needed to absorb new entrants to the workforce, it will still take several years at this higher level of job gains for the economy to reach full employment again.




retraining workers–but for what?

July 20, 2010 By in Current Market Thoughts, economics, emerging markets, Portfolio management, Recent Market Action, Strategy Tags: , , , , , , , , , Leave a comment

When I was in college in Boston in the Sixties, my school had a long-tenured and widely known hockey coach–and, despite a cast of excellent players, a thoroughly mediocre team.  According to my friends on the team, whenever they went to this coach for advice on any technical aspect of the game–skating, puck handling, shooting–his standard reply was, “Practice!”  Not very helpful, but that exhortation exhausted his knowledge base.

A lot of the recent commentary on the unemployment situation in the United States–and, by extension, anywhere else in the developed world–reminds me of that college hockey coach (thankfully, long since retired and succeeded by a line of much more skilled coaches).

The current situation is well-known.  Actually, I’m not sure it is.  The facts have been around for a long time.  And most people probably can dredge up the information if pressed.  But I’m not sure enough people in the developed world have passed from purely intellectual awareness to emotional commitment to act on the challenges they represent.

The working populations of China and India are gradually entering the labor force available to international firms, swelling its ranks by about 50%.  These workers are happy to work for a year for the wages their counterparts in the developed world demand for a month’s labor.  So, the latter are priced out of the market, and are being replaced by the former as quickly as possible.

The “insight” of the typical commentator on the “decline of the West” is limited to the suggestion that displaced workers be given temporary government support and retrained for new jobs.  I believe that’s right.  It’s also the orthodox prescription that can be found in any first-year economics text. But it’s also a “solution” as unhelpful and as devoid of content as “Practice!”  Retrain for what?  The commentators, many of them insulated by ivory-tower tenure that insulates them from the reality of the situation, offer (…have?) no clue.

There is some justification for stopping at framing the problem without offering any solutions.  Generally speaking, high-level industrial policy of the kind Japan’s MITI was once famous for hasn’t worked there, or anywhere else.  When the Cold War ended and the defense industry in the US collapsed, many scientists working in exotic metals used for weapons systems ended up designing golf clubs.  Who’d have guessed?–no one.

But I think there are some conclusions that can be drawn.  For instance:

1.  The tendency of Washington to prevent, say, Chinese industrial companies from making investments in the United States means that these firms continue to service US customers from abroad.  The associated job creation remains in China instead of migrating to the US.

2.  As Fiat’s Italian auto workers are now showing, and as west coast port workers in the US demonstrated several years ago, beneficiaries of an older order can be highly resistant to change.  In the developed world, it seems to me the most urgent need is to reform an education system that creates newly-minted graduates prepared to succeed in the world of 1960 (which no longer exists), but which is controlled by professionals who have been granted jobs for life.  Charter schools, anyone?

3.  I’m worried that the long-term unemployed are going to prove a particularly intractable problem.  Take a hypothetical  fifty-five year old high school graduate with no computer skills,  who has bounced from job to job during the housing boom but has been laid off from an assembly line or some other physical labor job eighteen months ago.  He will likely live another thirty-five or forty years.   What are his chances of getting another job?

Over a million young workers enter the labor force each year.  If the Fed projections are right, it will be at least a couple of years before the economy is healthy enough to absorb this flow.  By that time, our hypothetical worker will be approaching sixty–and a prime target of age discrimination.

Yes, retrain this worker.  But have computer skills eluded him for all this time because he didn’t need them, or because he’s been unsuccessful at past learning attempts?  I don’t know.

I suspect, though, that the US is going to experience a period of European-style chronic high unemployment–with the potential creation of a new underclass–for a long time.

investment implications

On the one hand, unemployment and education are political and social issues.  But they have a direct investment significance in that they influence the trend growth rate of GDP.  In extreme cases–not likely in the US, I think–economic stagnation has led to a “brain drain,” where the best and the brightest leave their home countries in search of better economic prospects elsewhere.

As far as Wall Street is concerned, I think the implications are clear–shade strongly away from the 25% or so of the stock market where earnings are closely linked to the fortunes of the overall domestic economy.  Until investors are clear that 75% of the market’s earnings are not, however, I suspect that stocks will continue to react en masse–though (I hope) with decreasing amplitude–to bumps along the road to economic recovery.