Building A Peak

June 3, 2018

by Steve Stofka

First I will look at May’s employment report before expanding the scope to include some decades long trends that are great and potentially destructive at the same time. In the plains states of Texas, Oklahoma, Kansas, and Nebraska, summer rain clouds are a welcome sign of needed moisture for crops. That’s the good. As those clouds get heavy and dark and temperatures peak, that’s bad. Destruction is near.

May’s employment survey was better than expected. The average of the BLS and ADP employment surveys was 203K job gains. The headline unemployment rate fell to an 18 year low. African-American unemployment is the lowest recorded since the BLS started including that metric in their surveys more than thirty years ago. As a percent of employment, new unemployment claims were near a 50-year low when Obama left office and are now setting records each month.

During Obama’s tenure, Mr. Trump routinely called the headline unemployment rate “fake.” It’s one of many rates, each with its own methodology. Now that Mr. Trump is President, he takes credit for the very statistic that he formerly called fake. The contradiction, so typical of a veteran politician, shows that Mr. Trump has innate political instincts. A President has little influence on the economy but the public likes to keep things simple, and pins the praise or blame on the President’s head.

The wider U-6 unemployment rate includes discouraged and other marginally attached workers who are not included in the headline unemployment rate. Included also are involuntary part-time workers who would like a full-time job but can’t find one. Mr. Trump can be proud that this rate is now better than at the height of the housing boom. Only the 2000 peak of the dot com boom had a better rate.

Let’s look at a key ratio whose current value is both terrific and portentous, like a summer’s rain clouds. First, some terms. The Civilian Labor Force includes those who are working and those who are actively seeking work. The adult Civilian Population are those that can legally work. This would include an 89-year old retiree and a 17-year old high school student. Both could work if they wanted and could find a job, so they are part of the Civilian Population, but are not counted in the Labor Force because they are not actively seeking a job. The Civilian Labor Force Participation Rate is the ratio of the Civilian Labor Force to the Civilian Population. Out of every 100 people in this country, almost 63 are in the Labor Force.

While that is often regarded as a key ratio, I’m looking at a ratio of two rates mentioned above: the Labor Force Participation Rate divided by the U-3, or headline, Unemployment Rate. That ratio is the 3rd highest since the Korean War more, ranking with the peak years of 1969 and 2000. That is terrific. Let’s look at the chart of this ratio to understand the portentous part.

Whenever this ratio gets this high, the labor economy is very imbalanced. Let’s look at some previous peaks. After the 1969 peak, the stock market endured what is called a secular bear market for 13 years. The price finally crossed above its 1969 beginning peak in 1982. In inflation-adjusted prices, the bear market lasted till 1992 (SP500 prices). Imagine retiring at 65 in 1969 and the purchasing power of your stock funds never recovers for the rest of your life. Let’s think more pleasant thoughts!

For those in the accumulation phase of their lives, who are saving for retirement, a secular bear market of steadily lower  asset prices is a boon. Unfortunately, bear markets are accompanied by higher unemployment rates. The loss of a job may force some savers to cash in part of their retirement funds to support themselves and their families. Boy, I’m just full of cheery thoughts this week!

After the 2000 peak, stock market prices recovered in 2007, thanks to low interest rates, mortgage and securities fraud. Just as soon as the price rose to the 2000 peak, it fell precipitously during the 2008 Financial Crisis. Finally, in the first months of 2013, stock market prices broke out of the 13-year bear market.

We have seen two peaks, followed by two secular bear markets that lasted thirteen years. The economy is still in the process of building a third peak. Will history repeat itself? Let’s hope not.

May’s annual growth of wages was 2.7%, strengthening but still below the desirable rate of 3%. The work force, and the economy, is only as strong as the core work force aged 25-54. This age group raises families, starts companies, and buys homes. For most of 2017, annual employment growth of the core fell below 1%. It crossed above that level in November 2017 and continues to stay above that benchmark.

Overall, this was a strong report with job gains spread broadly across most sectors of the economy. Mr. Trump, go ahead and take your bow, but put your MAGA hat on first so you don’t mess up your hair.


Executive Clemency

This week President Trump pardoned the filmmaker Dinesh D’Souza, serving a five-year probation after a 2014 conviction for breaking election finance laws. He helped fund a friend’s 2012 Senate campaign by using “straw” contributions. D’Souza complains that he was targeted by then President Obama and General Attorney Holder for being critical of the administration. A judge found no evidence for the claim but if he didn’t see the conspiracy against D’Souza, then he was part of the conspiracy, no doubt. I reviewed the 2016 movie in which D’Souza unveiled the perfidious history of the Democratic Party and its high priestess, Hillary Clinton.

Employment and Economy Swings Up

April 6th, 2014

Capital Goods

Factory orders, including aircraft, rose in February but general investment spending on capital goods declined.  The leveling off of non-defense capital spending in the past year indicates a lack of certainty among many businesses to commit funds for future growth.

A more panoramic view of the past two decades shows a peaking phenomenon at about $68 billion, one which this recovery has not been able to rise above.

Remember that these peaks are in current dollars and do not take inflation into account.  When adjusted for inflation, the trend is not reassuring.  A significant component of capital goods orders comes from the manufacturing sector – manufacturers ordering capital goods from other manufacturers – whose declining share of the economy puts a damper on growth in this area.


Modestly strong job gains of almost 200,000 in March sparked hope that the winter doldrums are over. The private payroll processor ADP reported 191,000 private job gains in March, in line with expectations and revised their February job gains from 139,000 to 178,000.  The headline this month was that private sector employment FINALLY surpassed the level in late 2008.

Net gains or losses in government employment have been negligible in the past several months.  State and local governments have been hiring enough to offset the small monthly declines in federal employees. Total non-farm employment is still below 2007 levels but so-o-o-o-o close.

While the unemployment rate stayed unchanged, many more unemployed started looking for work.  A reader writes “I read that the labor force has increased by 1.5 million from Jan-Mar, but that doesn’t jive with the number of people hired over that time.  Am I missing something here?”

The labor force includes both the employed and the unemployed.  Unemployed people, including those who retire, who have not looked for work in the past four weeks are not considered active participants in the labor force.   Whether a person was 50 or 80, if they started looking for work, they would then be counted in the unemployed and in the labor force.

The Bureau of Labor Statistics (BLS) states that:
The basic concepts involved in identifying the employed and unemployed are quite simple:
People with jobs are employed.
People who are jobless, looking for jobs, and available for work are unemployed.
People who are neither employed nor unemployed are not in the labor force.
This definition of the labor force uses the narrowest, or headline, measure of unemployment.  Since the beginning of the year, the labor force has increased 1.3 million, 1.6 million since October.

When people get discouraged, they stop looking for work.  Then a friend says “Hey, ABC company is hiring,” and people start their job hunt again.  In the past quarter, a net 800,000 people have come back into the labor force, despite the record number of people retiring and leaving the work force.

As the economy improves, enrollment in for-profit and community college will continue to decline, accelerating from the 2% decline in 2012 – 2013 (NY Times article)  As students start looking for work, they officially re-enter the labor force.

Retirees: According to PolitiFact 11,000 boomers per day become eligible for Social Security.  Let’s say that only 8,000 per day drop out of the labor force, making a total of about 700,000+ who retired this past quarter.  A job market that can continue to overcome the drag from retirement is a sign of strength.

The Civilian Labor Force Participation Rate is the percentage of (employed + unemployed) / (people who can legally work).  So if the Civilian Labor Force were 150 million and there were 250 million people 16 years and over and not institutionalized, 150/250 = .6 or 60%.  The participation rate is currently at 63%.



In the March ISM survey of service sector purchasing managers, employment rebounded strongly from the contracting readings of February.  New orders grew stronger; both of these components get more emphasis in the calculation of the CWPI.

Weighed down by the winter lull, the smoothed composite index of manufacturing and services growth has declined for six months in a row but this should be the bottoming out of this expansionary wave. Barring any April surprises, March’s strength in employment and new orders should lead to an uptick in  the composite in the coming months.



What are the chances an actively managed fund beat its benchmark?  Not good.  An analyst at Standard and Poors compared various indexes that her company produces vs the performance of actively managed funds.  In the past five years, only 28% of large cap actively managed funds beat the benchmark SP500 index.  Some mid cap and real estate funds did much worse; less than 20% beat their benchmarks.  Consider also that actively managed funds carry higher annual fees and/or operating expenses because the fund has to pay for the brain power of active management.

Up, Down, Round and Round

November 10th, 2013

Friday’s release of the monthly employment situation showed strong net job gains of 204,000 jobs and big upward revisions to the previously reported gains in August and September. The market should have reacted negatively to these positive numbers (yeh, go figure) in anticipation of the Fed tapering their stimulus program of monthly bond purchases.

But first we must go back to Thursday. The first estimate of real GDP growth in the third quarter came in above even the most optimistic forecasts at 2.8%, about a full percentage point above second quarter growth.  The primary reason for the gains though was the continuing build in inventories.  Inventory building is good in anticipation of robust sales but, as I’ll cover later, consumer spending has not been so robust.  The market reacted to the report with it’s largest daily loss in a few months.

On Friday, the employment report was released an hour before the market opened.  Trading began at the same level as Thursday’s close with little response to the strong job gains.  We can imagine that traders were twittering furiously to each other in the opening hour, trying to gauge the sentiment.  Buy in on strength in the employment numbers or sell on the strength in the employment numbers?  After the initial hesitation, the main index gained continuing momemtum throughout the day, with a final spike at the closing bell.

After digesting some of the numbers in the report, I think that traders realized how weak some of its components were, dimming the probability that the Fed will ease up on the gas pedal.  The Consumer Sentiment Survey, released a half hour after the opening bell, showed a continuing decline.  Within minutes, the market started trading higher.

The first number popping in the employment report is the 702,000 people who dropped out of the labor force.  To put that number in perspective, take a look at the chart below which shows the monthly changes in the labor force for the past ten years.  This is the second worst decline after the decline in December 2009, shortly after the official end of the recession.

This month’s .4% steep drop in the Civilian Force Participation Rate ties the record set in December 2009 when the economy was still on its knees.  The rate has now fallen below the 63% mark, far below the 66% rate of several years ago.

Employment in the core work force aged 25 – 54 actually dropped this past month.  Classifications of employment by age, sex, and education come from the survey of households, not employers, and may have been affected somewhat by the goverment shutdown. But the numbers of the past years show that there has been no recovery for this segment of the population.  In each lifetime, there are stages that last approximately twenty years.  This time of life should be  about building careers, building families, building assets and growing income.  I fear that for too many people in this age group, the slowly growing economy has not been kind.  This affects both a person’s current circumstances and dampens prospects for the future.

The headline job gains and classification of the types of jobs come from a separate survey of employers called the Establishment Survey.  Employers report their payroll count as of the 12th of each month.  Because they received paychecks, federal employees furloughed during the government shutdown in the first two weeks of October were still counted as employed in October.

There were some strong positives as well in this report.  Retailers added 44,000 jobs, above the average gains of 31,000.  This year’s gains have been the strongest in fifteen years.

The gains are about half of the eye-popping gains of the past fifty years, but they indicate a confidence among retailers.  Retail jobs are often the first job of many younger workers, who have endured persistently high unemployment during this recession. Here’s a glance at yearly job gains in the retail sector for the past fifty years.

As the holiday shopping season gets underway, all eyes will turn to the retail sector as an indicator of the consumer’s mood.  The U. of Michigan Consumer Sentiment Survey, released Friday, showed a continuation of an erosion in consumer confidence.  After peaking during the early summer at 85, this index has declined to 72, about the same levels as late 2009 when the economy was particularly weak.  The Expectations component of this survey, which reflects confidence in employment and income, has declined to about 63.  Gas prices have been declining, inflation has been near zero, and stock and home prices have been rising but this survey shows a steady decline in confidence.  The government shutdown probably had some effect on the consumer mood but the budget battles are not over.  This is the 7th inning stretch and few are standing up to sing “America The Beautiful.”

Professional Services and Health Care have been consistent leaders in job growth for the past few years but gains in these sectors have declined.  The unemployment rate notched up to 7.3% from 7.2%.

In a catch up effort after the recent government shutdown, the Dept of Commerce released data on factory orders for both August and September.  While the manufacturing sector as a whole has been strong, the weakness in new orders in these two months indicates a tempering of industrial production in the near future.

When adjusted for inflation, the level of new orders is still below the levels of mid-2008.

If we zoom out ten years, we can see that we at about the same levels as late 2005.

ISM released their monthly non-manufacturing survey, showing sustained and rising strong growth at just over 55, up a point for the previous month.  I’ve updated the CWI that I’ve been tracking  since June of this year.  A three year chart shows that even the troughs are part of a sustained growth pattern.  Furthermore, the span of the troughs keeps getting shorter, indicating a structural growth in the economy.

Let’s look back six years and compare this composite index of economic activity with the market.

The monthly report of personal income and spending released Friday showed less than 1% inflation on a year over year basis.  For the second month, incomes increased at an annualized rate of 6%, yet consumer spending remains sluggish.  The chart below shows the year over year growth in spending for the past twenty years.

A longer term graph shows the current fragility in an economy whose primary component is consumer spending.

Both the manufacturing and non-manufacturing portions of the economy continue to expand.  Employment has risen consistently at a level just above population growth.  Inflation is tame but so is consumer spending.  Income is rising.  Budget battles loom.  Expectations for holiday retails sales increases are modest.  Will the Fed ease or not ease?  The medium to long term outlook is positive, but with a watchful eye on any further declines in the momentum of consumer spending growth. The short term outlook is a bit more chaotic.  We can expect further wiggles in the stock market as traders rend their garments, struggling  with Hamlet’s dilemma: To buy or not buy?  To sell or not sell?

Unemployment Measures

When the Bureau of Labor Statistics (BLS) issues their monthly labor report, the headlines quote an unemployment rate and the number of jobs gained in the past month.  In addition to those headline numbers, a newspaper article may cite a Civilian Participation Rate, the number of long term unemployed, discouraged workers, etc.  To the casual reader, all of these numbers swirl around, making it difficult to see a clear picture.  Below is a pie chart breaking down the approximately 313 million people of the U.S. into various segments. (Click to enlarge in separate tab)

When you read about the Civilian Non-Institutional Population, it is all the people in the country except for those who are under 16, in the Armed Forces, a nursing home or prison.   A better term might be “non-restricted”, i.e. those who are, by definition, free to choose whether they want a job or not.  “Persons not in the labor force combined with those in the civilian labor force constitute the civilian noninstitutional population 16 years and over. (There is no upper age limit.)”  (BLS Source )

This population number becomes the divisor (the bottom number of a fraction) for the Civilian Employment Population Ratio (EMRATIO), which calculates the percentage of employed people to the Non-Institutional Population.

When you read “Civilian Labor Force” that means “”The sum of the employed and the unemployed constitutes the civilian labor force” (BLS Source)

When you read about the unemployment rate, this is the U-3 employment rate.

Sometimes you will read about the “true” or “real” unemployment rate, although often the speaker or author can not define what is “true” or “real”, showing a lack of knowledge about the various employment rates.  What they are usually referring to is the U-6 unemployment rate, which includes discouraged workers and those who are working part time because they either can not find a full time job or business is slow and their hours are reduced.

A casual reader of American History will remember the WPA, a government project that put up to three million people to work during the 1930s.  Projects included the Hoover Dam, Grand Coulee Dam, the Lincoln Tunnel linking Manhattan and New Jersey, Carlsbad Caverns, the Great Smoky Mountains National Park and public buildings throughout the U.S.  But who knew that a large part of the unemployment report itself was a WPA project begun in 1940? (BLS Source)