Holding Pattern

September 20, 2015

The big news this week was the decision by the Fed to not raise interest rates this month.  Big mistake.  The Fed’s decision signaled a lack of confidence in the global economy.  Are we to believe that the continuing strength of the American economy is so weak that it can not weather even a 1/4% interest rate increase?

Message received.  When the news was announced on Thursday, the initial reaction was good.  Yaay!  no rate increase.  Then, the reality sunk in.  Does the Fed know something that the rest of us don’t? The buyers went to the back of the bus.  The sellers started driving the bus.  Pessimism wiped out the gains in the early part of the week and ended the week down 7/10%.  When in doubt, traders get out.

There are many aspects of the labor market.  The Fed crafts a composite of over 20 factors, called the Labor Market Conditions Index (LMCI).  The latest reading was released on September 9th, a week before this month’s Fed meeting.  This may have contributed to the caution in the Fed’s decision making.  The overall labor market has still not fully recovered from the downturn this past spring.


Will your job become automated?  In this fast morphing economy, the demand for a particular skill set can change quickly.  Younger people, whether working or still in school, need to focus on developing transferable skills.   Here’s a list of the nine criteria that some researchers determined were important to keeping a job from being automated: “social perceptiveness, negotiation, persuasion, assisting and caring for others, originality, fine arts, finger dexterity, manual dexterity and the need to work in a cramped work space.”

When the first Boomers were born at the end of World War II, 16% of the workforce was employed in agriculture.  Millions of agricultural jobs have been lost in the past 70 years. Now it is less than 2%. (USDA source)

Computerization has led to the loss of millions of clerical and accounting jobs in the back offices of businesses throughout this country. Despite those job losses of the past 25 years, there are almost twice as many professional and business employees now as there were in 1990 (Source )

In contrast, construction employment is about the same as it was 20 years ago – an example of an industry that boomed and busted in the past two decades.  Despite that lack of growth, construction employment is still almost twice what it was in the go-go years of the 1960s. (Source)

Despite all these job losses due to automation and more efficient production methods, there are 350% more people working now (140 million) than there were at the end of WW2 (40 million). (Source)

Those who get left behind are those who have a narrow set of skills.

Labor Market Analysis

Each August the Federal Reserve hosts an economic summit for central bankers, economists and academics.  In 2014, Fed chair woman Janet Yellen commented on several aspects of the labor market:

Labor force participation peaked in early 2000, so its decline began well before the Great Recession. A portion of that decline clearly relates to the aging of the baby boom generation. But the pace of decline accelerated with the recession. As an accounting matter, the drop in the participation rate since 2008 can be attributed to increases in four factors: retirement, disability, school enrollment, and other reasons, including worker discouragement.

As Yellen noted, some changes were structural, some cyclical:
Over the past several years, wage inflation, as measured by several different indexes, has averaged about 2 percent, and there has been little evidence of any broad-based acceleration in either wages or compensation. Indeed, in real terms, wages have been about flat, growing less than labor productivity.

Ms. Yellen agrees that the headline unemployment rate, the U-3 rate, does not reflect current labor market conditions:  “the recent behavior of both nominal and real wages point to weaker labor market conditions than would be indicated by the current unemployment rate.

Since unemployment peaked at 25% during the Great Depression in the 1930s there has been an ongoing debate about unemployment during recessions.  Why don’t employees simply offer to work for less when the economy starts slowing down? Yellen offered some insights [my comments in brackets below]:

the sluggish pace of nominal [current dollars] and real [inflation-adjusted] wage growth in recent years may reflect the phenomenon of ‘pent-up wage deflation.’ The evidence suggests that many firms faced significant constraints in lowering compensation during the recession and the earlier part of the recovery because of ‘downward nominal wage rigidity’–namely, an inability or unwillingness on the part of firms to cut nominal wages. To the extent that firms faced limits in reducing real and nominal wages when the labor market was exceptionally weak, they may find that now they do not need to raise wages to attract qualified workers. As a result, wages might rise relatively slowly as the labor market strengthens. If pent-up wage deflation is holding down wage growth, the current very moderate wage growth could be a misleading signal of the degree of remaining slack. Further, wages could begin to rise at a noticeably more rapid pace once pent-up wage deflation has been absorbed.”

Home Sweet Home

March 31st, 2013

From its catatonic state the housing market continues to make headlines.  On Tuesday came a somewhat disappointing report on new home sales for February; at 411,000 it was a bit below expectations of 425,000.   A real estate saleswoman told me this week that it’s now a seller’s market in Denver.  I presume that means that buyers are now having to offer the asking price or above when submitting a sales contract to a seller.

For a long term perspective, let’s zoom out fifty years.  Home sales are at past recession bottoms BUT they are better than last year and the year before and the housing and labor markets are hoping.

Will the patient stir, starting to rise, only to fall back on the bed?  PUH-LEEZ DON’T!

Housing Starts, which include multi-family dwellings, are on an upswing but are also coming from a deep trough.

What is more telling for the labor market is the ratio of home sales to housing starts, which continues to decline as more and more multi-unit apartment buildings and condos are being built.

Construction of multi-unit dwellings takes less labor per family unit and the type of construction is often skewed to a different kind of labor force than the construction of single family homes.  There is more steel, concrete and masonry work in multi-unit construction, employing trade skills unfamiliar to some in single family residential construction.  This shifting emphasis of skills in the work force may damper growth in the construction labor market.

Let’s go up in our hot air balloons and take a gander at home valuation for the past 130 years.  The Case-Shiller Home Price index surveys home prices throughout the nation and adjusts for inflation.  The homes of today offer more than the homes of 100 years ago, both in convenience, comfort and safety.  However, the index is approaching an upper range that may be less attractive to potential buyers.

Let’s look at housing evaluations from an affordability perspective.  The National Association of Realtors offers an affordability index based on a composite of mortgages.  I prefer a different measure, one that is based on disposable income – income after taxes.  For many of us, buying a house is the biggest purchase of our lives.  Before we make such a big commitment, we need to have some savings (except during the housing boom) to make a down payment, and we need to feel some certainty about our future income.  Mortgage payments will probably take the largest bite out of our income.  

When we look at a long term history of the growth of the home price index (purchases only) and the growth of inflation adjusted disposable income, they track each other closely – until the housing boom really took off in 2000.  Below is a graph of the past 20+ years, showing the relationship between the two.


The upturn in home prices is still above the trend line growth of disposable income and until personal income can resume or surpass a 3% growth rate, any rise in home prices will be constrained.

GDP, Profits and Labor

Feb. 2nd, 2013

A lot to cover this week – the monthly labor report and the Dow Industrial Average breaks the psychological mark of 14,000.  Let’s cover the stock market rise because that will give us some context for the labor report.

The stock market rises and falls on the prospect for the rise and fall in corporate profits.  For the past year, profits have been healthy, increasing year over year by 15-20%.

The stock market is a compilation of attempts to anticipate these profit changes by six months or so. Sometimes it guesses wrong, sometimes it guesses right but the market loosely follows the trend in profits.

As a percent of GDP, corporate profits have reached a record high and this growing share of the economy is largely responsible for the doubling of the SP500 in the past three years.

There can be too much of  a good thing and this may be it.  An economy becomes unstable as one segment of the economy accumulates a greater share of the pie.

Facts are the nemesis of partisan hacks who simply disregard any information that does not fit with their model of how the universe works.  Data on government spending and investment contradict those who complain that government has too much of a share of the economy; it is now at historic lows.

This includes government at all levels: federal, state and local.  Reductions in government spending continue to act as a drag on both GDP and employment growth. What gives some people the sense that government spending is a larger percentage of the economy are transfer payments, like Social Security.  Neither the calculation of GDP or government spending includes these transfer payments, so the percent of government spending in relation to GDP as shown in the chart above is a truer picture of government’s role in the economy. 

Speaking of GDP – this past week came the first estimate of GDP growth for the fourth quarter of 2012.  The headline number was negative growth of 1/10th of a percent on an annualized basis.

Two quarters of negative growth usually mark the beginning of a recession.  Concern over this negative growth led to small losses in the stock market at mid-week as investors grew concerned about the January labor report, which was released Friday.  The negative growth was largely due to a severe reduction in defense spending and exports.  As a whole, the private economy grew at an annualized rate of 3.6%, a strength that helped moderate any market declines in mid week.

When the Bureau of Labor Statistics released their monthly labor report this past Friday, the headline job increase of 157,000+ and an unemployment rate stuck at 7.9% did not calm investors’ fears.  The year over year percent change in unemployment is still in positive territory.

The numbers of long term unemployed as a percent of total unemployment ticked down but remains stubbornly high at about 38% (seasonally adjusted)

What prompted Friday’s relief rally in the market were the revisions in the previous months’ employment gains.  As more data comes in, the BLS revises previous months’ estimates.  This month also included end of the year population control adjustments.

November’s gains were revised from +161,000 to +247,000; December’s gains were raised from +155,000 to +196,000.  For all of 2012, the revisions added up to additional job gains of 336,000, raising average monthly job gains for 2012 to 181,000 – near the benchmark of 200,000 needed to make a dent in the unemployment rate.  Previous decreases in the unemployment rate have been largely the result of too many people giving up looking for work and simply not being counted as unemployed.

Overall, the labor report put the kibosh on any fears of recession and the stock market responded with a rally of just over 1%.  Construction jobs continued their recent gains but employment levels are one million jobs fewer than the post-recession lows of 2003 and two million jobs less than the 2006 peak of the housing bubble.

The core work force aged 25-54 continues to struggle along.

The older work force has garnered much of the gains in the past year but this month was flat.

The larger group of workers counted as unemployed or underemployed, what is called the U-6 Rate, remained unchanged as did the year over year percent change. 

As the stock market continues to rise, retail investors have reversed course and have started to put more money into the stock market.  Sluggish but steady GDP and employment growth has prompted the Federal Reserve to continue its program of buying bonds every month, which tends to push up stock market values.  The Fed can continue this program as long as the sluggish pace keeps inflation in check and below the Fed’s target rate of 2.5%. 

In the short run, it is a good idea to follow the maxim of “Don’t Fight the Fed.”  What is of some concern is the long term picture.  Below is a 30 year chart of the SP500 index, marked in 10 year periods with two trend lines based on the first decade, one trend line (with the arrow) a bit more positive than the other. 

The market has changed in the past two decades.  The bottoms in 2002, 2003, 2010, 2011 were simply a return to trend, a return to sanity.  The downturn of late 2008 – early 2009 was the only downturn that broke below trend; truly, an overcorrection. Among the changes of the past two decades is a Federal Reserve that, some say, has helped drive these erratic asset bubbles by making aggessive interest rate moves, then keeping interest rates at low levels for a prolonged period of time.  Whether and how much the Fed’s interest rate policies contribute to stock market valuations is a matter of much vigorous discussion.  Whatever the causes are, it is important to recognize that over two decades the market has shifted into a jagged, cyclic investment.  The long term investor who has a ten year time frame before they might need some of the money invested in the stock market can be reasonably certain that they will be able to get most of their money back if not make a healthy profit.  For those with a shorter time horizon like five years, they will need to monitor the financial and economic markets a bit more closely or hire someone to do it for them.  This is especially true when one is buying at current market levels which are above trend.

The BUT Job Market

December 9th, 2012

The November Bureau of Labor Statistics (BLS) report released Friday surprised many.  Two days earlier, ADP, the private payroll firm that processes 24 million paychecks, released their estimate of private employment gains of 118,000 for the month of November.  Estimates of the BLS total employment growth were in the 80,000 range.  The reductions in government employment, which ADP doesn’t track, are largely over and don’t act as a drag on employment gains each month.

The reductions have been particularly heavy at the local level.  The number of civilians served by each local government employee has risen slightly since the official end of the recession in June 2009 but they are at relatively historic lows over the past five decades.

The thinking was that SuperStorm Sandy would have a significant impact on job growth in the heavily populated tri-state region of New Jersey, New York and Connecticut.  However, the BLS reported “our analysis suggests that Hurricane Sandy did not substantively impact the national employment and unemployment estimates for November.”  Huh???!!  The headline employment gains were 148,000, not enough to reduce the unemployment rate but enough to keep up with population growth.  The other headline number was that the unemployment rate had dropped to 7.7%, a drop of .2%.  Again, huh???!!

Given the circumstances, this was a good report – until one started diving into the numbers on the report.  Here it comes again – that big old BUT!  Another 200,000 workers dropped out of the labor force in November, and none – that’s right – none of them were older workers retiring.  Since November 2011, 2.5 million have left the work force; of those, one million are over 65.  Another 300,000 simply didn’t look for a job in the past month.  Some have gone back to school, whether by choice or the lack of it.

The ranks of the long term unemployed has dropped 200,00 in the past month, 900,000 in the past year.  Some have found jobs; some have run the course of their unemployment benefits and taken what they could get or given up.

Despite the recent rebound in housing, construction continued to lose jobs.

Leading gains were in professional and business services (43,000) and health care (20,000), both fields which have been steady gainers the past several years.  BUT, in the health care field, about 40% of job gains went to staff nursing homes.  

This trend will only get more pronounced as the Boomer generation ages and resource strapped elderly people and their families can not afford even temporary home care that might delay admittance to a nursing home.

Since the summer, businesses have been adding retail workers.  The graph below is seasonally adjusted so that the upward trend is more reliable.  Since June 2009, this sector has added 1/2 million jobs.  BUT – there it is again – many of these jobs are part time and pay below average wages.

The core work force, those aged 25 – 54, dropped last month and has gained only 200,000 in the past year.  How many sometimes think, “I would enjoy my kids more BUT I’m having difficulty keeping a roof over their heads.”

Employment gains of married men and married women have been flat in the past year.  Women head of households, ever resourceful, have gained 1/2 million jobs in the past year. 

Those aged 55 and over have seen job gains of 2 million in the past year; part of these gains are due to an age shift in the population; some is due to older workers continuing to work past their intended retirement.  Regardless of the causes, the trend is dragging down the economic recovery.  Older people simply don’t buy as much stuff as younger people do. 

Fans of the Silver Surfer – let’s climb on our galactic surfboards and rise high above space and time to look at the unemployment rate over the past several decades.  As the manufacturing sector has shrunk, the peaks and troughs of unemployment have risen.

The percent of unemployed workers who have been unemployed more than a half year also shows this disturbing long term trend.

The shrinking of the manufacturing sector, an inherently cyclical one, has had the positive effect of reducing the frequency of unemployment cycles.

2012 was the year that the first of the Boomers reached their full retirement age of 66.  Regardless of the health of the economy, we can expect to see the “Not in the Labor Force” number continue to rise as Boomers drop out of the labor force.  Since mid-2008, 3 million older workers have dropped out.

Each year about 2 million young adults graduate and enroll in college. (Census Bureau Source)  The other 2 million need some kind of work, either part or full time.  The level of unemployment has dropped by 50% for these new entrants into the work force but is still far above the 2007 level – a difficult job market is not a good way to start one’s working career. 

The delayed retirement of many Boomers will continue to put pressure on the job market with young adults particularly impacted.  GE is one company that is planning on bringing back jobs to this country from lower cost countries.  They cite two negatives that plague manufacturers in emerging countries: the lack of adequate patent protection and the theft of intellectual property. Two positives of domestic manufacturing are lower transportation costs and faster times to market.  Let’s hope that this repatriation of manufacturing becomes a trend – young people need the work.  The unemployment rate among those aged 18 – 19 has stayed above 20% for three years.

Job Openings – March

A couple of weeks ago, the Bureau of Labor Statistics (BLS) issued their March JOLTS (Job Opening and Labor Turnover Survey) report showing a continuing increase in job openings. Below is a Federal Reserve historical graph incorporating the latest March data.

Graphing the quarterly data evens out the monthly fluctuations and shows the upward trend.

While the trend is upward, we have come from a deep trough and we still have a long way to go to get to a healthy job market.  The number of job openings is about the same as in 2004 but the population has grown by 20 million since 2004.

The stock market is inextricably chained to the labor market.  In the graph below, we can see the similarity in trends between the S&P500 and the job openings.

The stock market attempts to anticipate the health of the job market.  In the spring of 2006, job openings halted their decline then rose and the market resumed upward in anticipation of a continued climb in job openings.  As job openings reversed and resumed their decline in 2007, it was a harbinger of the coming economic cliff.

January JOLTS

As a followup to my blog on the February jobs report and the job openings for December, here is the job openings report – JOLTS – for January from the Bureau of Labor Statistics:

The number of job openings in January was 3.5 million, unchanged from
December. Although the number of job openings remained
below the 4.3 million openings when the recession began in December
2007, the number of job openings has increased 45 percent since the
end of the recession in June 2009.

These are seasonally adjusted figures. As the graph shows there is steady but stuttering progress.