Strong Jobs Report Again – Time To Change?

My finals at Baruch College are over. I’m back now. In this post, I will write about November jobs report. On the next post, I will be writing about the European Central Bank (ECB), the Fed and the risks for a rate increase.


On December 4, the United States Department of Labor reported November payroll numbers, which was stronger than expected. There was 211K jobs added in November, stronger than expected and the second consecutive month increase above 200K. Additionally, September and October payrolls were revised higher  by 35K. September was revised higher from 137K to 145K (+8K) and November from 271K to 298K (+27K). Over the past 12 months, an average monthly job gain was 237K, little higher than the 224K average in the same period of 2014. Year-to-date, however, only 210K jobs were added every month on average, compared to 253K last year for the same period.

Total Non-Farm Payrolls – Monthly Net Change
Total Non-Farm Payrolls – Monthly Net Change

I believe this hiring pace is only temporary due to holidays. A lot of employers, especially large department retailers, are adding temporary or “seasonal”  workers. Retail trade payrolls rose 31K as retailers ramped up seasonal hiring.

The unemployment remained at a April-2008 low of 5%. The labor-force participation rate ticked up 0.1% higher from 38-year (1977) low of 62.4% to 62.5%. In a typical business cycle, the labor-force participation rate rises when the economy is growing reboustly. While this participation rate ticked higher, we should not get our hopes up. It has been in a long-term decline since the financial crisis of 2008. One month of data is not enough.

Unemployment Rate + Labor Force Participation Rate

One interesting thing to note is the U-6 unemployment rate, or the underemployment. It is a broader measure of unemployment, which includes people who aren’t looking for work and those who are working fewer hours than they wish. An individual with a master’s degree working as a bus driver is considered to be underemployed. U-6 ticked up to 9.9% in November from 9.8% in October, but down from 11.4% a year ago. If it increases again in December, I look that as a sign that the economy is about to get worse. If it continues to increase and increase, the economy is headed for a trouble.

Average hourly earnings rose by 4 cents, or 0.2% to $25.25, following a 9-cent gain in October. Half of the monthly gain in November compared to October, pulled down the annual rate down from 2.5% to 2.3%. Average weekly hours worked fell 0.1 hours from 34.6 to 34.5.

Average Hourly Earnings and Average Weekly Hours
Average Hourly Earnings and Average Weekly Hours

While increasing wages are good news, increases in minimum wages are dreadful for the economy in the long run. I previously stated in “October Jobs Report Strong: It is Just One Report” post,

“…wage growth might suggest that employers are having trouble finding new workers (should I say “skilled” workers) and they have to pay more to keep its workers and/or to get new skilled workers. This could draw more people back into the labor market, increasing the participation rate. Without the right skills, good luck.”

“Without the right skills, good luck.” Any escalation in minimum wages will cause more students to drop out to work at “no-skill needed” and/or “low-skill needed” places.

Unemployment rate for civilians by 16-19 years old, and 25 years and over by educational attainment
Unemployment rate for civilians by 16-19 years old, and 25 years and over by educational attainment

Young people should not drop out just to work at Mcdonald, Costco, etc, as a “minimum wage” employee. They need skills. Skills that will be very useful for their future. Not flipping burger skills.

You see the red line on a graph above? That’s the unemployment rate for 16-19 years old in the past two decades. The lower the education attainment, the higher the unemployment rate.

Don’t forget the threat of technology. Do not underestimate the power of technology. McDonald has already rolled out and are rolling out self-service kiosks in restaurants. In other words, replace the “minimum-wage” employees with technology.

While this is a strong jobs report again, it is time to change. Holiday season is nearing its end. Technology continues to destroy more jobs than it is creating. Back to “normal” jobs report and “poor” jobs report series, starting next month.

Repulsive Jobs Report

Last Friday (October 2), jobs report for September came out way weaker than expected. Non-farm payrolls report shows 142K jobs were added, vs 200K expectations. Unemployment rate stood unchanged at seven-year low of 5.1%. Not only that, but wage gains stalled, labor force shrank, and July and August gains were revised lower.

July job gains were revised lower to 223K from 245K (-22K) and August job gains were revised lower to 136K from 173K (-37K), totaling downward revisions of 59K. Average jobs gains for third quarter is now at 167K, lower than the 2014 average of 260K. So far, job growth has averaged 198K a month this year, compared with an average gain of 260K a month the previous year.

Total Non-Farm Payrolls – Monthly Net Change
Total Non-Farm Payrolls – Monthly Net Change

Unemployment rate stayed at 5.1% only because people stopped looking for work. In other words, they lost confidence in the labor market. 350K people dropped out of the labor force which took labor force participation rate fell to 62.4%, the lowest in 38 years (1977), from 62.6% in the previous three months.

Labor Participation Rate (Source: @ReutersJamie)
Labor Participation Rate (Source: @ReutersJamie)

Wages also showed weakness. Average hourly earnings fell by a penny to $25.09 after rising 9 cents in September. The average workweek declined by 0.1 hour to 34.5 hours.

There are increased worries that global slowdown is weighing on the domestic economy. The repulsive jobs report knocked down the chances of a rate-hike for this year. Federal Funds Rate (FFR) shows less than 10% and less than 35% chance of rate hike in October and December, respectively. Regardless of weak jobs growth, I still expect 0.10% rate-hike this month. But, I don’t expect 25 basis points for the year. If 0.25% were nothing, the Fed would have raised it already. The Federal Open Market Committee (FOMC) will meet on Tuesday-Wednesday, October 27-28.

Weak jobs report seems to point out a weak third quarter GDP growth following a strong rebound in the 2nd quarter. According to final GDP report released on September 25, second quarter grew at an annual pace of 3.9%, vs previous estimate of 3.7%. Advance (1st estimate) GDP report for the third quarter will be released on Thursday, October 29.

In the first quarter, the economy grew only 0.6% because of strong U.S. dollar, low energy prices, West Coast port strike, and the bad weather. Well, winter is approaching. Who’s not to say that the weather will hamper the growth again? The dollar is still strong and the energy prices are still low.

Energy sector continues to struggle. The mining industry – which includes oil and natural-gas drillers — lost 10K jobs last month, totaling 102K losses of jobs since December 2014. Energy companies continue to layoff workers since low energy prices are hurting companies. Energy companies like Chesapeake Energy and ConocoPhillips continues to reduce its workforce and its operations, and cut capital expenditures to offset higher costs.

Earlier in September, the Job Openings and Labor Turnover Survey (JOLTS) report showed that there were 5.8 million job openings in July, a series (series began in December 2000) record and higher than 5.4 million in May, as employers cannot find qualified workers.

It’s likely to get worse in the longer-term because of higher minimum wages. If employers pay higher wages, more people, especially teenagers, are likely to drop out and work. If states and companies continue to raise minimum wages, jobs that require skills such as programming, etc, will not be filled in the United States, but in countries with higher amount of education. That’s why recent minimum wage increases will batter, not help, the U.S. economy in the longer-term.

Reactions to the jobs report:

US markets fell immediately after the report, but rebounded later. 10-year Treasury yield fell below 2%, to the lowest level since April. US Dollar plunged, but recuperated about half of the losses later.

Standard & Poor 500 ETF ("SPY") - Hourly
Standard & Poor 500 ETF (“SPY”) – Hourly

 

10-Year Treasury Index ("TNX") - Hourly
10-Year Treasury Index (“TNX”) – Hourly

 

US Dollar ("/DX") - Hourly
US Dollar (“/DX”) – Hourly