Category Archives: Employment

December Employment Report

KEY DATA: Payrolls: +252,000; Revisions: +50,000; Private Sector: +240,000; Unemployment Rate: 5.6% (down 0.2 percentage point); Hourly Wages: -0.2%

IN A NUTSHELL:   “Firms may be hiring like crazy but they are not paying up for those workers, at least not yet.”

WHAT IT MEANS:  Today I get to be a true economist: There is both good news and bad news in the December employment report.  Let’s start with the positive.  The economic jobs machine has shifted into high gear.  Payrolls rose strongly in December and both the October and November gains were revised upward.  On average, employment increased by an average of nearly 290,000 per month over the past three months.  For all of 2014, almost 3 million new positions were added, the most since 1999, the peak of the Y2K/ boom.  Job gains were across the board, with construction, manufacturing, finance, health care and especially restaurants adding workers solidly.  We are eating out again and that is a great sign.  Also, the public sector has finally started to help out with state and local governments hiring as their revenues continue to rise.  While the federal government, excluding the ever-shrinking postal service, is not hiring very much, at least it is no longer cutting workers.

There was also a very sharp drop in the unemployment rate.  We hit the lowest level since June 2008.  Okay, the labor force declined as did the participation rate, but by now, everyone should know what I think of those numbers.  The labor force growth in 2014 was disappointing but it did pick up quite sharply in the second half of the year.  As for the participation rate, it was down only 0.1 percentage point from December 2013.  It has stabilized recently.

The disappointing aspect of the report was the decline in the hourly wage and a downward revision to the November increase.  While the labor market continues to tighten, firms seem to be able to put off raising wages. 

MARKETS AND FED POLICY IMPLICATIONS:  This was a really good report but the wage numbers keep it from being a great one.  I am just not sure what to make of the hourly earnings data.  For example, there were hourly wage declines in manufacturing, education and health care, finance, information services and utilities.  These are not your typical low pay sectors where you would expect worker pay to fall, especially when demand is rising.  While retail wages were off, they were flat in hospitality and leisure.  Basically, I am not so sure we should make any judgments about worker compensation from these numbers.  That is important since the Fed is watching inflation closely, especially since some members are concerned that inflation is too low.  More rapidly rising wages would ease those concerns.  Still, with the job market firming, it is only a matter of time before we see consistently better wage increases.  The dam holding back the wage gains may be higher and stronger than expected, but it is not unbreachable and with the unemployment rate near full employment, we will likely see the cracks appearing very soon.  Until they do show up, though, Fed Chair Yellen can remain “patient”.   

November Employment Report

KEY DATA: Payrolls: +321,000; Revisions: +44,000; Private Sector: +314,000; Average Hourly Earnings: +0.4%; Unemployment Rate: 5.8% (Unchanged)

IN A NUTSHELL:   “Is this liftoff?”

WHAT IT MEANS:  The jobs report is the first big one of the month and this was a really big one.  The economy may not yet be a big mean jobs machine but it is just about there.  November job gains were way above expectations and there were solid upward revisions to the previous two months numbers.  For the past three months, an average of nearly 280,000 new positions have been added and that can simply be described as very strong.  The increases were across the board as nearly 70% of the industries posted gains.  You have to search far and wide to find any major drop in employment.  There were strong gains in construction, manufacturing, retail trade, financial activities, transportation, professional services and restaurants.  Even the government chipped in despite a cut back in education.  In other words, everybody seems to be on the hiring bandwagon.  The key, though, is wages and while they rose more than they had been.  That is really good news.  Meanwhile, the unemployment rate was unchanged.  The labor force did rise, so that is an indication the strengthening market is pulling back in more people.

MARKETS AND FED POLICY IMPLICATIONS: This was a great report but don’t expect gains to continue at the 300,000 level.  The economy has not yet reached a growth rate that would support it.  But increases between 250,000 and 300,000 are likely and that would lead to further declines in the unemployment rate.  I expect the full employment rate, which is roughly 5.5%, to be reached in the spring but labor shortages should be showing up sooner.  The November wage increase is a warning that labor market conditions are already starting to turn.  The Fed will not react to a one-month solid rise but if we see additional solid gains, then the tone of the statement will change.  I suspect the Fed will be talking about a tightening labor market at its next meeting, which is in ten days.  As for investors, the yin and the yang is the strong economy vs. the potential that the Fed could raise rates sooner than others think.  But that has been overhanging decisions for a while; it’s just that few have been discussing it.

October Employment Report

KEY DATA: Payrolls: 214,000: Revisions: +31,000; Private Sector: 209,000; Unemployment Rate: 5.8% (down from 5.9%); Hourly Wages: +0.1%; Year-over-Year: 1.9%

IN A NUTSHELL:   “Though people are coming into the workforce and finding jobs, we still need hiring to be stronger before we will see wage gains accelerate and worker confidence improve.”

WHAT IT MEANS:  The results are in and the labor market is close to being healthy but it is not there yet.  While there was little bad news in the October employment report, we really cannot say that workers should feel great about conditions. While job gains were less than hoped for, the August and September increases were revised upward solidly, bringing net gains to 245,000.  That is pretty solid.  The revisions are critical because they are showing better growth than first reported.  The initial job gain for August was 142,000, a disappointing performance.  But that now stands at 203,000, a pretty decent number.  It is likely that the upward revisions will continue, which means we have to focus on the previous months, not just the current month’s numbers.  Over the past three months, job gains have averaged just under 225,000, a strong but not yet robust pace.  Gains were across the board, including manufacturing, construction, retailing and even local government. So much for fiscal austerity.   The problem remains wages.  They rose modestly once again and the only thing that is keeping people afloat is the even slower rise in prices.

The unemployment rate declined to its lowest level since July 2008.  All components were strong as the labor force grew, unemployment dropped and the labor force participation rate rose.  One detail popped out: The teenage unemployment rate was 18.6%.  Teens comprise only 3.7% of the labor force but 12.1% of those unemployed.  The unemployment rate for those 20-years and older was 5.3%.  To make a big dent in the unemployment rate, we have to cut the teenage rate a lot more.  However, when it comes to labor shortages, teenagers are not the target hiring group, so we should keep a closer eye on the over-20 unemployment rate.

MARKETS AND FED POLICY IMPLICATIONS: Almost all the economic numbers point to an improving labor market and economy.  So, why did the electorate throw the Democrats out on Tuesday?  They blamed them for a “weak” economy and they were not really wrong.  The economic number that matters most to the average worker is income, not GDP or labor force participation rate.  Politicians and economists can debate those other data all they want, as long as wage gains are minimal, people will feel sour about the economy.  So let’s stop talking about jobs and start talking about income.  If anyone has any idea how to grow workers incomes other than reaching a point of labor shortages, let me know.  Thankfully, we are getting there and the unemployment rate is nearing full employment.  Wage gains will have to follow, but getting businesses to accept that reality may take a lot longer now than in the past.  That time frame is something the Fed members will be puzzling over, as it holds the key to Fed policy. 

September Employment Report

KEY DATA: Payrolls: +248,000; Private: +236,000; Unemployment Rate: 5.9% (down 0.2 percentage point); Hourly Wages: down $0.01

IN A NUTSHELL:  “Firms are hiring but that has yet to translate into any increase in wages.”

WHAT IT MEANS:  The greatly anticipated September employment numbers did not disappoint, unless you were hoping for some wage pressures.  Payroll gains were well above expectations, but the headline number actually understates the increase because there were large upward revisions to both the July and August totals.  There were a total of about 69,000 more jobs created in those two months than had been initially estimated.  If you add the 38,000 additional jobs in the August report to the 248,000 added in September, the net gain was 286,000.  (I had 289,000, so I feel pretty good, especially after last month’s debacle.)  Given the NFIB’s report that small business hired heavily in September and those increases only trickle in, I would not be surprised if the September job increase was also revised upward.  Over the past twelve months, businesses have added over 2.6 million new positions, the largest increase since May 2006.  The rise in payrolls was distributed across the economy.  Construction was up solidly, but the rise in manufacturing was less than expected.  Retailers, restaurants, personnel service firms, trucking companies and health care providers all added positions solidly.   States are also back into hiring mode.

The best news was that the unemployment rate dropped below 6% for the first time since July 2008.  (I expected a 6% number.)  Yes, the labor force participation rate dropped, as did the labor force, but the number of people employed soared and the number unemployed dropped sharply.  In any event, I have explained, ad nauseam, why this whole discussion is absurd so let it go.  What was disappointing was the lack of any increase in wages.  The labor market may be tightening, labor shortages may be appearing, but firms are still holding the line on wages.   

MARKETS AND FED POLICY IMPLICATIONS: This was a very good report.  The economy averaged nearly 225,000 new positions over the past three months, which is pretty solid.  So, why is the growing job demand not showing up in worker compensation?  Part of the issue may be measurement and part structural.  Salary increases are not granted uniformly across the year.  They tend to be bunched at review times, which could be quarterly, semi-annually or annually.  There may be labor shortages, but in-between reviews, wages are not going to rise unless a worker can get another job and leverage the offer.  For those on contracts, wages are fixed until the contract ends.  Since the government reports average wages, any increases by the additional workers may not move the needle a whole lot.  That doesn’t mean wage pressures aren’t building.  It just means that when they show up, they will not rise smoothly.  They could gap up.  If the Fed waits for wage gains to appear in the data, they will be well behind the curve.  Wages have always been a lagging indicator and with businesses still convinced that they can hire people at the wage they want to pay rather than the wage they have to pay to actually get the person, it will take extreme shortages before businesses thrown in the towel.  But when they do, watch out.

June Employment Report

KEY DATA: Payrolls: +288,000; Private Sector: +262,000; Unemployment Rate: 6.1% (down 0.2 percentage point); Hourly Earnings: +0.2%

IN A NUTSHELL:  “Anyone still doubt that the labor market is strengthening?”

WHAT IT MEANS: After being way out on a very thin limb for months now, saying that the labor market is a lot better than the talking heads would have you believe, we have some pretty convincing evidence that is the case.   Payrolls soared in June and the gains were across the board – 65% of the industries posted increases.  I expected about 250,000 but I made one big mistake: The bad winter meant a lot of schools were open longer than normal, boosting the education jobs.  State and local education payrolls rose by 20,000.  Even adjusting for that artificial rise, which will come out in July, the hiring boom was impressive.   We averaged 272,000 new workers over the past three months and 255,000 private sector positions as both April and May were revised upward.  Manufacturing increases were solid but not spectacular and construction rose less than expected.  But it was in the service-producing component where we really saw the hiring occur.  The only major category was “other services”, which includes repair and maintenance, laundries and membership associations.  In other words, we didn’t take our vehicles to the local shop or get our clothes cleaned.  Horrors!

The strong job gains are helping drive down the unemployment rate, which at 6.1% was the lowest since September 2008.  The labor force grew and the labor force participation rate stayed stable for the third consecutive month, both good news.  The only negative news was a rise in those who could only find part-time work.  But that number is extremely volatile and the change over the year has been pretty stable for a couple of years.  It would be better if the level was declining.  Despite the decline in the number of people unemployed, it is down 2.3 million over the year, wage pressure remain tame.  I still believe that will change in the fall or early winter.

MARKETS AND FED POLICY IMPLICATIONS: It is hard to argue that the labor market remains moribund.  Unemployment claims are low, layoffs, as reported by Challenger, Gray and Christmas, are flat and hiring is picking up.  But the missing link remains wages.  My argument has and still is that businesses still don’t believe they have to bid for workers so they are holding the line for as long as possible.  But the longer they delay, the bigger the retention and attraction problem becomes and when that dam breaks, it could mean a lot faster gains in wages than anyone expects.  By year’s end, we could be fairly close to the full-employment level of about 5.5%.  Does anyone believe that wages remain stable when workers are not available?  I don’t.  And that is the conundrum the Fed faces.  If, after six years of not having to think about compensation, executives are being stubborn about making wage adjustments, the Fed could be find that a key indicator, compensation, is lagging even longer than in the past.  That could cause the FOMC to wait longer than it should to start raising rates.  As for the markets, if slow job growth was good for equities, will strong job gains be worrisome?  Who knows?  But lots more jobs are better than just a few more jobs and the real issue will be interest rates: They are likely to rise a lot faster than expected.

May Employment Report

INDICATOR: May Employment Report

KEY DATA: Payrolls: +217,000; Private: 216,000; Unemployment Rate: 6.3% (unchanged); Hourly Wages: +0.2%

IN A NUTSHELL: “A better than expected employment report reinforces the belief that the labor market is strengthening and the economy is picking up steam.”

WHAT IT MEANS: After the robust April report, there were worries that the large job gains were just a rebound from the restraining effects of the winter and we could get a very disappointing payroll increase in May. The ADP estimate only added to those concerns. Well, that didn’t happen. As expected, the May job gains were well below the 282,000 posted in April, but they were still quite solid. Indeed, the three-month average of 234,000 was the strongest in nearly nine years. That was in 2005 when the housing boom was going strong. The increases were largely across the board, with only state and federal governments and the motion picture industry posting large losses. I get it that postal employment is being reduced, but why over 9,000 motion picture employees were cut is beyond me. That was the only oddity in the report. Durable goods payrolls rose but nondurables were down. Construction was okay, not great. The services sector was solid and the rise in temporary workers was not particularly large. The details are frequently really weird but this was not one of those reports. A benchmark was passed in May: Total payrolls finally exceeded their pre-Great Recession peak despite the fact that government remains over 900,000 below its previous high.

On the unemployment front, the rate remained at 6.3%, which was somewhat of a surprise. After declining sharply in April, a modest uptick would have not been unusual. And the stability occurred despite a rise in the labor force and no change in the participation rate. Last month, the drop was discounted by some (not me) because of the shrinking labor force and participation rate. Those changes were just the usual volatility in the data. But there still remains a lot of slack in the labor market as wages rose at a relatively modest pace that is only minimally outstripping inflation. That explains a lot of the sluggishness in the economy.

MARKETS AND FED POLICY IMPLICATIONS: This was a very good report that was a surprise only after the ADP numbers came out. Consensus was about 210,000, I was at 224,000 and the number split the difference. Most people, including myself, had the unemployment rising to 6.4%. So this was basically right on expectations. As such, it should not create much excitement in the markets unless you actually sit back and think about it. If we keep creating 225,000 to 250,000 positions a month, a level I think is easily attainable, the unemployment rate will consistently decline. By year’s end, we should be below 6% and moving close to full employment, which is roughly 5.5%. That should be viewed as really good news as it would trigger the needed wage increases. I suspect that firms, which have not had to worry about compensation for years, will fight raising salaries. But that could only defer the judgment day and actually raise costs by increasing turnover. The labor market is not strong by any means, but this report supports the view that it is getting there and probably faster than most believe.