Nonfarm Payrolls data indicate that the economy added 96,000 (seasonally-adjusted) jobs in August. This number threw Bond Squad and the street a curveball. The Street revised its forecast for job growth higher (to 130,000) following a better-than-expected ADP report. We front ran the Street by forecasting 130,000 jobs last week, due to strong July data. ADP often throws curveballs and we were not about to swing. However, the so-called “establishment survey” threw us a curveball when the BLS revised July data lower. July Nonfarm Payrolls were revised lower by 22,000 to 141,000 from an initial read of 163,000.
Although we did not believe that the stronger economic data observed in July would be sustainable at this time, we did not believe we would see downward revisions. We also believed that there would be some spillover from the phenomenon of automotive factories remaining open in July. Auto sales were strong and we believed that hiring would creep higher in August. What has apparently occurred is that workers were not recalled in August because they were not laid off in July. This is seasonality wreaking havoc on the numbers. Seasonal adjustments account for layoffs in July and call backs in August. Neither has occurred this year. The result was good July data and a payback in August.
Even though seasonality can cause volatility in the data, taking the average of the July and August data probably paints a good picture of job growth for the past two months. The resulting average Nonfarm Payrolls data for July and August is 118,500. Nearly every economist on the Street has stated that recent economic data is consistent with job growth in the low 100,000s.
No Time to Wallow in the Mire
The economy appears to be mired in the low-to-mid-100,000s. Nonfarm Payrolls has averaged 73,000 jobs per month since the recession ended in July 2009, but it has averaged 146,000 since December 2010 (the first full month after QE1). Goldman Sachs Chief Economist, Jan Hatzius, pointed out that Nonfarm Payrolls averaged 153,000 in 2011, but only 139,000 in 2012, thus far. What this comparison leaves out is that the average for the first eight months of 2011 yielded average job growth of 143,000, closer to this year’s average. Calendar year 2011 benefitted, not only from a spike in job growth at the beginning of the year (as did 2012), but a spike in hiring heading into the holiday season.
Nonfarm Payrolls since January 2011 (Source: Bloomberg):
Though not precisely correlated, the patterns of 2011 and 2012 are similar. Could we see a spike in hiring heading into this holiday season? It is possible, but gains in holiday hiring could be offset by a reduction or stagnation in the workforce among export driven companies. Due to a faltering global economy and the “Fiscal Cliff” fast approaching, companies' incentive to hire in the fourth-quarter of 2012 could be less than it was a year ago.
Surrender, Surrender
Today’s depressing data goes beyond the disappointing Nonfarm Payrolls data. It even goes beyond the 15,000 jobs lost in manufacturing (in spite of strong automotive industry data). The household data tells a troubling story.
The headlines report that the Unemployment Rate declined from 8.3% (actually 8.25%) to 8.1% (actually 8.111%). However, the “household survey” reports that the decline came not from workers finding jobs, but from workers leaving the workforce. The size of the workforce contracted. The labor force participation rate fell to 63.5%, the lowest since 1981. The number of people in the labor force (Americans who are working or looking for work) fell by 368,000. To put this into perspective, the data indicates that more than three-times the number of people left the labor force than found jobs! Temporary workers declined by 5,000. Increased hiring of temporary workers is believed to indicate an improving job market. Ergo, a decline in the number of temporary workers does not bode well for job seekers.
Why the big discrepancy between the BLS data and the ADP data? ADP measures job growth among companies for which it provides payrolls services. Among these companies are many retailers, restaurants and healthcare –related firms. The data from these sectors were fairly strong. According to the data; Retailers added 6,000 jobs, restaurants hired 28,000 workers, and the healthcare industry added nearly 17,000 jobs. Of these, only healthcare is likely to continue expanding at a robust pace. Other than in healthcare, jobs created do not appear to be what one might consider well-paying.
That 80s Show
Today’s data are filled with interesting tidbits. One is that, if the labor force was the same size as it was in the beginning of 2009, the unemployment rate would be over 11%. How about wage growth? What wage growth? On a month-over-month basis, wage growth was flat. On a year-over-year basis, wage growth maintained its pace of 1.7%. This is just keeping up with the pace of inflation. However, the rate of inflation (as per headline CPI) has declined during the past year from 3.8% in August 2011 to 1.4% in August 2012. Core inflation increased to 2.2% in August 2012 from 2.0% in August 2011. This indicates that a good portion of the increase in consumer spending might have been from lower food and energy prices.
Average Weekly Hours for July was revised to 34.4 from 34.5. This figure was repeated in August. Not only is job growth problematic, those who have jobs are not seeing their hours increase. Typically, rising hours worked data is a precursor for increased hiring. Instead, they have trended slightly lower from a 2012 peak of 34.6 (during the warm winter).
U.S. Labor Participation since 1980 (source: Bloomberg):
Judging by the recent run-up in energy prices and the probable effects from the drought in the Mid-west, the consumer will experience what is, in effect, a tax increase heading into the all-important holiday season. Add to the equation a potentially harsh winter for the Northeast and winter 2012-2013 could be a drag on growth, just in time for the “Fiscal Cliff.”
Déjà vu All Over Again
Enough of crunching the data and opining on their causes, readers want to know what this means for Fed policy, interest rates and the fixed income markets.
Today’s data dramatically increase the chances that the Fed does something at next week’s FOMC meeting (9/12-9/13). Whether or not it engages in asset purchases (and to what degree) remains to be seen. The markets have reacted to the increased probability of Fed intervention by sending Treasury yields lower and commodity prices higher.
Usually easing, whether it is traditional or quantitative, results in rising long-term rates. After all, easing is designed to promote growth which generates inflation. However, the market is assuming that the Fed is incentivized with keeping long-term borrowing costs low. Helping that scenario along is that higher food and energy prices could put the brakes on consumption and core inflation. It seems that we have discussed this before. We do not believe that QE3 will do much to boost hiring. However, the Fed has a mandate of full employment (in addition to price stability). It will do whatever it can to add however many jobs QE can generate, as long as inflation remains under control. Those who do not like the Fed’s course of action should cease blaming the Fed and blame the fiscal policy makers who are really responsible for forcing the Fed’s hand.
The prospect for low rates for an extended period of time should be good for high grade corporate bonds, high yield bonds, municipal bonds, preferreds and dividend paying equities. We would consider high grade corporate bonds, the upper-tier of high yield, municipal bonds and dividend paying equities as investment opportunities. The remaining asset classes may present trading opportunities, but investors tend to become complacent and overlook the true risk present in these volatile asset classes. In reality, high-risk assets remain high-risk assets. High-volatility assets remain high-volatility assets. We are temporarily in an environment which benefits these assets. When the world “normalizes” investors could be “whip-sawed” when the market reassesses risk in a more traditional fashion
Though not precisely correlated, the patterns of 2011 and 2012 are similar. Could we see a spike in hiring heading into this holiday season? It is possible, but gains in holiday hiring could be offset by a reduction or stagnation in the workforce among export driven companies. Due to a faltering global economy and the “Fiscal Cliff” fast approaching, companies' incentive to hire in the fourth-quarter of 2012 could be less than it was a year ago.
Surrender, Surrender
Today’s depressing data goes beyond the disappointing Nonfarm Payrolls data. It even goes beyond the 15,000 jobs lost in manufacturing (in spite of strong automotive industry data). The household data tells a troubling story.
The headlines report that the Unemployment Rate declined from 8.3% (actually 8.25%) to 8.1% (actually 8.111%). However, the “household survey” reports that the decline came not from workers finding jobs, but from workers leaving the workforce. The size of the workforce contracted. The labor force participation rate fell to 63.5%, the lowest since 1981. The number of people in the labor force (Americans who are working or looking for work) fell by 368,000. To put this into perspective, the data indicates that more than three-times the number of people left the labor force than found jobs! Temporary workers declined by 5,000. Increased hiring of temporary workers is believed to indicate an improving job market. Ergo, a decline in the number of temporary workers does not bode well for job seekers.
Why the big discrepancy between the BLS data and the ADP data? ADP measures job growth among companies for which it provides payrolls services. Among these companies are many retailers, restaurants and healthcare –related firms. The data from these sectors were fairly strong. According to the data; Retailers added 6,000 jobs, restaurants hired 28,000 workers, and the healthcare industry added nearly 17,000 jobs. Of these, only healthcare is likely to continue expanding at a robust pace. Other than in healthcare, jobs created do not appear to be what one might consider well-paying.
That 80s Show
Today’s data are filled with interesting tidbits. One is that, if the labor force was the same size as it was in the beginning of 2009, the unemployment rate would be over 11%. How about wage growth? What wage growth? On a month-over-month basis, wage growth was flat. On a year-over-year basis, wage growth maintained its pace of 1.7%. This is just keeping up with the pace of inflation. However, the rate of inflation (as per headline CPI) has declined during the past year from 3.8% in August 2011 to 1.4% in August 2012. Core inflation increased to 2.2% in August 2012 from 2.0% in August 2011. This indicates that a good portion of the increase in consumer spending might have been from lower food and energy prices.
Average Weekly Hours for July was revised to 34.4 from 34.5. This figure was repeated in August. Not only is job growth problematic, those who have jobs are not seeing their hours increase. Typically, rising hours worked data is a precursor for increased hiring. Instead, they have trended slightly lower from a 2012 peak of 34.6 (during the warm winter).
U.S. Labor Participation since 1980 (source: Bloomberg):
Judging by the recent run-up in energy prices and the probable effects from the drought in the Mid-west, the consumer will experience what is, in effect, a tax increase heading into the all-important holiday season. Add to the equation a potentially harsh winter for the Northeast and winter 2012-2013 could be a drag on growth, just in time for the “Fiscal Cliff.”
Déjà vu All Over Again
Enough of crunching the data and opining on their causes, readers want to know what this means for Fed policy, interest rates and the fixed income markets.
Today’s data dramatically increase the chances that the Fed does something at next week’s FOMC meeting (9/12-9/13). Whether or not it engages in asset purchases (and to what degree) remains to be seen. The markets have reacted to the increased probability of Fed intervention by sending Treasury yields lower and commodity prices higher.
Usually easing, whether it is traditional or quantitative, results in rising long-term rates. After all, easing is designed to promote growth which generates inflation. However, the market is assuming that the Fed is incentivized with keeping long-term borrowing costs low. Helping that scenario along is that higher food and energy prices could put the brakes on consumption and core inflation. It seems that we have discussed this before. We do not believe that QE3 will do much to boost hiring. However, the Fed has a mandate of full employment (in addition to price stability). It will do whatever it can to add however many jobs QE can generate, as long as inflation remains under control. Those who do not like the Fed’s course of action should cease blaming the Fed and blame the fiscal policy makers who are really responsible for forcing the Fed’s hand.
The prospect for low rates for an extended period of time should be good for high grade corporate bonds, high yield bonds, municipal bonds, preferreds and dividend paying equities. We would consider high grade corporate bonds, the upper-tier of high yield, municipal bonds and dividend paying equities as investment opportunities. The remaining asset classes may present trading opportunities, but investors tend to become complacent and overlook the true risk present in these volatile asset classes. In reality, high-risk assets remain high-risk assets. High-volatility assets remain high-volatility assets. We are temporarily in an environment which benefits these assets. When the world “normalizes” investors could be “whip-sawed” when the market reassesses risk in a more traditional fashion
No comments:
Post a Comment