Recent Job Reports Charting Success

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The February jobs report was released by the Bureau of Labor Statistics on Friday.  It paints a relatively rosy picture with solid job growth of 295,000 and a declining unemployment rate that reached 5.5 percent.  Wall Street Journal’s Real Time Economics provides an informative snapshot of the recent job trends in employment.

Chart 1:  Year-to-year job gains are steadily rising.

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Chart 2:  Unemployment rate continues to fall.

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Chart 3:  Labor force participation rate continues to fall which is not good, but employment to population ratio is rising, which is good.

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Chart 4:  Even though the type of jobs are improving, we are still seeing more part-time jobs than full-time jobs.

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Chart 5:  Unemployment rate is falling for all levels of education.

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Chart 6:  Long-term unemployment rate has steadily fallen, suggesting that the job market is improving.

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Chart 7:  While length of unemployment remains higher than pre-recession period, it is also falling.

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Chart 8:  While long-term unemployment is still above pre-recession levels, short-term unemployment is below it.

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Chart 9:  Even though average hourly wages remain relatively stagnant, the number of hours worked is rising, which is driving up average weekly earnings over the last quarter.

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Chart 10:  Recent surge in employment suggests that we might be near full employment.

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When evaluating labor markets, it is more useful to evaluate them over an extended period.   Most of these ten charts suggest that the U.S. labor market is headed in the right direction.




Labor Market Momentum Continues To Grow

The Bureau of Labor Statistics released their January 2015 jobs report that showed the economy grew by 257,000 jobs and the unemployment rate had a modest increase at 5.7 percent.  This is a good sign because January and February are typically slow hiring months with weather being a factor.  Over the last six months, we have gained at least 250,000 jobs or more in four of those months with an average job growth of 282,000.

Here is why the figure of 282,000 is significant.  If we can maintain this pace over the next two years, then we can close the jobs gap originating from the Great Recession before 2017.  Even though we have recovered all of the jobs lost from the Great Recession, a gap remains because there were not enough jobs created to account for the growth in the labor force.

When consumers feel that low gas prices will be permanent, we feel ‘richer’ and that will show in our spending habits.  As a result, we have seen retail trade employment grow by 46,000.  Other industries enjoying gains include health care, financial services, and manufacturing.

Another encouraging sign is in construction.  Despite January typically being a slow month due to weather, there was a gain of 39,000 jobs.  This figure exceeds monthly average of 28,000, thus suggesting that the housing market and business activity might see gains in the future.

Previously, we have seen job gains, but wages have been stagnant.  Hopefully, that trend will begin to reverse, which we have seen in January with average hourly wages increasing by 25 cents.  Even though the Fed will closely monitor wage growth for concern of inflation, Americans will be gratified to see their pay increase in the future.

Here are three graphs courtesy of the St. Louis Fed’s FRED research website that show how much the labor market has improved over the last year.

  1. Civilian unemployment rate is steadily falling.                 Screen Shot 2015-02-09 at 3.59.34 PM
  2. The alternative measure of unemployment (U-6) rate that attempts to measure discouraged workers and underemployed workers continue to fall.   Screen Shot 2015-02-09 at 4.00.52 PM
  3. Part-time employment for economic reasons is also falling.  Screen Shot 2015-02-09 at 4.02.03 PM

We are off to an encouraging start in January, so let’s hope the momentum continues through the year.

U.S. Economic Growth Remains Solid Despite Not Keeping Pace

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The U.S. Bureau of Economic Analysis released its preliminary estimate of 4th quarter results and it shows that economic growth slowed considerably from last quarter’s torrid pace of 5 percent to 2.4 percent.  This estimate should be viewed with caution because it is based on incomplete data and further revisions will be released in the future.  Having said that, it still remains a decent figure and is more in line with what we experienced throughout the year.  If this quarter’s growth were to receive a grade, it would be C+ without a curve, but an A with a curve.

What to smile about 4th quarter growth:

  • Consumer spending picked up, which can be explained by low gas prices that freed up more money to spend in other areas.
  • Business spending also grew, particular in intellectual property and residential.

What to frown about 4th quarter growth:

  • A weakening global economy and resurgent U.S. economy drove down net exports.
  • Federal government spending contracted by the largest margin of the year.
  • The pace of equipment spending dropped and overall growth in fixed investment and structures grew at a slower rate.

Overall, we should still be encouraged by these numbers.

Setback In U.S. Retail Sales Temporary Blip


Even though U.S. retail sales in December were down slightly from November, the U.S. economy continues to gain momentum.  While some are suggesting that this represents a chink in the armor in the reemergence of the U.S. economy, this is likely a temporary setback and one should fully expect our U.S. retail sales to continue its resurgence through the first quarter.

Here are reasons for U.S. optimism:

  1. Low gas prices should continue for the foreseeable future.
  2. Consumer confidence will continue to rise as they start to believe low gas prices are permanent.
  3. While energy and commodity sectors will struggle, the expected rise in consumer spending should offset those declines.
  4. As consumers believe low gas prices will be more permanent, they will loosen their wallets more in the future.

Here are reasons for concern:

  1. Energy and commodities sectors will take a hit and possibly affect banking and access to credit.
  2. Countries outside the U.S. are experiencing economic decline, which will impact U.S. exporters.

Optimism outweighs concerns due to:

  1. U.S. economic activity is strongly weighted toward consumer spending with it representing approximately 70 percent of all economic activity.
  2. Lower energy and commodity costs will make it more attractive for retailers to expand operations and create jobs.

Despite these potential threats, the strength of the U.S. consumer should lead the U.S. retail sales to rebound at a healthy rate in the first quarter of 2015.

When Experts Misunderstand Unemployment Statistics

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I know everyone likes a conspiracy.  Obviously, hedge funds manager Kyle Bass appears to infer the government is  the Bureau of Labor Statistics (BLS) ‘semi-rigged’ the unemployment statistics.  In an interview on CNBC Squawk Box interview, Bass says that an improved unemployment rate is deceptive.  He expects that the unemployment rate might even drop further, but it will be misleading because it will be a result of people dropping out of the labor force rather than jobs being created. While he might have a valid point, it is incorrect to suggest that the government does not track ‘true’ unemployment.

Economists recognize that the ‘true’ unemployment rate not only tracks those currently looking for a job, but those that want a job and quit looking due to being discouraged.  This is measured and is located in Table A-15 of the monthly job report, thus not hidden from the public.  Unlike his claim that the true unemployment rate is 11 percent, this alternative measure of unemployment is actually at 12 percent.  Now before giving Bass praise for pointing out a supposed weakness in the unemployment rate, it should be noted that this figure has been steadily dropping over the last year.  In fact, it has dropped substantially from the last year when it was 13.6 percent.  Since the end of the recession in June 2009, we have recently seen a steep decline that suggests the job market is improving.

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This alternative measure of unemployment looks at the following:

  • Unemployed and currently looking for work
  • Marginally attached to the labor force, meaning that they are no longer looking for work, but want a job and have searched for a job within the last 12 months.  (Note:  We consider this to be the discouraged worker)
  • Working part-time for economic reasons.  (Note:  Would like to work full-time, but cannot find full-time work.  Therefore, it does not include part-time workers by choice, such as college students who only want to work part-time so that they can go to school full-time.)

Having said that, it is obvious that the jobs picture is not perfect.  Even though part-time employment has declined over the last year, it still remains highly elevated from the pre-recession period.  Also, wages also remain stagnant.  In my opinion, the main problem is a changing landscape of the economy where we are seeing a shift from value in using our hands (manufacturing) to using our minds (services).  Right now, we are in a transitional phase with plenty of low-paying, low skill jobs and many high-paying, high skill jobs.  The problem is there are not enough decent paying, middle skill jobs.  Until these workforce skills are updated, wages will remain stagnant.

While it makes for good TV, do not be fooled with this faux conspiracy.

Maintaining Fed Credibility Is Key To Controlling Inflation

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Diana A. Cooke and Wiliam T. Gavin of the St. Louis Fed’s Regional Economist do an excellent job in explaining the role of Fed credibility on inflation.  Inflation is the rise in overall prices and its measure is critical in determining the overall health of an economy.  Even though some inflation is actually healthy, high rates of inflation erodes wealth and causes investor and consumer uncertainty.  Also, deflation can be even more damaging as businesses struggle to make ends meet due to an inability to raise prices.  That is why investors and the business community values any insight on predicting future inflationary trends.

There is historical relevance of Fed credibility and the trend of inflation.  The Fed is represented by the Federal Open Market Committee that sets interest rates through conventional means, such as open market operations, discount rate, and reserve requirement, and non-traditional methods, such as quantitative easing, referred to as large scale asset purchases by Bernanke.  If you want to learn more both methods, view this lecture from former Fed Chairman Ben Bernanke.

Specifically, look at the video between 8:40 to 12:40 where Bernanke discusses the Fed’s conventional methods in controlling monetary policy.  From 12:41 to 19:09, he talks about non-conventional methods.

Now referring back to Fed credibility and its impact of inflation, we noticed the following trends:

In the 1970s, the Fed had little credibility and that is one of the reasons why inflation was high at that time.  This goes back to the last of the ten principles from Mankiw, which states that there is a short-run tradeoff between inflation and unemployment.  Mainly due to Middle East unrest that drove oil prices very high, the U.S. economy suffered from high rates of inflation.  This stunted economic growth and in an attempt to boost job growth, the Fed pursued easy money strategy to keep interest rates low.  However, the market frowned upon this action and that drove inflation even higher.  This is shown with the graph from Cooke and Gavin below:

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Notice how the Fed Funds Rate which is shown in red was driven down around the mid-1970s.  During that period, inflation was very high.

It was not until late 70s and early 80s where we see the Fed Funds Rate raised in order to fight inflation.  This move eventually killed high inflation, but it came at a cost of higher unemployment and two recessions.  It was during this period, described as 1980-1986, where the Fed regained its credibility and that was a main contributor to falling prices.

This credibility held true for the next twenty years (1987-2007) where inflation remained modest.  However with the onset of highly irregular monetary policy, the Fed pursued drastic measures to stabilize an economy on the brink of collapse due to deteriorating financial institutions that were penalized for its poor lending practices.

Even though the Fed’s efforts during this recent crisis was more extensive than the 1970s and one would expect Fed credibility in managing inflation to diminish, we still have not seen a rise inflation.  While this is puzzling, Cooke and Gavin believe we can look to the Fisher Effect to understand why inflation has been so sluggish.

The Fisher Effect was developed by Irving Fisher in his 1930 publishing of The Theory of Interest.  It basically explains how the nominal interest rate is a function of the real interest rate and inflation expectations through this accounting expression:

Nominal interest rate = Real interest rate + Expected inflation rate

While nominal interest rates are expressed as the rate paid by individuals that want to borrow money or earn on funds held in savings accounts, the real interest rate is adjusted to account for inflation.  Since no one knows what inflation will be in the future, people guess what it will be.  Cooke and Gavin provide an example of how this works through the following example:

Suppose an investor is willing to lend $100 for a real rate of return of 3 percent and they expect inflation to rise by 2 percent next year.  Applying the Fisher Effect, they would agree to a nominal interest rate of 5 percent based on the accounting expression above.  (5.00 = 3.00 + 2.00)

Even though it is difficult to determine the actual real interest rate today, we can determine what it was in the past.  Let us plug in what we know.  If the Fed Funds Rate is between 0 and 0.25 percent, then that is a proxy for the nominal interest rate.  Between 4th quarter of 2007 and the beginning of the 4th quarter of 2010, the average inflation rate is at 1.6 percent.  Therefore, applying the Fisher Effect, we must assume that the real interest rate must be around -1.35 percent.  (0.25 = -1.35 + 1.60)

The negative real interest rate is consistent with the economic decline that we experienced during 2008-2010.  However from the 4th quarter of 2010 and the end of 2013, we experienced an uptick of 2.2 percent in real gross domestic product.  That means the real interest rate should be on the rise.  Since the nominal interest rate remains near zero due to the Fed Funds Rate unchanged, then that would place downward pressure on inflation.  For example, let us assume that the real interest rate increased from -1.35 percent to -0.75 percent, then that would mean the inflation rate would have to fall from 1.6 percent to 1 percent if the nominal interest rate is at 0.25 percent.  (0.25 = -0.75 + 1.00)

Now knowing what we learned above, Cooke and Gavin describes three possible scenarios that will all be driven by the Fed’s credibility with investors.

Scenario 1:  Investors lose credibility and believe inflation will rise significantly.  That would lead to a similar environment of the 1970s where stagflation was the norm.  This is certainly a scenario that we want to avoid.

Scenario 2:  Investors still believe the Fed is credible and inflation remains around 2 percent.  This scenario will allow the Fed to gradual raise interest rates without threatening a recovery.  An increase in nominal interest rates will allow for the real interest rate to rise above zero.  This is the best-case scenario.

Scenario 3:  The Fed continues to keep interest rates low in an environment where the economy remains sluggish.  In this case, nominal interest rates remain near zero and the real interest rate stays negative.  This will cause investors to believe future inflation will fall.  This is the worst-case scenario because deflation is tougher to reverse than inflation.  With businesses forced to lower prices, that will lead to cuts in business spending and result in job losses.

Given the uncertainty caused by turmoil in the Middle East and Eastern Europe, do not be surprised if deflation becomes our biggest threat to a more robust recovery.  Regardless, investors and their take on Fed credibility will be essential to determining our economic fate.

U.S. Economy Picks Up Steam In 2nd Quarter

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The U.S. Bureau of Economic Analysis released 2nd quarter data and it showed better than expected results.  While many expected a significant improvement from the dismal 1st quarter, a growth of 4 percent in real GDP was larger than expected.  Given their propensity to revise economic data at later dates, we should be cautious in relying on it.  For instance, they again revised the economic contraction of last month from 2.9 percent to 2.1 percent.  However, this is certainly evidence that the economy has rebounded from a terrible first quarter.

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Some of this rise can be attributed to severe weather in the previous quarter where consumers stayed in, but started to make up for lost time by resuming their spending habits.  This explained the healthy boost of 2.5 percent between April and June in consumer spending.

Business investment was also healthy.  Gross private investment rose by 17 percent with most of the rise occurring with equipment.  This is a significant improvement over the last quarter where investment declined by 6.9 percent.  These figures are volatile, but we can take comfort that investment spending has risen in five of the last six quarters.

This improvement is consistent with my July 2nd post entitled, “Don’t Worry, Be Cautiously Happy”.  The combination of an improving labor picture and rising manufacturing activity are boosting hopes of a more robust recovery.  However, we are not out of the woods yet and should be concerned with the various world crises that can hamper U.S. economic growth in the future.