Markets greeted the most recent monthly employment report with a rousing cheer and a robust and broadening stock market rally; bonds reacted to an improved outlook based on this report; and interest rates rose while the futures market of the short-term policy rate (fed funds) adjusted to a lower likelihood of a rate cutting sequence in 2020. Those who predicted recession and bearish market pundits had to run for cover.
Or did they?
We find an instructive note in the new TLRwire service offered by Philippa Dunne and Doug Henwood. They put the 266,000 new jobs number into perspective:
“Employers added 266,000 jobs in November, 254,000 in the private sector. That’s well above the 184,000 average over the last year, and the 189,000 average of the previous three months. The number was boosted by the return of some 40,000 autoworkers, but there was strength in several other sectors. Construction was up 1,000 (a twelfth its average over the last year); manufacturing, 54,000 (well over twice its recent average even if you take out the returning strikers); retail, 2,000 (a contrast with an average loss of 3,000); transportation and warehousing, 16,000 (two-and-a-half times its recent average); information, 13,000 (more than twenty times its average before rounding); finance, 13,000 (a third above average); professional and business services, 38,000 (slightly above average); education and health, 74,000 (with both categories coming in well above average); leisure and hospitality, 45,000 (almost a third above average, with strength coming mostly outside our favorite sector, bars and restaurants); and other services, 9,000 (a quarter above average). In the red were mining and logging, down 7,000 (compared to an average of unch), and wholesale trade, off 4,000 (compared to an average gain of 5,000). Government added 12,000, with local government in the lead. There’s no sign of a surge in Census hiring yet.
“• Revisions were strongly positive, with October taken up 28,000 and September by 13,000, for a combined total of 41,000. Most of the revisions came before seasonal adjustment. Retail revisions were particularly strong, accounting for half the two months’ combined total.
“• A bit of historical perspective: 266,000 seems like a big number these days, but it’s equal to the average growth rate in employment from 1948 to 2000, an average that includes recessions. Over that 52-year stretch, employment growth averaged 2.1% a year; our current 1.5% rate is only impressive by the beaten-down standards of economic life after 2000. If you look at expansions only, the unweighted average gain was 3.1% a year, or 387,000 a month at current levels.”
Let me pause here and make a pitch. The former Liscio Report (TLR) is a widely read, well-respected in-depth research service with a wealth of data on labor markets. I read it regularly. Recently, Philippa and Doug launched TLRwire, a shorter form of their work in a weekly note that really probes the details and produces “nuggets” of helpful insights and thought-provoking information. They are offering an introductory subscription rate of $27 dollars a month (or $275 a year). I’m a subscriber and have so far found every issue helpful.
Here’s an example of their analysis on climate change and economics:
“In May the IMF updated their estimates of global subsidies for fossil fuels: they were 6.3% of world GDP in 2015 and are projected to be 6.5% of world GDP in 2017—really, going up? In 2015 the largest contributors to the $5.2 trillion in global subsidies were China, $1.4 trillion; the U.S. $649B; Russia, $551 billion; the EU, $289 billion; and India, $209 billion, with coal and petroleum accounting for 85% of the subsidies. Of course, that means fossil fuels are underpriced by about $5 trillion a year. The IMF closes their abstract by contending that in 2015 efficient fuel pricing would have dropped global carbon emissions by 28%, cut fossil-fuel air pollution deaths by 46%, and raised government revenue by 3.8%. Those revenues are crucial, since the emergency and clean-up services engendered by climate events fall to the public sector. Of course, the IMF compilers are aware that a sudden shift to efficient pricing is unrealistic and offer these calculations as a benchmark for beginning the process.”
Here’s how to subscribe to TLRwire: https://www.tlranalytics.com/subscriptions/tlr-wire.
Now let’s get back to the outlook for 2020 and the employment situation. Implied is the question, “Will the labor markets tighten sufficiently as to cause and upward trajectory in labor costs and eventually change the inflation forecast from benign to intensifying upward?”
We expect to see more upward movement in wages and benefits in 2020, and we expect to see a continuation of the gradual transfer of income in favor of labor at the expense of capital. Labor markets are tightening. If we look only at the unemployment rate to see this, we may have trouble discerning why there is still some way to go to fully reach full employment at a level that accelerates wages and labor costs. The reason is that the employment participation rate declined and that adjustment in the statistics requires us to view them through the lens of the employment population ratio and to also look at the comments that accompany the national employment statistics.
Here’s an example. We have a link to a chart pack at the end of this commentary. The cover page reads “Beveridge Curves” since that is the form we use in most of the charts. Please take some time with the charts. If you have any difficulty opening the link, please email me; and I will ask our IT folks to help you. The link takes you to the chart pack on the Cumberland Advisors website.
Take a look at the first chart (page 2) entitled “U-3 Unemployment Rate & Employment Population Ratio Divergence.” The picture tells the story. Things have been changing since the economic recovery started ten years ago. The crossover point, in 2014, is marked on the chart.
In most cases in the 46 page chart pack we have graphically depicted three economic cycles: The first is the expansion from December 2001 to November 2007 (denoted in light blue); the second is the recession from December 2007 to June 2009 (denoted in red); and the third is the expansion since 2009 (denoted in green). Charts like 3 and 4 show you how robust the expansion has been and how the unemployment rate combined with the job vacancy rate has reached all-time highs in the recovery to date. This measure, taken on its own, would tell you the economy is “steaming hot” when it comes to jobs. So why haven’t we seen an upward acceleration in wage pressures?
Now look at charts 9 and 10. They cover the same period and compare the employment population ratio to the job vacancy rate. These charts tell a different story. There is a large gap to close before the employment population ratio reaches levels we saw before the Great Recession. In the rest of the charts you will see many examples of remaining gaps between today’s jobs picture and that before 2008. You will also find other measures that attempt to tell this story.
So which view is correct? The answer is that both are. Each is a way of estimating the recovery in the jobs statistics. And that observation leads us to our forecast and conclusion. We think these two series will be converging in 2020. We see that trend each month as new folks show up in the employed category when the same folks didn’t appear in the labor force in the previous month. This trend is a very good sign for economic growth. It also means the job market is tightening. Lastly, it means that the forces which will ultimately accelerate wage and benefits costs (employment cost index) are building. Thus our year-end forecast for 2020 is rising employment income as the 160 million working Americans begin to see some acceleration in income and as another million folks return to the labor force.
Please enjoy the chart series (all 46 pages): https://www.cumber.com/pdf/Beveridge-Curves-Master.pdf
David R. Kotok
Chairman and Chief Investment Officer
Email | Bio
Read the full series of "Year-End & 2020 Forecast Notes" by David R. Kotok at this link (updated as they are published):
https://www.cumber.com/cumberland-advisors-market-commentaries-year-end-2020-forecast-notes-by-david-r-kotok/
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