GDP

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Jobs – Where to Next?

This week we will get our next insight into the employment outlook. Today’s ADP employment report – they tell us about the number of people added or subtracted from all they private sector payrolls they process for businesses – gets us off to a good start.

ADP managed payrolls added 216,000 new jobs last month. That’s a lot better than the consensus forecast of 170,000, and a significant step up from January’s revised 173,000. It brings the three month average to 223,000, which compares with last year’s monthly average of 156,000, so clearly things have improved. It is also the twenty-fifth straight month of job growth, and reinforces the overall impression that the economy is enjoying a solid, if unspectacular, period of growth.

The expansion was spread across the economy, so growth appears to be well balanced: small business accounted for about half of the new jobs; the service sector added 170,000, while manufacturing added 46,000. It is this balance that suggests the recovery is sustainable at least as long as events in Europe or the Middle East fail to disrupt it.

With this is mind it is useful to reflect on how the job market might develop through the year – an election year no less.

One issue that immediately comes to mind is that much of the improvement so far has not come from the addition of new jobs, so much as from the steady decline in the elimination of existing jobs. In other words it is a decrease in the rate of firing that is driving the increase in payrolls. As we all know, even in good years businesses are busy both hiring and firing, it is the balance between the two that matters. For the current improvement to continue at the same rate we need to see a shift from an emphasis on fewer firings to an increase in new hiring. That will depend a great deal on business expectations for sales in the upcoming months. That, in turn, will depend on the outlook for wages, and the continuance – or lack thereof – of the debt reduction households were forced into by the banking crisis that started this whole cycle. Unfortunately the prospect for sufficient activity translated into sufficient spending is less bright than we need. So I suspect that the current rate of improvement will falter somewhat as the year progresses. We will still be adding jobs, but nowhere near the rate needed to bring the unemployment rate down to a respectable level. It will be a few years before the economy has restored an unemployment rate within the bounds of normality. That is as long as nothing crops up to ruin the recovery.

One factor that will play a key role in the next few months of job creation is the productivity rate. Much of the initial spurt – such as it was – in growth came not from job creation but from businesses squeezing extra output from current payroll and capital levels. This showed up as an acceleration in productivity. Today we heard that the productivity increase for the fourth quarter was revised up to 0.9% bringing the year as a whole to 0.4%. This is the lowest rate of growth since 1995, and way below 2010’s 4.1%. This suggests that sustained growth in business will now have to come from increasing workforces as it appears businesses have squeezed that last drop out of the current workforce.

Tellingly along side this productivity slow down is a rise in labor costs. There was a sharp spike in the hourly wage rate in the fourth quarter, most likely driven by an increase in overtime pay. The first estimate of fourth quarter unit labor costs had shown an increase of 1.2%. This has now been revised to 2.8% and brings the annual increase to 2.0%, the fastest rate since 2008.

This brings us back to business expectations. With the current workforce fully utilized 0 as suggested by the declining productivity numbers and rising labor costs – the stage is set for a round of new hiring. This would be the best case, and would support a continuance of the current rate of job growth. It is my view that business still has a relatively pessimistic outlook – the various indicators of business confidence are improving but not that rapidly – that drives my forecast of a slight weakening from that current pace rather than a continuance of it.

All this could be cast aside later this week when we hear from the Labor Department. The current best guess seems to be that overall payrolls, both private and public, added slightly less than the ADP figure – in the 200,000+ range. That is decent, but insufficient. The unemployment rate may drop a little, but not by much. This could be the new trend that extends through the summer. We can discuss that Friday.

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Round Up, and Returns

I’ve been off line for a few days, so I ought to catch up with the news.

Which, it turns out, isn’t really news at all. The economy is right where we left it. Chugging along at an unspectacular pace, adding jobs at a modest rate, growing, but too quickly, and exposed to the exact same risks that beset it before. Our banks are still way too large relative to our economy, Europe still is dithering about in self-inflicted recession, and the Middle East is simmering back to one of its regular boils thus threatening oil supplies.

The more things change, the more they stay the same. Or something like that.

Stateside, things are going reasonably well for an economy hobbled by awful policy leadership and gluttonous banks. Sales of homes are showing signs of life, which by itself is a relief, but is probably more important as an indicator the households are growing in confidence. Both new homes and existing homes are selling at rates above their crisis bottom dwelling levels. But neither are bubbling along at unsustainable rates either. I have mentioned before, but here I go again, that construction has now fallen behind long term demand. We have a growing housing shortage in some areas. Especially multi-unit housing. I suspect that sometime in the next year or so we will see a small blip – and I hope it is only a small blip – in construction as this shortfall is erased.

The long slow debt reduction process has evidently had an impact on household expectations: purchases of big ticket items has picked up. Unfortunately wages are lagging still – they have for decades – so any acceleration in these kinds of products will inevitably involve a run up in debt as well. The key will be reaching a sustainable level of debt and avoiding the excesses of the Bush era bubble.

Which brings me to the banks.

They remain a dagger pointed directly at the heart of our economy. They have failed us mightily for a very long time. During the past two decades they have misdirected capital throughout the economy with spectacular abandon. The dot-com and housing bubbles stand in permanent testimony the the ineptitude of our banker’s ability to spot a good investment opportunity. The one thing we know bankers are good at is generating, on paper at least, profits that justify big bonuses. They are less adept at ensuring a reliable and stable flow of capital into the real – non-financial – economy where the economy would benefit from long lasting increases in its productive capacity. And they are certainly not very good at credit analysis.

This latter point is being hammered home heavily at the moment by the squirming over sovereign debt. The steady right-offs of sovereign debt by our large banks is horrific to watch. Even worse is the craven attempt to get taxpayers to offset such losses in one way or another. Bankers are supposed to be skilled at risk management. Apart from managing our payments systems that’s what they are paid to do. Yet they seem all to want to be relieved of that duty every time they make a mistake. Making mistakes is an essential part of the training of every good risk manager. They are supposed to learn and get more capable as they go along. Ours just want to be bailed out so they can get back to making a quick buck. Where, oh where, are our regulators?

Which bring up the scuffle going on over the Volcker Rule.

This, as you all know, is a rule that iS supposed to be appended to the infamous – and frankly incredibly dense and not at all good – Dodd Frank reform of banking. You would have thought that within a document of over 800 pages someone would have find room to write in a rule to deal with proprietary trading. This is the kind of trading that banks do for themselves and not on behalf of a client. It is the locus of the most egregious casino mindset that sent us careening off the cliff, and is the least useful of all the things banks do. I have nothing against proprietary trading along as taxpayers are not deployed to clean up the losses. If traders want to have fun gambling, sop be it. Not on our dime. Not at all. The Volcker rule is supposed to force banks to carve out proprietary harding and thus eliminate taxpayer support for gambling. The banks are aghast. They are crying and pouting because it looks like their toys are being taken away. Which they are. Justifiably so. You don’t give fireworks to children. You don’t allow traders to trade on the taxpayer’s dime. Things get blown up otherwise. Nonetheless they banks are marshaling a formidable array of lobbyists to attack Congress in order to keep the subsidy they rely on to boost their margins. Keeping the Volcker rule off the books is one way to avoid having to be good at banking – playing with free money is so easy any juvenile can succeed. Look around the yahoos on Wall Street to see just how stupid one can be and still make a fortune if you are playing with someone else’s money.

This brings me to the inimicable effects of returns. Particularly the return on equity in whose name all sorts of evils are wrought on a daily basis. ROE is the driver of modern business. Everyone tries to ‘maximize’ ROE. As if maximization is possible in an uncertain world – just how do you determine what a maximum is in the face of uncertainty? No one knows, but all sorts of experts opine about maximization as if it is possible. It isn’t. So business leaders use a proxy: they seek to attain the ROE the ‘market expects’. This is a measure admittedly plucked from thin air. Or, more precisely, the air between the ears of sundry Wall Street analysts who opine constantly about the required return on equity in various industries. It is very subject to whim and rises and falls rather like skirt lengths on Parisian fashion runways. The problem recently has been that everyone is reaching for ever higher levels of ROE. Hence the urge to cut costs, deploy more capital at the expense of labor, off-shore production, otherwise outsource, and – this is the killer – to take more risk.

Just last week Proctor and Gamble announced a slew of lay-offs in order to ‘align’ its ROE with market expectations. P&G’s problem is that too much of its business is here in the US where ROE is hard to squeeze – the underlying sluggish growth of the economy is a major block to higher ROE, growth is much more attainable in emerging economies where consumption is still a novelty. Thus P&G needs to downscale its operations in the US – hence the layoffs – while boosting its operations abroad. This, by the way, is the same company that has abandoned much of its marketing to the US middle class on the basis that said class no longer has sufficient purchasing power to justify the expense. P&G’s shareholders, no doubt, will be happy to hear about the move to boost ROE. American workers probably less so.

Likewise, much of the banking objection to reform is that it will limit ROE. Poor dears, perhaps this means less of a bonus. Here’s my response: tough. Banking is not supposed to be a high ROE business. And if your bank is so large that it is a good cross section of the US economy – which all the big banks are – then your ROE will mimic, or track closely to, the economy’s overall performance. Trying to squeeze an abnormal rate of return from a mature economy is likely to drive you to do reckless things. And we know where that leads. Safe banking is low ROE banking. Get used to it. The lunatics on Wall Street who constantly demand higher rates of return than are sustainable should be silenced or ignored. If they really want those rates of return they ought to invest in boutique style banks that have portfolios small enough and select enough not to be samples of the entire economy. Size matters in banking. Just don’t tell those traders. They’re juvenile enough as it is.

So. There we are. There’s lots going on, but not a lot of change. Which is probably a good thing in an election year fraught with awful candidates and practically no sharp criticism. But that’s another story.

Oh, and one last thing: does anyone really care anymore about the Oscars? If there’s one totem to the past it is an awards ceremony in an era of instant review. Social networking, downloading, streaming and all the other properties of an internet economy have made the movie industry look increasingly out of touch. It still knows how to lull an audience in order to make a living, but its business model is looking extraordinarily musty. The Oscars belong in the 1950’s. It’s time to move on.

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Sales Point the Way

The stock market sagged at the sight of today’s retail sales report. The news was note as good as Wall Street had forecast, so stock prices had presumably anticipated something that didn’t exist. What a shock.

Coming out of the end of last year some forecasters had begun to hyper ventilate about 2012 being a breakout year. Sales, employment, production, and confidence were all moving in the right direction, and even the Fed was beginning to see healthier GDP prospects. This led to some folks getting a tad carried away and forecasting retail sales growth of about 1.0% in January. So the report of a mere 0.4% rise was something of a shock.

It ought not to have been.

Much of the rise at the end of last year was a typical late recession, early recovery, burst of ‘pent up demand’ for big ticket items such as cars. Look through the data and you see automobile sales being critical to the increase from fall onwards. In order to make those purchases households reversed their steady de-leveraging and ran up some extra debt. This was unlikely to be a sustainable trend, so sales were bound to level off. Which the January report shows they did.

It was only if you accept that the recovery was truly solid and that households had reached a comfortable debt to income level that you could then look to a period of robust sales. Even then incomes don’t provide any real help. Indeed stagnant wages will be a primary source of weakness for a long time to come. What aggregate income growth we saw – and what also fed into sales growth – was not a rise in wages, but a rise in total incomes driven by rising employment. This is a real trend and will help us throughout 2012, but eventually we will arrive at a point where the absence of wage increases will act as a brake on growth.

So, in my view, we are riding a small wave at the moment, we are not seeing the emergence of anything more than the consequences of having more workers earning wages, coupled with a more general feeling of well-being as the crisis continues to recede. Those two are the factors driving sales. Nothing more.

So looking for the kinds of growth rates Wall Street was forecasting was based on a misunderstanding of what’s going on at ground level.

Having said that, we should not under-estimate growth either.

Sales grew across the board. The big box stores saw growth of around 2.0%; and sales at bars, restaurants, bookstores, and music stores all grew by between 1.0% and 1.5%. Things are generally much better than they were a year ago. The only sales that declined were at online outlets where both internet and mail-order sales dropped by about 1.1%. This may simply be a seasonal oddity, but it is worth watching over the next month or two.

So. What to make of this?

Not a great deal. Ignore the stock market reaction – safe advice under normal times and especially at the moment – and watch wages, employment, confidence, and debt ratios. They are all moving in the right direction, but slowly. Sales won’t move much differently. Nor will GDP. The outlook for modest growth stays in effect. Especially during a year infested with political hyperbole and grandstanding.

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Jobs – Lot of Them

Today’s employment report was very positive. It is difficult, even for a conformed skeptic like myself, to find much to gripe about – we will get to my caveats in a moment. If this keeps up the election this November takes on a totally different tenor. More importantly, a whole bunch of people will be newly employed. About time.

According to the report the US economy added 243,000 jobs in January. Virtually all of this was in the private sector and was well distributed across the economy – no one sector or industry dominated, so this was a broad based gain. Of note was the 50,000 new jobs on manufacturing, and the gain in retail stores which was a little patchy but nonetheless strong. The retail sector lost 14,000 jobs in specialty clothing stores as places like The Gap retrenched, but this was more than offset by gains elsewhere, such as the 19,000 pick up in department stores. Overall retailers have added 390,000 jobs since the end of 2009, which suggests that demand is filtering back and that business confidence is growing.

The manufacturing gain was particularly strong in the durable goods sector, which reflects the increase in investment we have seen over the last year. Overall durable goods manufacturers have added 418,000 jobs in the past two years.

One of the caveats we need to note: construction id reported to have added 21,000 new jobs in January, after having added 31,000 in December. We should be cautious here. The unusually warm weather may have allowed firms to hire earlier than they normally would. Plus the seasonal adjustment may be giving a positive skew to the data. Let’s see if this trend keeps up further into spring.

The service sector contributed the most to the overall gain. Firms providing professional services led the way by adding 70,000 new jobs, with almost half that coming in the employment industry itself. Clearly the workplace is changing for the better if the employment bureaus feel the need to staff up to cover the volume. Other notable gains were in accounting, 13,000 new jobs, and architecture and engineering, with 7,000 new jobs. Elsewhere in services, health care continued to add jobs – 31,000 in all – with a notable contribution being made by the businesses affected by the new health care reform, which clearly did no harm to the private sector.

Lastly we should note that the hospitality industry, including restaurants and other eating places, is recovering well. It has added 487,000 jobs since the low reached for that industry in February 2010, with 44,000 coming this January alone.

This stronger job growth is reflected in the unemployment rate which dropped 0.2% to 8.3%, and is now down 0.8% since last August. Within the demographics, the unemployment rate for adult male and female workers is now the same at 7.7% – the rate for male workers fell in January. Teenage unemployment remains very high at 23.2%, while the unemployment rate for blacks fell to 13.6%.

The number of people who are marginally attached to the workforce – to use the rather dry term tossed about by the government – remained about the same at 2.8 million. These people are those who are wanting to work, have looked for a job in the past year, and are still without a job. This group consists of about 1.1 million discouraged workers – people who have given up looking for work currently because they don’t think there is anything out there; and about 1.7 million who have not looked for work in the past four weeks – usually because of things such as school commitments and so on.

This leaves the total of unemployed workers at 12.8 million, down from 13.1 million in December 2011, and 13.9 million a year ago. Obviously progress is being made.

What do we make of all of this?

First an additional caveat: the Bureau of Labor Statistics annually changes its estimate of the population. This year it added over a million people to its estimate. That alters the proportions favorably when we are discussing unemployment. I don’t think this alters the trend at all, but it does give the appearance of a more dramatic gain than might be real.

With that in mind, this is a good report. Jobs are being created across the board – except in the government sector which has lost 276,000 jobs in the last year, but didn’t change much in January. There is now a noticeable recovery in the private sector which added about two million jobs in 2011. Most of that growth has been in the last six months alone. The rate of job creation in manufacturing is now at a six year high. The flip side of job creation measured by the new claims of unemployment assistance has dropped to a new, and much lower, level. So the tone of the labor market has improved markedly.

Things are definitely looking up. There is no denying the progress being made.

Now back to my normal grumpiness: this is not enough. An unemployment rate of 8.3% this far into an erstwhile recovery is mediocre at best. Even at January’s pace of job creation we will have unusually high levels of unemployment well into 2014, which is absurd and painful given that we all knew how to avoid the problem.

Which brings us to politics: the recent steady improvement in the employment situation will start to have a knock-on effect in the presidential election. If, and it is still a big if, the unemployment rate gets below 8.0% during the summer, and if, also a big if, growth chugs along above 2.0% all year, then Obama’s re-election chances will surely rise dramatically. It would also take away the primary line of attack from whichever Republican he is running against. I wonder how long it will be before we hear of conspiracy theories surrounding the government’s supposed rigging of the numbers. I guess mid-summer.

But that is speculation.

What is real is this improvement in the labor market. Let’s applaud and hope for more.

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Dour News Round-Up

Following last week’s report on economic growth at the end of last year, we have begun to watch for signs as to whether the uptick to a near 3% rate will continue. Probably not.

The first sign of a slide backwards is the news that consumer confidence has slipped in January. The Conference Board’s index of confidence now stands at 61.1%, down from December’s 64.8%. While the decline is not very significant it brings to an end a run of improvement. More importantly, perhaps, is the news that the main cause for the drop was a reversal in expectations. The index includes measures of opinions about current activity as well as expected activity. Given the stagnation we find ourselves in it is no surprise to find there has been a wide difference between the two views. People are very downcast about the current situation, but generally relatively upbeat about the future. January’s decline in the overall index was driven by a slide in optimism on both levels: the number of people saying that current conditions are bad rose from 33.5% to 38.7%; while there was a slight decline in the number of people saying they expected things to improve. The outlook for an increase in incomes – or the lack thereof – seems to be the main driver of pessimism.

If this decline in confidence carries over four a month or two, we can expect the upturn in consumption we saw at the end of 2011 to level off. Since, as you all know, consumption is the main driver of the US economy, this would kick away one of the main props of growth, leaving us exposed to a period of more modest growth and heightened risk.

Likewise the news that home prices continue to decline is hardly a positive sign. The latest Case-Shiller index report, with prices up through last November, was released today. The news was not good. Prices of homes fell a further 1.3%, bringing the year on year decline to 3.7%. The index now stands 32.9% below its 2006 peak. The define was consistent across the country, only one major city – Phoenix – saw a gain on the month, and only Detroit and Washington DC saw gains over the year. On the downside, Atlanta saw the worst annual decline, at 11.8%, while several cities, including Tampa, Las Vegas, and Seattle, all hit new low points. Lower prices have, not unnaturally, produced a slight increase in sales. Our problem continues to be that real estate, which was major driver of employment during the 2000’s, remains highly depressed. Even after the recent uptick is sales, which has been spread over several months in a row, sales are at near all time lows. Consumers have not yet shaken off the full impact of the rapid loss of wealth implied by the fall in prices, and as long as the decline continues we cannot expect people to feel positively about their prospects.

Add in the protracted loss of traction for wages, despite the slight upturn in incomes in December, and it is no surprise that the mood remains dour.

What do we make of this?

Not a great deal: nothing significant has changed. The signs are that the economy is still growing, but that all the reasons for growth to be slow remain in place. Consumers are still beset by a poor outlook for wages, weak home prices, and an employment market only improving very slowly. This is scarcely the stuff to spawn a boom. Indeed it looks more likely that it will cause a slowdown. So my projection for GDP stays the same: look for growth around 2.0%, sometimes above by a little bit, sometimes below. Stagnation continues.

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