published: October, 07th 2016
By Rick Wedell, CIO
Weekly Update 10/7/16 – Jobs
Jobs data was out this morning, and appears to have a little bit of something for everyone. Market appears roughly flat on the news – 10 year treasuries are slightly tighter as the probability of a December rate hike looks a little more solid, and stocks are selling off slightly. *Overall the report was mixed – the jobs added number was 156K which was slightly below the 172K median estimate, and the unemployment rate actually ticked up by 10bps (10 basis points = .10% change) to 5% as we had more Americans enter the labor force. Nothing overly robust in that news, however on the positive side wages grew at a solid 2.6% year over year which is the highest rate we’ve seen since the end of the recession. On the equity side, look for the market to digest the news that economic growth is probably not as robust as the bulls would like, but it is robust enough to support the Fed’s dot plot for now (hike in Dec., two hikes next year). Nothing really to get overly excited about in either direction.
Let’s talk briefly about work force participation and the unemployment rate. We define the total labor force as the number of people in the US who are either working or who are looking for a job. The total civilian non-institutional population in the US is about 254mm, and only about 160mm of them are actually included in the definition of the labor force, as the other 94mm people are neither working nor actively seeking jobs. We get the unemployment rate by looking at the percentage of people IN THE LABOR FORCE who are out of a job. So here’s the trick – if some of those 94mm people who aren’t currently looking for work decide to look next month, it expands the labor force. If that expansion happens faster than job creation, then the unemployment rate grows DESPITE the fact that we still grew the jobs number, which is precisely what has been happening for the past few months.
So why is that? Well, the percentage of the population that is not in the labor force grew significantly during and after the recession. Think of it this way – there were a lot of people who either lost their jobs or could not find jobs when the job market imploded, and many of them got discouraged after a long time of trying to find a job and simply stopped looking. When they stopped, they shrank the labor force. Some of them will never return, due to personal preference or stale job skills. That said, as the labor markets have started to heat back up, a lot of people are starting to reconsider that early retirement choice.
The point - there are two competing views of where the economy is right now. One view is that we’ve got a long way to run before we get to full employment and inflation, because there are A LOT of people who will be joining the labor force and unemployment will stay persistently higher than we expect it to as they do. If this is the case, inflation will stay lower for longer, we probably have a few more bull years left in this cycle, and we can be patient about raising rates. The competing view is that we are later cycle, with accelerating wage growth which will likely lead to inflation. As a result, the Fed should be watching the wage growth number carefully and hike appropriately to attempt to prolong the expansion cycle for as long as possible.
We tend to be in the latter camp for the following reason - the only way that we get to increased workforce participation is if the job market is hot enough to coax people out of early retirement. In other words, jobs need to be easy to get and they need to pay well to get people who stopped looking for work years ago to dust off the resume and start the interview process. By definition, that means we will see wage growth, which will trigger inflation. It is true that we will continue to see an increase in the labor participation rate, but we only get that increase IF we see wage growth, and wage growth is the trigger for inflation.
No real trades to speak of this week in the portfolios. We also continue to watch the financials as that appears to be a sector rotation / rising interest rate hedge that has some legs to it.
*According to the US Department of Labor Report
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