April Jobs Report: The Two-Tiered Recovery

The April jobs report continued the saga of a two-tiered labor market. The economy added 160,000 jobs and the unemployment rate remained at 5 percent. Revisions to the previous two moths amounted to 19,000 fewer jobs than originally reported. But the broad numbers may not paint a true picture of the employment landscape. The biggest complaint is that overall wage growth has been unimpressive. In April, average hourly wages increased by 0.3 percent, nudging up the annual increase to 2.5 percent. Given the impressive number of jobs added, most analysts have been promising that wage growth would soon follow, but annual wage growth has remained between 2 and 2.5 percent for the past few years, below the near-3 percent seen in previous expansions. While 2.5 percent is not a bad number, we have been here before and now need to see consistent readings that are trending higher.

It’s not supposed to work this way. If employers are having a hard time filling positions, and workers are more willing to jump ship, wages should be rising faster. However, according to economist Joel Naroff, “No matter how tight the market may be, companies are still willing to go without new hires and limit pay increases.”

It may be that the labor market is not quite as healthy as the top line measures indicate. In addition to the 2.1 million Americans who have been out of work for more than six months, the number of workers who work part-time but would rather be full-time remains at a still-elevated 6 million. According to research from the Federal Reserve Bank of Chicago, the high numbers of “part-time for economic reasons” is a contributing factor to limiting wage growth.

What appears to be happening is that workers in the high growth fields can demand higher wages, but the vast majority of workers either don’t feel like they have bargaining power or have made a different kind of adjustment: if the boss can’t pay me more, maybe I will work a little less. This could be part of the reason why worker productivity has dropped off. According to the Labor Department, in the recent 2007-2015 period, annual labor productivity has slowed significantly to 1.2 percent, the worst period since the late-1970s to mid-1980s. Naroff says the downshift is understandable because “until workers have reasons to work harder (i.e., greater compensation), they will find ways not to work harder.”

Of course, with corporate earnings set to drop for a third consecutive quarter, companies are unwilling to take the first step to incentivize their workforces. This strange game of chicken is unlikely to continue for too much longer. Unfortunately, there is probably an equal probability that we see a downshift in the economy, which would spur workers to step it up; and an uptick, which would force companies to pay more.

MARKETS:

• DJIA: 17,740 down 0.2% on week, up 1.8% YTD
• S&P 500: 2057 down 0.4% on week, up 0.6% YTD
• NASDAQ: 4736 down 0.8% on week, down 5.4% YTD
• Russell 2000: 1114, down 1.5% on week, down 1.9% YTD
• 10-Year Treasury yield: 1.78% (from 1.83% a week ago)
• June Crude: $44.66, down 2.7% on week
• June Gold: $1,294.00, down fractionally on week
• AAA Nat'l avg. for gallon of reg. gas: $2.21 (from $2.21 wk ago, $2.65 a year ago)

THE WEEK AHEAD:

Mon 5/9:

China CPI/PPI

Tues 5/10:

Walt Disney

6:00 NFIB Small Business Optimism Index

10:00 JOLTS

Weds 5/11:

Macy’s

2:00 Treasury Budget

Thursday 5/12:

Kohl’s, Ralph Lauren, Nordstrom

8:30 Import/Export Prices

Friday 5/13:

JC Penney

8:30 Retail Sales

8:30 PPI

10:00 Consumer Sentiment

Pay Raises Ahead?

Nearly six years after the official end of the recession, something exciting is about to happen: Americans are likely to FINALLY get a raise! Government data (the Employment Cost Index or “ECI”) showed that compensation in the first quarter increased by 2.6 percent from a year ago, up from the 2.2 percent gain in the previous quarter and the fastest pace since Q4 2008. The private sector did even better, seeing an annual growth rate of 2.8 percent, the best year over year pay gain since Q3 2008. A year ago, the rise in private sector wages and salaries was only 1.7 percent, so while growth rates are still modest by historical standards, this report demonstrates good progress and is a sign of potentially more robust increases later this year. Joel Naroff of Naroff Economic Advisors predicts, “Within a quarter or two at the most, we should be back above 3 percent,” which is just about average for an expansion.

How can we square this upbeat information with the monthly jobs report category of “average hourly earnings”, which showed annual growth of just 2.1 percent in Q1 (and for the entire recovery)? Greg Ip of the Wall Street Journal notes, “The divergence may be explained by the fact that the quarterly figures include commissions and other performance-based pay, which rose sharply in the first quarter, and may not be repeated.” That may be true, but it should also be noted that the Fed has traditionally put more weight on the employment cost index, since it tracks the same jobs over time and adjusts for the changing mix of jobs in the economy. If Janet thinks ECI is the better gauge to use, then we should too.

Other indicators have enhanced the case for future pay raises: weekly jobless claims are hovering at 15-year lows; ISM Service sector indicators are strengthening; and a variety of big companies, including McDonalds, Wal-Mart, Target, Cheesecake Factory and Aetna, have all announced an increase in pay to lower wage workers.

We’ll learn more about the state of the nation’s labor market this week, when the government releases the April employment update. Economists are hopeful that the weak March report, where just 126,000 positions were created, was a one-off event, rather than a more worrisome trend that is gripping the nation. The consensus estimate is that 220,000 new jobs were created and for the unemployment rate to edge down by a tenth of a percent to 5.4 percent.

Happy Anniversary, Greek Bailout! Time sure does fly, when you bail out an indebted nation. It has been FIVE YEARS since Europe and the International Monetary Fund first agreed to bail out Greece (May 2, 2010). Eurozone officials are busy trying to hammer out yet another debt restructuring with Greece, which once again faces a summer default without a deal.

MARKETS: That thud you heard this week was the sound of plummeting social media stocks. Twitter, LinkedIn and Yelp all tumbled by more than 20 percent on the week, after weaker than expected earnings reports and dim prospects for the rest of the year. Social media stocks have been on a massive run and even with these three misfires, the social media index (SOCL) is up over 10 percent this year, 3.5 percent better than the NASDAQ Composite.

• DJIA: 18,024, down 0.3% on week, up 1.1% YTD
• S&P 500: 2108, down 0.4% on week, up 2.4% YTD
• NASDAQ: 5,005 down 1.7% on week, up 5.7% YTD
• Russell 2000: 1267, down 3.1% on week, up 2% YTD
• 10-Year Treasury yield: 2.12% (from 1.92% a week ago)
• June Crude: $59.15, up 3.5% on week (up 25% in April, biggest monthly gain since 5/09)
• June Gold: $1174.50, down 0.03% on week
• AAA Nat'l avg for gallon of regular Gas: $2.60 (from $2.51 week ago, $3.69 a year ago)

THE WEEK AHEAD:

Mon 5/4:

Cablevision, Comcast

10:00 Factory Orders

Tues 5/5:

Zillow

8:30 International Trade

10:00 ISM Non-Manufacturing Index

Weds 5/6:

MetLife, Prudential, Whole Foods

8:15 ADP Private Sector Jobs

8:30 Productivity

Thurs 5/7: UK Election

Zynga

3:00 Consumer Credit

Fri 5/8:

AOL

8:30 April Employment Report

Sell in May and Go Away?

Is the US economy finally back to a "normal" jobs market? Unfortunately, not yet. At first blush, the employment report was much better than expected, but pessimists found plenty to highlight as well. First the good news: The economy created 288,000 jobs in April and there were upward revisions to the previous two months, amounting to an extra 36,000 jobs than were previously reported. Total monthly job creation over the past three months has averaged 238,000, an improvement over the past year’s pace of 190,000.

Additionally, the unemployment rate dropped to 6.3 percent, the lowest level since September 2008, but most of the decline had to do with a massive 806,000 reduction in the labor force, which pushed down the participation rate (the number of people employed or actively seeking employment) to 36-year lows of 62.8 percent. Still, while the monthly results on the rate might seem discouraging, the folks at Capital Economics remind us, “The labor force has increased by about 1.5 million over the past six months.”

As most know, the top-line unemployment rate only captures those who have a job or are actively looking for work. A broader measure of joblessness, which includes those who have stopped looking for work as well as people working part-time for economic reasons, fell to 12.3 percent, which is certainly an improvement 13.9 percent from a year ago, but still very high.

The ranks of the long-term unemployed continued to show progress, dropping by 287,000 in April to 3.5 million. Over the past year, the number of long-term unemployed has decreased by 908,000 and the median duration of unemployment dropped to 16 weeks, which is down from 20 weeks a year ago and half the amount of time it took to land a new job at the worst part of the jobs recession. Still, from 1994 through 2008, roughly half of all unemployed jobseekers found jobs within 5 weeks, which shows that the labor market remains far from normal.

There has also been concern about quality of jobs created during the recovery. Nearly five years after the end of the recession, job growth is still heavily concentrated in lower-wage industries. The food services and drinking places, administrative and support services (includes temporary help), and retail trade industries continue to lead private sector job growth during the recovery.

The addition of low-wage jobs is keeping a lid on average hourly earnings, which were unchanged last month and the annual growth rate of hourly earnings slipped back to 1.9 percent from 2.1 percent. Before the recession, wages were regularly growing at above 3 percent year-over-year. Wage growth and an increase in hours worked are the necessary components to help consumers feel confident enough to eventually pick up their spending.

What’s the bottom line? The labor market is improving, but we are not there yet, which may be why markets barely budged on the news. Or maybe it’s something else…could investors be thinking about the old trader’s chestnut, “Sell in May and Go Away” The market-timing strategy says investors should get out of stocks in May, avoiding the volatile spring and summer months; and then jump back in after October to enjoy an end of the year rally. There is some statistical evidence to back the adage. According to S&P Capital IQ (as cited in the Wall Street Journal), since 1977, the S&P 500 has averaged a total return, including dividends of 3.3 percent from May through October. That performance dramatically lags the Barclays Aggregate Bond Index, which has averaged a 7.6 percent gain during those same months for the past 36 years.

Skeptics brush aside the idea as a trading trap, warning investors to stick to their long-term game plans. After all, while the data may confirm a trend, in any year the results might change. Last year, the S&P 500 jumped 10 percent from May through October, so selling in May and going away would have been a terrible strategy. Bottom line: ignore the rhymes and stick to your diversified, balanced portfolio!

But there may be other reasons to consider taking a hard look at your asset allocation and ensuring that your stock position is not too weighty. Consider the front-page Wall Street Journal headline, “Retirement Investors Flock Back to Stocks,” which highlights new data from Aon Hewitt showing that stock investments accounted for two thirds of employees' new contributions into retirement portfolios in March, the highest percentage since March 2008! Um, contra-indicator, anyone? This could be a case where retail investor enthusiasm may come at a market top.

After all, it’s been three years since the S&P 500′s last correction began. On April 29, 2011 the S&P 500 started a long and volatile decline from 1363.61, which ended five months later (on October 4) and 19.9 percent lower (1099.23). Since then, there have been five pullbacks of more than 5 percent but less than 10 percent. The biggest of those declines was a 9.9 percent drop that lasted from the April 2, 2012 close through June 1, 2012.

MARKETS:

• DJIA: 16,512, up 0.9% on week, down 0.4% YTD
• S&P 500: 1881, up 1% on week, up 1.8% YTD
• NASDAQ: 4123, up 1.2% on week, down 1.3% YTD
• 10-Year Treasury yield: 2.59% (from 2.66% a week ago, lowest yield of year)
• June Crude Oil: $99.76, down 0.8% on week
• June Gold: $1302.90, up 0.1% on week
• AAA Nat'l average price for gallon of regular Gas: $3.68 (from $3.52 a year ago)

THE WEEK AHEAD:

Mon 5/5:

Pfizer, AIG

10:00 ISM Non-Manufacturing Index

Tues 5/6:

Disney, Whole Foods, Groupon

8:30 International Trade

Weds 5/7:

A-B InBev, Tesla, AOL, Zillow

8:30 Q1 Productivity

10:00 Yellen Testifies before Joint Economic Committee

3:00 Consumer Credit

Thurs 5/8:

News Corp, CBS

7:30 ECB/BOE Interest rate decision

Chain Store Sales

8:30 Weekly Jobless Claims

10:00 Yellen Testifies before Senate Budget Committee

Fri 5/9:

Ralph Lauren

10:00 Wholesale Trade

10:00 JOLTs