Is the US Economy at Full Employment?

It may not feel like it, but the US economy is at full employment. The Labor Department reported that the economy created 178,000 jobs in November, just under the 2016 average monthly creation of 180,000; and the unemployment rate fell to a nine-year low (August 2007) of 4.6 percent. According to the Federal Reserve, there is no magic unemployment rate that defines “full employment,” because that notion is largely determined by uncertain and “nonmonetary factors that affect the structure and dynamics of the job market,” which “may change over time and may not be directly measurable.” Still, in the Fed’s September 2016 Summary of Economic Projections, participants’ estimates of the longer-run normal rate of unemployment ranged from 4.5 to 5 percent and had a median value of 4.8 percent.

The 4.6 percent November print might make you think that we are indeed at full employment, but why the rate fell is also important. The slide occurred not just because of new workers finding jobs, there were also 226,000 people dropping out of the labor force. That amount surprised economists, who mostly told me, “let’s see what the coming months bring, before we come up with a reason behind the change.”

Meanwhile, the broader measure of unemployment (U-6), which includes part-timers who can’t find full-time work and discouraged jobseekers, who have given up looking for work, fell to 9.3 percent, a rate not seen since April 2008. The broad rate averaged 8.3 percent in the two years before the recession.

Besides the surprising decrease in the labor force, the other disappointment in November was the tenth of a percent slide in average hourly earnings, after a sharp rise in the prior month. Still, earnings were up at a 2.5 percent annual rate (compared with 2.8 percent in October), a decent clip with inflation remaining low.

This was the last important piece of data before the Fed’s last policy meeting of the year. While it was not sterling, it was certainly good enough to justify increasing rates by a quarter of a percent. Whether or not the central bankers will explicitly change their notion of full employment remains to be seen.

MARKETS: Investors took a breather from the post-election stock rally. Crude oil shot up over 12 percent on the week, after OPEC agreed to cut production in 2017.

• DJIA: 19,170, up 0.1% on week, up 10% YTD
• S&P 500: 2191, down 1% on week, up 7.2% YTD
• NASDAQ: 5255, down 2.7% on week, up 5% YTD
• Russell 2000: 1347, down 2.5% on week, up 15.7% YTD
• 10-Year Treasury yield: 2.39% (from 2.36% week ago, yields hit a 17-month high of 2.44% on Thurs)
• January Crude: $51.68, up 12.2% on week, largest gain since Jan 2009
• February Gold: $1,177.80, down 0.3%
• AAA Nat'l avg. for gallon of reg. gas: $2.17 (from $2.12 wk ago, $2.05 a year ago)

THE WEEK AHEAD:

Sun 12/4: Italian Referendum: Voters will determine whether or not to change some aspects of the Italian constitution. (For more, see analysis by E.P. LiCursi at the New Yorker.) A no vote could unseat the current Prime Minister Matteo Renzi and potentially impact the weak Italian banking system and even Italy’s membership in the EU, often referred to as “Quitaly”.

Mon 12/5:

10:00 ISM Non-Manufacturing

Tues 12/6:

8:30 Q3 Revised Productivity and Costs

8:30 International Trade

Weds 12/7:

10:00 Job Openings and Labor Turnover Survey

3:00 Consumer Credit

Thurs 12/8

Friday 12/9

10:00 University of Michigan Consumer Sentiment

Aug Jobs Report: Federal Reserve Rate Hike off Table

It looks like the Federal Reserve will not need to act its upcoming FOMC policy meeting in a few weeks. The Labor Department reported that the economy created 151,000 jobs in August and the unemployment rate remained at 4.9 percent. Because June and July showed robust gains of over 270,000 each, the three-month job average now stands at 232,000. But for all of 2016, there has been an average of 163,000 jobs added per month, well below the nearly quarter of a million monthly pace of the past two years.

While economists say that the fall off is expected in the eighth year of a recovery, taken together with the recent slowdown in manufacturing and persistently low inflation, the Federal Reserve will likely put an interest rate increase on the back burner until December. According to the futures markets, traders see just a 12 percent chance of a hike at the September meeting, down from 27 percent before the announcement. Odds of a December increase are 50-50.

The report also highlights a divide between economists about the state of the US economy. Paul Ashworth of Capital Economics noted, “There is a long history of the initial August payroll estimate coming in below consensus expectations and then being revised higher” and the firm has been upbeat about the state of consumer spending and its ability to propel growth in the second half of the year.

Stephanie Pomboy of MacroMavens believes the situation is more problematic. Last week, before the unemployment report was released, she told the New York Times, “After the bursting of the housing bubble and the Great Recession, there has been a generational shift away from spending toward saving among consumers. The great consumer credit boom of the 1980s, 1990s and 2000s is over…this new impulse to save leads to a sluggish pace for growth.”

Regardless of which side wins the long-term intellectual battle, the fact that both growth and inflation remain so low, in the short term we know that the Fed will not raise rates at least until December.

Mon 9/5: LABOR DAY…US MARKETS CLOSED

Tues 9/6:

9:45 PMI Services Index

10:00 ISM Non-Mfg Index

Weds 9/7:

10:00 Job Openings and Labor Turnover Survey

2:00 Fed Beige Book

Thursday 9/8:

3:00 Consumer Credit

Friday 9/9:

August Jobs Report Could Seal Fed Rate Hike

In her speech from Jackson Hole, Janet Yellen said that U.S. economic activity continues to expand, led by solid growth in household spending. The second estimate of GDP backed up that sentiment. Although government and business spending slipped in the second quarter and overall growth was just 1.1 percent, consumer spending increased at a 4.4 percent annualized pace, the biggest gain since late 2014 and far better than last year’s 3.2 percent. Yellen also noted, “while economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market” and “the case for an increase in the federal funds rate has strengthened”. And if there is continued economic progress, as the central bank expects, the Fed should be able to gradually keep increasing the federal funds rate, despite the fact that inflation is running below the central bank’s stated two percent objective.

For most of this year, the Fed has been focused on the U.S. labor market, along with international developments/dramas (China’s slowdown earlier in the year and the UK Brexit vote in June), in managing monetary policy. That’s why this week’s release of the August jobs report could tip the scales for the September 20-21 FOMC policy meeting. If job creation jumps well beyond the consensus estimate of 200,000 expected for the month, the Fed could argue that the labor market is gaining steam (June saw a 292,000 gain and July increased by 255,000) and therefore a September rate hike might be justified. Conversely if the August jobs number is a disappointment and/or if other upcoming economic data disappoint, the Fed could remain on the sidelines.

Traders, who had seen just a 20 percent probability of a September rate hike the week prior, interpreted Yellen’s comments as more hawkish than previously believed. According to fed-funds futures’ Friday settlement, the probability of a quarter-point rise in September had doubled to over 40 percent and the likelihood of a rate hike at the December 13-14 FOMC meeting was up to over 60 percent, from 50-50 a week ago. While there is a meeting in early November, it occurs just days before the presidential election, so most believe the Fed will choose to stay mum for that one.

MARKETS: As traders turn the page on August and look to September, it is worth mentioning that September has historically been the worst month for stocks. According to the Stock Traders Almanac, September has seen an average decline of 0.5 percent in the Standard & Poor’s 500 index since 1950.

• DJIA: 18,395, down 0.9% on week, up 5.6% YTD
• S&P 500: 2169, down 0.7% on week, up 6.1% YTD
• NASDAQ: 5219, down 0.4% on week, up 4.2% YTD
• Russell 2000: 1238, up 0.1% on week, up 9% YTD
• 10-Year Treasury yield: 1.63 (from 1.58% week ago)
• British Pound/USD: 1.3136 (from $1.3078 week ago)
• October Crude: $47.29
• December Gold:  at $1,324.80
• AAA Nat'l avg. for gallon of reg. gas: $2.21 (from $2.15 wk ago, $2.53 a year ago)

THE WEEK AHEAD:

Mon 8/29:

8:30 Personal Income and Spending

10:30 Dallas Fed Mfg Survey

Tues 8/30:

9:00 Case-Shiller HPI

10:00 Consumer Confidence

Weds 8/31:

8:15 ADP Private Payroll Report

9:45 Chicago PMI

10:00 Pending Home Sales Index

Thursday 9/1:

Motor Vehicle Sales

8:30 Productivity and Costs

9:45 PMI Manufacturing Index 10:00 ISM Mfg Index

10:00 Construction Spending

Friday 9/2:

8:30 August Employment Report

10:00 Factory Orders