Will July Jobs Report Convince the Fed?

In its recent policy meeting statement, Federal Reserve officials said that in the six weeks since the previous meeting, “The labor market continued to improve, with solid job gains and declining unemployment.” The central bankers also noted that a range of indicators point to diminished slack in the jobs market since early this year. With just a little more progress in the labor market, the Fed could finally pull the trigger on its first interest rate increase in more than nine years. Whether that decision occurs at the September, October or December meeting has caused great consternation for analysts, economists and navel gazers. For the rest of us poor schlubs, the exact timing doesn’t matter all that much. The bottom line is that that short-term rates will likely rise before the end of the year.

The rationale for sooner, rather than later on rate increases is clear: start now, while data are improving in order to be ahead of the curve. The “what’s the rush?” argument is: sure job gains are strong, but wage growth still stinks – fresh evidence of which was seen on Friday, when the Fed’s favorite measure, the Employment Cost Index, showed the slowest pace of quarterly growth since at least 1982 in the second quarter. In fact, total compensation grew by just 2 percent from a year ago, down from 2.6 percent in Q1. Without robust wage growth, consumers are unlikely to spend, which will keep annual growth mired at this lousy two percent rate.

The data this week may help clarify things for the Fed. There are only two monthly jobs reports before the next FOMC meeting in September and one of them occurs this Friday. Predictions for monthly jobs created are running between 200,000-250,000. In the first six months of the year, monthly job creation has averaged 208,000, less than the nearly 260,000 monthly average seen in 2014.

The unemployment rate should remain at a seven-year low of 5.3 percent, but that number comes with an asterisk. While more people have nabbed jobs during the recovery, there has also been a big drop in the labor force participation rate, which measures the percentage of people working or actively seeking employment. The rate was at 62.6 percent as of June, the lowest level since 1977.

The participation rate peaked in 2000, when according to Capital Economics, “there were only 18 people in their 60’s for every 100 prime-aged people (those aged 25-54). Today there are 28.” In other words, a lot (probably half) of the falling participation rate has to do with aging Baby Boomers, who are retiring. Sure there are people who are fed up and checking out of the workforce or maybe earning money in some sharing/gig economy type of arrangement, but economists say those numbers are probably not big enough to call it a trend.

MARKETS: Chinese stocks are still in a bear market (down 29 percent from the June peak), but US and European markets edged up on the week.

• DJIA: 17,689 up 0.7% on week, down 0.8% YTD
• S&P 500: 2,103, up 1.2% on week, up 2.2% YTD
• NASDAQ: 5,128 up 0.8% on week, up 8.3% YTD
• Russell 2000: 1238, up 1% on week, up 2.3% YTD
• 10-Year Treasury yield: 2.2% (from 2.27% a week ago)
• September Crude: $47.12, down 2.1% on week
• October Gold: $1,094.90, up 0.9% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.66 (from $2.72 wk ago, $3.52 a year ago)

THE WEEK AHEAD:

Mon 8/3:

Motor Vehicle Sales

8:30 Personal Income and Spending

9:45 PMI Manufacturing

10:00 ISM Manufacturing Index

10:00 Construction Spending

Tues 8/4:

Coach, Walt Disney

10:00 Factory Orders

Weds 8/5:

FitBit, GoDaddy, Herbalife, Tesla

8:15 ADP Private Jobs

8:30 International Trade

10:00 ISM Non-Manufacturing Index

Thurs 8/6:

Zynga

Fri 8/7:

8:30 July Employment Report

3:00 Consumer Credit

A Spring Back for Jobs

The death of the job market was greatly exaggerated. Cassandra’s were out in force after the weak first quarter, but to the relief of economists, the May employment report showed a much hoped for spring back in the labor market. The Bureau of Labor Statistics said 280,000 new jobs were added last month, exceeding the consensus estimate of 220,000. The previous two months were revised higher by a total of 32,000. Over the past six months, the economy has added an average of 236,000 jobs per month, a solid gain though lower than last year's monthly average of about 260,000. The unemployment rate ticked up to 5.5 percent for the right reason-like in April, more people joined the labor force and while a number of them landed jobs, some were not able to do so in May. [As a point of reference, in the three years prior to the recession, the unemployment rate averaged 4.8 percent, which is below the post World War II average of 5.8 percent.]

The labor force participation rate (the number of Americans in the labor force or actively seeking employment) ticked up to 62.9 percent, the high end of the narrow range of 62.7 to 62.9 percent seen for the past year. There was also a 268,000-drop in discouraged workers in May to 1.9 million, the lowest number since 2008.

As more candidates snag those coveted jobs, economists say that wage gains are not likely to be far behind. In this report, average earnings increased at a better than expected pace month over month and are now up 2.3 percent from a year ago, the biggest increase since the summer of 2013. Before you pop the champagne, it’s worth considering that 2.3 percent is just a touch ahead of the pokey pace of the past few years, is still below the 3 percent growth seen in the last expansion and not to rub salt into the wound, but increases of more than 4 percent were common in past expansions.

Those wage gains are elusive because there is still significant slack in the labor market. Slack can come in many forms: those 1.9 million discouraged workers; the 6.7 million people working part time, who want a full-time job; and the 2.5 million long-term unemployed. As a report from the Atlanta Fed recently noted: “There is intense competition among job seekers for available job opportunities. And within many jobs, the demand for more hours has been greater than the supply of hours offered by employers.”

Productivity, or lack thereof, is also creating a headwind for wage growth. First quarter productivity decreased at a 3.1 percent seasonally adjusted annual rate and has now fallen for two consecutive quarters, the first time that has happened since 2006. “The most important factor determining living standards is productivity growth, defined as increases in how much can be produced in an hour of work,” Fed Chairwoman Janet Yellen said in a speech last month. “Over time, sustained increases in productivity are necessary to support rising incomes.”

Finally, economists note that because inflation is running low and the hangover form the recession remains indelible, workers have not demanded higher wages. But the tide could be turning, as the May jobs report showed a little spring in the labor market's step!

MARKETS: Despite fears than an M&A boom is fueling high valuations in the tech sector and pushing stock indexes to unsustainable levels, the action this week was in the bond market. Benchmark government bond yields in Europe, Japan and the US increased to their highest levels of the year. After the jobs report confirmed strengthening in the US economy, the price of the US 10-year dropped and the yield rose to 2.4 percent, the highest closing level since October 6^th. The latest action prompts the question: Is the thirty-year bull market in bonds finally coming to a close? Stay tuned…

• DJIA: 17,849, down 0.9% on week, up 0.15% YTD (3^rd consecutive weekly loss)
• S&P 500: 2092, down 0.7% on week, up 1.65% YTD
• NASDAQ: 5,068 down 0.03% on week, up 7% YTD
• Russell 2000: 1261, up 1.1% on week, up 4.7% YTD
• 10-Year Treasury yield: 2.4% (from 2.1% a week ago, the biggest weekly rise since the June 2013 “taper tantrum”)
• July Crude: $59.13, down 1.9% on week (first weekly loss since March)
• August Gold: $1168.10, down 1.8% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.75 (from $2.73 wk ago, $3.66 a year ago)

THE WEEK AHEAD:

Mon 6/8:

Apple developer conference: Company expected to launch a streaming music service

Tues 6/9:

9:00 NFIB Small Business Optimism Index

10:00 Job Openings and Labor Turnover Survey (JOLTS)

Weds 6/10:

Thurs 6/11:

8:30 Retail Sales

8:30 Import/Export Prices

Fri 6/12:

8:30 Producer Price Index

9:55 U Michigan Consumer Sentiment

When will Americans get a Raise?

The first quarter was waaaaay worse then originally thought. The government’s third and final estimate of GDP showed that the economy contracted by a 2.9 percent annual pace, the biggest decline since early 2009. The drop was caused by a reduction in consumer spending, which was slashed to 1 percent from 3.1 percent, as Americans spent less on health care and other services. Before we get too crazy about the reading, which really was awful, it’s good to note that more up-to-date data show that activity is rebounding in the second quarter. The growth rate of manufacturing output has already strengthened, bank lending is picking up and housing has regained some footing. But the depth of the first-quarter decline means growth over the first six months of the year likely fell below the economy's average rate of just over 2 percent since the economy emerged from recession in June 2009, and far below the U.S. economy's longer-term growth rate of just over 3 percent.

All of this is a prelude to what most Americans see as their most direct link to the economy: the jobs market. Because of a long Independence Day weekend, the June jobs report will be released a day early, on Thursday. After a rough start to the year, job creation has picked up to an average of 234,000 per month over the past three months, which means that employers are adding jobs at the fastest pace in 15 years. Additionally, weekly jobless claims are now just above their post-recession low and are at least back down to where they were prior to the recession's start in late 2007. This year alone has seen advances; with the number of people seeking unemployment benefits falling 10 percent since the first week of January.

Economists expect that hiring will continue to show progress, with 210,000 new positions created in June. The unemployment rate is seen remaining at 6.3 percent. With job creation returning to a more reasonable pace, attention will turn to wages. Average earnings were up just 2.1 percent in May versus a year ago and when adjusted for inflation, wages have actually edged lower by a tenth of a percent from a year ago. But companies think they may soon be paying more. According to the Duke University - CFO Magazine quarterly business outlook, US chief financial officers expect salaries and wages to increase by 3 percent over the next 12 months, which would be more in line with historic averages.

Additionally, now that the economy has recaptured all of the 8.7 million jobs lost during the recession, economists are waiting for disgruntled workers to re-enter the labor force.  Four years ago, 6.8 million Americans were of work for six months or longer – the number now stands at half that amount. While there has been progress, only 22 percent of those who became long term unemployed between May 2008 and June 2009 have returned to full time work since 2008. 28 percent are working part time; 14 percent are still unemployed and 35 percent have dropped out of the labor force. As of May, the participation rate, which is the number of people working or actively seeking employment, remained at a 36-year low of 62.8 percent.

MARKETS:

• DJIA: 16,853, down 0.5% on week, up 1.7% YTD
• S&P 500: 1961, down 0.1% on week, up 6.1% YTD
• NASDAQ: 4,397, up 0.7% on week, up 5.3% YTD
• 10-Year Treasury yield: 2.53% (from 2.63% a week ago)
• July Crude Oil: $105.74, down 1% on week
• August Gold: $1320, up 0.3% on week
• AAA Nat'l average price for gallon of regular Gas: $3.68 (from $3.51 a year ago)

THE WEEK AHEAD: It will be a shortened holiday week, but a busy one! In addition to the jobs report, there will be reports on manufacturing, auto sales and construction spending.

Mon 6/30:

BNP Paribas is expected to settle with US regulators. The bank will likely plead guilty to criminal charges of violating US sanctions and pay as much as $9 billion, which would be the largest ever fine for sanction viaolations. Additionally, the bank is expected to slash its dividend and sell billions of euros to fortify its balance sheet

Deadline for Argentina to begin paying back billions to creditors

9:45 Chicago PMI

10:00 Pending Home Sales

10:30 Dallas Fed

Tues 7/1:

Motor Vehicle Sales

9:45 PMI Manufacturing Index

10:00 ISM Manufacturing Index

10:00 Construction Spending

Weds 7/2:

8:15 ADP Private Jobs

10:00 Factory Orders

11:00 Fed Chair Janet Yellen gives a lecture in DC at an IMF

Thurs 7/3:

8:30 Weekly Jobless Claims

8:30 June Employment Report

8:30 International Trade

10:00 ISM Non-Manufacturing Index

1:00 US Markets close early for Independence Day

Fri 7/4: US Markets closed for Independence Day