Dec Jobs Report: Dude, Where’s My Raise?

It’s official: 2014 was the best year for job growth since 1999, with a total of 2.952 million non-farm jobs created. The Labor Department reported that the U.S. economy added 252,000 jobs in December and the unemployment rate dropped to 5.6 percent, the lowest level since June 2008. That said, the labor market still remains in the healing phase for at least these four reasons:

1. We Ain’t there yet: The Hamilton Project at the Brookings Institute examines the “jobs gap,” which is the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels while also absorbing the people who enter the potential labor force each month. To keep up with population growth since the recession began, the economy would need to create about 4.6 million additional jobs.
2. Broad Unemployment Rate is still high: The headline unemployment rate of 5.6 percent is awfully close to the average of 5.5 percent recorded from 1990 – 2006. But the broader unemployment rate (the BLS statistic known as “U-6”, which includes official rate, plus marginally attached workers, those who are neither working nor looking for work, but want a job and have looked for work recently; and people who are employed part-time for economic reasons), stood at 11.2 percent at the end of 2014. While that is down from the 13 percent from a year ago and way down from 17.1 percent seen in April 2010, it is still above the 8 to 9 percent readings observed before the recession started.
3. Whither the American Worker? The participation rate, which counts the number of Americans who are employed or actively seeking a job, fell to a fresh 36-year low of 62.7 percent. Before the recession started, 66 percent of the working age population either had a job or was looking for one. Economists estimate about half of the drop is attributed to baby boomers retiring, but the other half is likely due to the severity of the recession and something that economists call “labor market scarring,” which means that when some people lose their jobs amid a deep downturn, they find other ways to survive, including relying on friends and family; claiming disability or working under the table.
4. Dude, Where’s My Raise? Average hourly earnings fell by 0.2 percent in December from the prior month, which put wage growth at just 1.7 percent annually, (Thankfully, because of the big drop in oil and gas, inflationis running at 1.3 percent from a year ago.) In previous expansions, wage growth averaged 3 to 3.5 percent.

Just days ahead of the December jobs report, the Federal Reserve Bank of San Francisco released a paper asking “Why Is Wage Growth So Slow?” (I asked a similar question six months ago, “When Will Americans Get a Raise?”) Authors Mary C. Daly and Bart Hobijn note, “A prominent feature of the Great Recession and subsequent recovery has been the unusual behavior of wages.” At this point you may want to exclaim, “NO KIDDING” or some other expletive, but what was really unusual about the most recent recession, according to the research, is that more workers did not take STEEPER wage cuts.

In past recessions, companies cut wages and then subsequently raised them amid upturns. But in the past three recessions, Corporate America minimized wage cuts and instead laid-off more workers. The goal was to keep the remaining workers happy. Who knew that those who kept their jobs had it better than they thought?

Because many firms did not reduce wages during the recession, “they must now work off a stockpile of pent-up wage cuts.” And because “it takes some time to fully exhaust the pool of wage cuts, wage growth remains low even as the economy expands and the unemployment rate declines.”

That’s why despite putting up the best year for job creation since 1999, wage growth continues to be disappointing. “Industries that were least able to cut wages during the downturn and therefore accrued the most pent-up cuts have experienced relatively slower wage growth during the recovery.” Fed economists say wage growth should slowly pick up, as the labor market tightens and companies are forced to pay up for talent. American workers are waiting...

MARKETS: If the first week of the year is a harbinger for the rest of 2015, we better fasten our seat belts, because it's going to be a bumpy ride.

• DJIA: 17,737, down 0.5% on week, down 0.5% YTD
• S&P 500: 2045, down 0.6%, down 0.7% YTD
• NASDAQ: 4704, down 0.5%, down 0.7% YTD
• Russell 2000: 1185, down 1.1% on week, down 1.6% YTD
• 10-Year Treasury yield: 1.97% (from 2.12% a week ago)
• February Crude Oil: $48.36, down 8.2% on week (7^th consecutive weekly loss)
• February Gold: $1,216.10, up 2.5% on week
• AAA Nat'l average price for gallon of regular Gas: $2.14 (from $3.32 a year ago)

THE WEEK AHEAD: What’s the upside of stagnant wages? It’s good for corporate profitability. This week kicks off quarterly earnings season and the estimated year-over-year earnings growth rate for S&P 500 companies in Q4 is 1.1 percent, according to Factset. Analysts will also be keeping a close tab on those companies that are either hurt by or benefit from lower oil prices.

Mon 1/12:

Alcoa

Tues 1/13:

7:30 NFIB Small Bus Optimism

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

Weds 1/14:

JP Morgan Chase, Wells Fargo

8:30 Dec Retail Sales

2:00 Fed Beige Book of Economic Conditions

Thurs 1/15:

Citigroup, Bank of America, Schwab, Schlumberger, Intel

8:30 Weekly Jobless Claims

8:30 Producer Price Index

8:30 Empire State Manufacturing Index

10:00 Philadelphia Fed Survey

Fri 1/16:

Goldman Sachs

8:30 Consumer Price Index

9:15 Industrial Production

9:55 Consumer Sentiment

Goldilocks Jobs Report for the Fed

The economy bounced back and created a better than expected 248,000 jobs in September and upward revisions for the previous two months amounted to an additional 69,000 jobs than previously reported. Coming into the fourth quarter, 2014 monthly job creation has averaged 227,000, up 17 percent from last year’s pace. According to Bill McBride at Calculated Risk, we should be partying like we’re Prince, because this year is on pace to be the best year for both total and private sector job growth since 1999. The unemployment rate dropped to 5.9 percent, the lowest level since July 2008, due to a combination of 232,000 people landing jobs and 97,000 would-be workers dropping out of the labor force (more on those drop-outs in a bit.) Adding to the good news, the broad unemployment rate, which includes the official rate, plus marginally attached workers (those who are neither working nor looking for work, but want a job and have looked for work recently); and people who are employed part-time but want full time work, fell to 11.8 percent, the lowest level since 2008.

But nearly seven years since the start of the recession, there are signs that the labor market is not fully healed. There are still 3 million Americans who have been out of work more than six months, which is down from a recession high of 6.7 million, but is still almost 50 percent higher than its highest pre-recession level on record; the participation rate, which tallies the number of people working or actively seeking a job, fell to 62.7 percent, the lowest level since February 1978; and average hourly earnings have increased by just two percent, matching the pace of inflation.

The not-too-hot, not-too-cold jobs report jibes perfectly with the Federal Reserve’s monetary policy. Yes, growth is accelerating, which is why the central bank will complete the wind-down of its bond buying at the end of this month. But the noticeable “slack in the labor market” as evidenced above, justifies the Fed’s decision to keep a lid on interest rates…and of course, stock investors liked that a great deal, making the week a losing one, but not an horrible one.

Speaking of the Fed, economists are atwitter over a new monthly data release, called the labor market conditions index, which will dig into labor market trends beyond the standard monthly unemployment rate measure. The central bank will release the updated data on the first business day following the monthly employment report and the first release will occur on Monday. Warning: according to the Fed, the LMCI is a staff research product and not an official statistical release and could be subject to “delay, revision or methodological changes without advance notice.”

It will be a relatively quiet week on the economic calendar, but let me be the first to wish you a Happy Financial Planning week! The Financial Planning Association created the week in order to raise awareness about the importance of the financial planning process. To celebrate, check out this week’s “Jill on Money” radio show, with special guest Kevin Keller, the CEO of the Certified Financial Planner Board of Standards!

MARKETS: It coulda’ been worse...a better than expected jobs report rescued what was shaping up to be a very bad week.

• DJIA: 17,009 down 0.6% on week, up 2.6% YTD
• S&P 500: 1968, down 0.8% on week, up 6.5% YTD
• NASDAQ: 4475, down 0.8% on week, up 7.2% YTD
• Russell 2000: 1104, down 1.3% on week, down 5% YTD
• 10-Year Treasury yield: 2.45% (from 2.53% a week ago)
• November Crude Oil: $89.74, down 4.1% on the week (down 16% from mid-June high)
• December Gold: $1192.20, down 3.9% on the week (lowest since Aug. 3 2010)
• AAA Nat'l average price for gallon of regular Gas: $3.31 (from $3.37 a year ago)

THE WEEK AHEAD:

Mon 10/06:

Tues 10/7:

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

10:00 Consumer Credit

Weds 10/8:

Alcoa

2:00 FOMC Minutes

Thurs 10/9:

8:30 Weekly Jobless Claims

Fri 10/10:

8:30 Personal Income and Spending

Here Comes Holiday Season 2014

As the third quarter ends and investors tally returns, attention will once again return to the more mundane issues, like job creation, economic growth and of course, the all-important holiday season. Economists predict that companies stepped up the pace of hiring to 215,000 from the softer than expected August result of 142,000 and the unemployment rate is likely to remain at 6.1 percent. September numbers should be helped by the return to work of up to 25,000 workers at the New England grocery store Market Basket who walked out in late July. However, some of that effect will be offset by the recent closure of a number of large casinos in Atlantic City, which should reduce employment by 6,500. Regardless of these month-to-month fluctuations, the positive trend remains in tact. Most of the business surveys indicate that labor conditions have improved, households are saying that jobs are more plentiful and initial jobless claims are close to a 14-year low.

Despite the improvement in the labor market over the past year, the effects of the Great Recession are still impacting many Americans. According to a report from Rutgers University, more than 20 percent of those who were laid off over the past five years are still unemployed; and one in four who found work, is stuck in a temporary job. Of those who were lucky enough to land a new position, 46 percent say they had to take a pay cut and 44 percent reported a drop in status.

For those who kept their jobs, wages have remained largely flat and that may be due to the fact that many companies chose the more palatable option of freezing, rather than cutting wages during the recession. Because they did not lower wages during the downturn, employers have been slower to increase them as the economy has improved. The good news is that this condition can only last for so long. As the economy improves, the competition to attract and retain employees will increase and wages will rise.

If job creation and wage growth improve, that leaves one more area of concern for the labor market: the participation rate. Participation rate, or the number of American workers employed or actively seeking work, has been bumping along 35 year-lows of 63 percent, with no sign of picking up any time soon. Fed Chair Janet Yellen has noted that the low participation rate is one of the signs of “slack in the labor market”. Specifically, economists worry about the percentage of prime-working-age Americans, those between 25 and 54, who are in the labor force. As of this summer, the percentage fell to a 30-year low and for prime-working-age men, the number has dropped to the lowest reported since the government began computing the figure in 1948.

At issue is why all those people are not in the labor force. Research by the Cleveland Federal Reserve Bank attributes nearly half of the decline in participation since 2007 to aging, while 10 to 35 percent may be attributable to a weak labor market. That means that even if the labor market were to substantially improve, the participation rate may remain low over the longer-term, which the research defines as a decade. The research may mean that Fed policy makers may want to be careful about using a low participation rate as a rationale for keeping rates low.

Beyond jobs, the big focus as the economy enters the final quarter of the year will be consumers. The holiday season could turn out to be better than in the past if the job market and the economy gain steam. Last week, the first of the holiday sales predictions was released: Deloitte sees a sales increase of between 4 to 4.5 percent from November through January. That would be a modest improvement over last year's 2.8 percent gain to $944 billion, according to U.S. Commerce Department data that excludes auto and gasoline sales. But the mood and behavior of consumers has been mercurial throughout the recovery. Unless there is a consistent, positive change in conditions, any end of year euphoria may have to wait until 2015.

MARKETS: It was the worst week for stocks in nearly two months. Bears will point out that the Russell 2000 index of small stocks is close to correction territory (down 8.5% from the summer highs), while the bulls will note that the small and momentum stocks had similar movements lower in the spring, only to fake out investors by bouncing back swiftly.

• DJIA: 17,113 down 1% on week, up 3.2% YTD
• S&P 500: 1982, down 1.4% on week, up 7.3% YTD
• NASDAQ: 4512, down 1.5% on week, up 8% YTD
• 10-Year Treasury yield: 2.53% (from 2.58% a week ago)
• November Crude Oil: $93.54, up 2.1% on the week
• December Gold: $1215.40, down 0.1% on the week (lowest close since Dec 31, 2013)
• AAA Nat'l average price for gallon of regular Gas: $3.34 (from $3.42 a year ago) By the end of the year, up to 30 states could have an average gasoline price of less than $3/gallon, according to a recent GasBuddy forecast

THE WEEK AHEAD:

Mon 9/29:

8:30 Personal Income and Spending

10:00 Pending Home Sales

Tues 9/30:

9:00 Case Shiller Home Price Index

9:45 Chicago PMI

10:00 Consumer Confidence

Weds 10/1:

Automobile Sales

8:15 ADP Private Payrolls

9:45 PMI Manufacturing

10:00 ISM Manufacturing

10:00 Construction Spending

Thurs 10/2:

7:30 Challenger Job Cuts

8:30 Weekly Jobless Claims

10:00 Factory Orders

Fri 10/3:

8:30 Sep Employment Report

8:30 International Trade

9:45 PMI Service

10:00 ISM Non-Manufacturing

Tepid Wage Growth Restrains Economy

The U.S. labor market continued to improve in August, though not as much as analysts’ had predicted. Employers created 142,000 positions and the unemployment rate edged down to 6.1 percent, because a bunch of people left the labor force. Before you start worrying the recovery is falling apart, consider this: But for a lousy January (when severe weather pervaded much of the country) and this jobs report, which may have been impacted by unusual events in auto manufacturing and retailing, this year has actually been a very good one for job creation. There have been 1.732 million jobs added in 2014, or an average of 215,375 per month. In the last 15 years, the U.S. has seen average monthly job gains of at least 200,000 in just one year (2005), so let’s not throw in the towel just yet. And taking a longer view, private-sector payrolls have grown by more than 10 million since the jobs recovery began in March 2010. According to the WSJ, “employers outside the government have added jobs for 54 straight months—the longest such streak on records back to 1939”.

Still, there are many problems that persist in the labor market, like 3 million people out of work for more than six months and a historically low participation rate, to name a couple. But perhaps the most vexing for the economy is that wage growth remains stuck at around two percent from a year ago. As a frame of reference, Americans usually see pay increases of about 3 percent during expansions, so the recent recovery, which officially began in June 2009, has been sub-par for growth as well as for wages.

Last week, the Federal Reserve has released its Survey of Consumer Finances for the year 2013. The central bank conducts these surveys every three years, so this is the first comprehensive update we have seen since the recovery has taken hold. There’s lots of fascinating information in the report about income distribution, but let’s cut the chase on the topic at hand: the median American family earned 5 per cent less in 2013 than in 2010 after inflation. (Don’t be distracted by the average, because the results of the top ten percent sway the results.)

And if you want to get really depressed, consider this: median income has declined about 12.4 per cent since the peak in 2004. One of the contributing factors to the consumer credit binge of 2004-2007 was that as incomes slowed, Americans borrowed more to cover the difference. And the housing and credit collapse that helped trigger the financial crisis has taken a big bite out of how much Americans are worth. Median net worth is still 40 per cent below peak. Or put another way by Matthew C. Klein of the Financial Times, “Adjusted for inflation, the typical American is no better off than she would have been in the early 1990s.”

If you are among the top 3 percent who has seen gains in income and net worth, these trends are bad for you too. The reason is simple: there are not enough high earners to carry the economy. We need a broader swath to enjoy growth so that they will spend more freely. The pokey wage growth explains why consumers have become thriftier during the recovery, resulting in GDP growth of about two percent annually, more than a full percentage point below the post-World War II average.

The weakness in consumer spending or the somewhat disappointing August Employment report does not mean that the economy has veered off track. In fact, there is evidence that housing, business spending, exports and government activity are all accelerating. But only when the broad consumer base, which accounts for about two-thirds of overall activity, more fully participates in the recovery, will the country return to trend growth.

MARKETS:

• DJIA: 17,137, up 0.2% on week, up 3.4% YTD
• S&P 500: 2007, up 0.2% on week, up 8.6% YTD
• NASDAQ: 4464, up 0.06% on week, up 9.7% YTD
• 10-Year Treasury yield: 2.46% (from 2.34% a week ago)
• October Crude Oil: $93.45, down 2.8% on week
• December Gold: $1267.30, down 1.6% on week
• AAA Nat'l average price for gallon of regular Gas: $3.44 (from $3.58 a year ago)

THE WEEK AHEAD: More clues about consumer spending will be revealed with the release of the August retail sales report. Economists expect a jump in sales, boosted by cars and an increase in back-to-school shopping. Because how we feel about the economy can be related to how we spend, economists will also be eager to see the preliminary results of the University of Michigan September Consumer Sentiment survey.

Mon 9/8:

3:00 Consumer Credit

Tues 9/9:

Apple event: iPhone 6 and iWatch expected to be unveiled

7:30 NFIB Small Business Confidence

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

Weds 9/10:

Thurs 9/11:

8:30 Weekly Jobless Claims

Fri 9/12:

8:30 August Retail Sales

8:30 Import/Export Prices

9:55 Consumer Sentiment

10:00 Business Inventories

Post-Polar Vortex Jobs Report

After disappointing, weather-related readings over the past few months, the Labor Department’s March employment report should see a return to the pre-polar-vortex trend of 190-thousand new jobs. But that’s just back to where we were: When will the big uptick in job creation finally arrive? Economists note that the steady decline in initial jobless claims points to a pick-up to over 200,000 a month in the next few months.  The analysts at Capital Economics are more upbeat, saying that they  “wouldn't rule out a gain in non-farm payrolls of more than 300,000 next month.” The unemployment rate should remain at or just below February’s 6.7 percent, but investors will also keep an eye on another labor market indicator that Fed Chief Janet Yellen mentioned as a variable in the central bank’s policy-making process - long-term unemployment, which counts the number of people out of work for more than six months. As of the last report, there were 3.8 million long-term unemployed Americans and the long-term unemployment rate was 2.5 percent, double its 1.2 percent long-run average.  Compare that still-high rate with the short-term unemployment rate, which at 4.2 percent in February, is now below its long-run average of 5.2 percent.

A new paper from the Brookings Institute analyzes long-term unemployment. Unfortunately, only 11 percent of those who were long-term unemployed in a given month returned to steady, full-time employment a year later. Even after finding another job, reemployment does not fully reset the clock for the long-term unemployed, who are frequently jobless again soon after they gain reemployment.

Why has long-term unemployment persisted? “There is no clear structural reason why long-term unemployment should have developed into such a particular problem in this economic cycle. The most likely explanation is simply that the severity and length of the recession and the weak recovery that followed explains why so many people fell into long-term unemployment.”

Some economists have feared that the throngs of the long-term unemployed were part of the reason that wage growth has remained muted for everyone else. The Brookings paper argues “The short-term unemployment rate is a much stronger predictor of inflation and real wage growth than the overall unemployment rate in the U.S. Even in good times, the long-term unemployed are on the margins of the labor market, with diminished job prospects and high labor force withdrawal rates, and as a result they exert little pressure on wage growth or inflation.”

While the plight of the long-term unemployed has a devastating human impact, the paper posits that it may not bode ill for the jobs and wage recovery.

MARKETS: After last year’s 30 percent gains, markets have been trading in a narrow range for the past 6 weeks and many investors believe that those conditions will persist. In the latest American Association of Individual Investors’ weekly survey, neutral sentiment, the expectation that stock prices will stay essentially unchanged over the next six months, jumped to 40.2 percent, the highest level since April 14, 2005 and the 12th straight week above the historical average of 30.5 percent.

• DJIA: 16,323, up 0.1% on week, down 1.5% YTD
• S&P 500: 1857, down 0.5% on week, up 0.5% YTD
• NASDAQ: 4155, down 2.8% on week, down 0.5% YTD
• 10-Year Treasury yield: 2.72% (from 2.75% a week ago)
• April Crude Oil: $101.67, up 2.2% on week
• June Gold: 1294.30, down 3.1% on week
• AAA Nat'l average price for gallon of regular Gas: $3.54 (from $3.64 a year ago)

THE WEEK AHEAD

Mon 3/31:

9:45 Chicago PMI

10:30 Dallas Fed Survey

Tues 4/1:

Motor Vehicle Sales

10:00 Construction Spending

10:00 ISM Manufacturing Index

GM CEO Mary Barra testifies before Congress on the recall of over 2.5 million cars

Weds 4/2:

8:15 ADP Private Jobs

10:00 Factory Orders

Thurs 4/3:

7:30 Challenger Job Cuts

8:30 Weekly Jobless Claims

8:30 International Trade

10:00 ISM Non-Manufacturing

Fri 4/4:

8:30 March employment report