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

2015 Economic Crystal Ball

No rest for the weary or hung over…time to dust off the crystal ball to see what lies ahead! Global Economy: After increasing at an estimated 2.4 percent rate in 2014, economists expect that U.S. GDP will pick up to 3 percent this year, which would be the strongest growth in a decade. Since 2000, the fastest real GDP growth was 3.8 percent in 2004, and the fastest growth for the recovery was 2.5 percent in 2010. The dot-com meltdown, plus the financial crisis has taken a toll on the U.S. economy since 2000, with an annualized pace of 1.9 percent, well below the post World War II average of 3.3 percent.

The drivers of growth include: consumers, who after paying down lots of debt, should see wage gains and will continue to enjoy the benefits of low energy prices; state and local governments, which have stopped slashing budgets and may spend a bit more freely; and the housing market, which after taking a breather in 2014, should contribute more to the economy in 2015.

Outside the U.S., the picture is more complicated. China’s double-digit growth rates are a thing of the past, as the world’s second largest economy attempts to impose controls that will likely keep GDP at six to 7 percent in the year ahead. Japan and Europe are still battling low prices, which is why central banks in both areas are likely to crank up efforts to defend against inflation. Emerging markets will continue to diverge, with countries that have not addressed economic imbalances, like Russian, Brazil and Venezuela struggling, while more balanced economies, like India, Thailand and Chile should be better positioned for growth.

2015 Year of the Raise: If 2014 was the year of the job (probably the best year for job creation since 1999), economists are hopeful that 2015 will be the year of the raise. Wage growth has remained stubbornly at 2 percent during the recovery, but this year, the improving economy and labor market should help wage growth finally start to outpace the rate of inflation.

Federal Reserve Rate Hikes: With bond buying over, the big question for 2015 is: “When will the Fed FINALLY increase short-term interest rates?” Reading between the lines of central bank speeches, statements and press conferences, most believe the first rate hike will occur in the third quarter of the year. Goldman Sachs analysts’ noted that once the Fed starts the process, it could move faster than the market now expects.

Oil: At her last press conference of the year, Janet Yellen called low oil a “transitory” phenomenon, which loosely translated means “Don’t get too used to those cheap gas prices!” The reason is that supply and demand will surely change. If the global economy picks up, so too will demand for oil, but these changes often occur slowly, which is why some economists are predicting that oil prices will likely remain in a range of $50 to $75 a barrel in 2015.

2014 MARKETS:

• DJIA: 17,823.07, up 7.5% (6^th annual gain, longest streak since 1990s)
• S&P 500: 2058.90, up 11.4% (up an average of 20.7% a year for the last 3 years including dividends, its best three-year returns since the late 1990s)
• NASDAQ: 4736.05, up 13.4%
• Russell 2000: 1204.70, up 3.53%
• Stoxx Europe 600: 342.54, up 4.35%
• Argentina Merval: 8579.02, up 59.14%
• Shangahi A Shares (Mainland China): 3389.40, up 53.06%
• RTS Russia: 790.71, down 45.19%
• 10-Year Treasury yield: 2.173% (from 3.03% a year ago)
• February Crude Oil: $53.27, down 46% (lowest level since May, 2008)
• February Gold: $1,184.10, down 1.5%
• WSJ Dollar index: 83.04, up 12% (highest level since Sep 2003)
• AAA Nat'l average price for gallon of regular Gas: $2.24 (from $3.32 a year ago)

THE WEEK AHEAD: 

Mon 1/5:

Automobile Sales

Tues 1/6:

9:45 PMI Services Index

10:00 Factory Orders

10:00 ISM Non-Mfg Index

Weds 1/7:

8:15 ADP Employment Report

8:30 International Trade

2:00 FOMC Minutes

Thurs 1/8:

8:30 Weekly Jobless Claims

3:00 Consumer Credit

Fri 1/9:

8:30 December Jobs Report

10:00 Wholesale Trade

2014 Financial Year in Review

With just a few days before we turn the page to 2015, it’s time to take look back at 2014 and highlight some of the big financial stories and trends of the year. Economic Growth: The year started with weakness, due to unusually cold weather across the nation. The economy actually contracted by annualized pace of 2.1 percent in the first three months of the year, before recovering to grow by 4.6 percent in the second quarter and by a surprisingly strong 5 percent annualized pace in the third. The fourth quarter probably expanded by 2.5 to 3 percent, though the government will not release its first estimate of growth until January 30th. For the year, the economy likely grew by two and a half percent, which is a small improvement from the previous few years, though still below the long-term average of 3.3 percent.

Labor Market: 2014 was the year of the job. Through November, the year was on pace to be the best year for job creation since 1999, with the economy adding just over 2.6 million total payroll jobs. The unemployment rate stands at 5.8 percent, down from 6.7 percent at the end of last year; and the number of people out of work for more than six months has dropped from 3.9 million last December, to 2.8 million, the lowest level for long-term unemployed since January 2009. While 2.8 million is still very high, it is down from over 6 million from a peak in early 2010.

Federal Reserve and the Bernanke Hand-Off to Yellen: The transition from the Ben Bernanke era to the Janet Yellen regime was mostly smooth. Oh sure, there was the inevitable woops moment at her first press conference back in March, when the newly-anointed Fed Chair let it slip out that the Fed would raise rates “something on the order of around six months” after the central bank’s bond buying (aka “Quantitative Easing” or “QE”) ended. Those eight words threw financial markets into a temporary tailspin (reminiscent of 2013’s “Taper Tantrum,” which occurred after then-Chairman Ben Bernanke began discussing tapering bond purchases), as investors worried that the Fed would increase rates faster than expected.

As it turned out, Yellen’s Fed slowly unwound the central bank’s bond buying policy and announced its conclusion at the October FOMC meeting. Then, in its last policy meeting of the year, the Fed split the difference on the language it used to describe when it would increase short-term interest rates. The central bank “judges that it can be patient (emphasis mine) in beginning to normalize the stance of monetary policy,” but also added the new description of their stance was “consistent” with past assurances that rates would stay low for a “considerable time.” The last Fed meeting of the year and the subsequent Yellen press conference spurred the 2014 Santa Claus Rally.

Financial markets: The biggest market story of 2014 was the swift and steep near-50 percent plunge in crude prices. The catalyst for the drop was a combination of softening demand in China, Europe and Japan, combined with a surge in U.S. production. Because the price of oil determines about two-thirds of the price of a gallon of regular gas, drivers were delighted to enjoy the 38 percent dive from a high of $3.70 a gallon on April 8th, to $2.29 today.

Meanwhile, both the stock and bond markets performed far better than most analysts expected at the beginning of the year. While there were periodic ups and downs, investors were spared a full-blown stock market correction, defined a fall of at least 10 percent. (It may have felt like a correction in October, but that was a 7.3 percent drop.) As of this writing (I’ll update this post after the close on December 31), the S&P 500 is up 13 percent and the bond market has also seen smart gains, with US Treasuries returning 5.6 percent this year, on track for the best performance since 2011, after losing 3.4 percent last year, according to the Bloomberg U.S. Treasury Bond Index.

Of course, in any given year, there are winners and losers (in market lingo, this is sometimes called “divergence in performance.”) In 2014, the laggards in the equity universe were US small caps (loosely defined has companies having a market value less than $1 billion); and a handful of emerging stock markets. Before you throw in the towel on these assets, its good to remember that just because 2014 was a U.S., big-cap world, does not mean that 2015 will see a repeat performance. (There’s a reason why every investment prospectus features the warning “Past performance is not indicative of future results.”) In fact, small caps outperformed the broader market from the bear-market bottom of March 2009 through 2013. Think of 2014 as a bit of give back on that outperformance.

U.S. Government Backs Off: Here’s a nice change from 2013: this past year had no Congressional stand-offs! That’s right, no Fiscal Cliff, no Sequestration, no government shut down and no fight over the debt ceiling.

Geopolitical Issues Heat Up: 2014 was filled with a series of scary geopolitical events: unrest in Ukraine; Russian annexation of Crimea; an outbreak of violence between Israel-Hamas; the rise of ISIS; pro-democracy protests in Hong Kong; and an outbreak of Ebola. Economists call these events “exogenous,” which means coming from outside. The practitioners of the dismal science hate exogenous events, because they are impossible to predict. Investors also detest these events, because they often can have a significant negative effect on prices.

MARKETS: Holiday shortened weeks are usually kind to investors and last week did not disappoint. If history is any guide, the bulls are likely to remain in control next week too. During the last five trading sessions of December and the first two of January, the Dow has gained an average of 1.7 per cent, according to the Stock Trader's Almanac (the data go back to 1896!)

• DJIA: 18,053, up 1.4% on week, up 8.9% YTD (best 5 days since 2011)
• S&P 500: 2088, up 0.9% on week, up 13% YTD (52^nd record high of the year)
• NASDAQ: 4806, up 0.9% on week, up 15.1% YTD
• Russell 2000: 1215, up 1.5% on week, up 4.4% YTD
• 10-Year Treasury yield: 2.25% (from 2.18% a week ago)
• February Crude Oil: $54.73, down 4.2% on week
• February Gold: $1,195.30, down 0.04% on week
• AAA Nat'l average price for gallon of regular Gas: $2.29 (from $3.31 a year ago)

THE WEEK AHEAD:

Mon 12/29:

10:30 Dallas Fed Manufacturing Activity

Tues 12/30:

9:00 Case Shiller Home Price Index

10:00 Consumer Confidence

Weds 12/31:

8:30 Weekly Jobless Claims

9:45 Chicago PMI

10:00 Pending Home Sales

Thurs 1/1: NEW YEAR’S DAY – GLOBAL MARKETS CLOSED

Fri 1/2:

9:45 PMI Manufacturing

10:00 ISM Manufacturing

10:00 Construction Spending

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