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

Election Surprises and Stock Markets

Last week (What Would Spook Markets?), I focused on recent research conducted by economists Eric Zitzewitz and Justin Wolfers, which concluded that a Trump victory would “reduce the value of the S&P 500, the UK, and Asian stock markets by 10-15 percent...and would significantly increase expected future stock market volatility.” There may be some proof to this thesis: As Trump’s numbers have improved, stocks have responded in kind by dropping: the S&P 500 has dropped for nine consecutive sessions, for a total of a 3.1 percent slide. The numbers still favor Clinton, but this has been a strange year, so it is worth looking back to other presidential shockers. 68 years ago, Republican Thomas Dewey was thought to be the favorite and according to analysts at Capital Economics, “the polls caused the stock market to rally in the weeks leading up to the election. However, the shock re-election of incumbent President Harry Truman caused the S&P 500 to fall by more than 10 percent over the next two weeks.”

Finally, given Trump’s vow to fight the results, if the race is close, it is instructive to consider how a contested election result might play out for investors. In 2000, when the country had to wait for the Supreme Court to weigh in on a recount, there was a clear negative market reaction: stocks dropped by almost 5 percent during the week after the election and remained volatile during the 36-day period after polling day.

October Jobs Report:The labor market recovery continued in October, as the economy created 161,000 jobs and the unemployment rate edged down to 4.9 percent, mostly in line with expectations. Beyond the headlines, there were three positive data points in the report: the August and September results were revised higher, bringing the average monthly gain for 2016 to 181,000 jobs; average hourly earnings rose, pushing up the annual increase by 2.8 percent, the fastest monthly growth since June 2009 and an especially impressive number, considering that inflation is running at about 2 percent; and the broader measure of unemployment, which includes those who have stopped looking for jobs and those working part-time for economic reasons fell to 9.5 percent, the lowest level since April 2008. (Note: Although a lot of Americans are working part time, almost all of the 11 million jobs added since the recession officially ended in mid-2009 have been full-time positions.)

At the Federal Reserve policy meeting last week, the central bankers noted that “the case for an increase in the federal funds rate has continued to strengthen, but decided, for the time being, to wait for some further evidence of continued progress toward its objectives.” Consider the October jobs report as further evidence that will help bolster the Fed’s case for a quarter-point interest rate increase at the December 13-14 meeting. Traders are betting on it…according to the futures markets, there’s a 75 percent chance of that outcome.

MARKETS:

• DJIA: 17,188 down 1.5% on week, up 2.7% YTD
• S&P 500: 2085, down 1.9% on week, up 2% YTD (9 consecutive losing sessions, longest losing streak since Dec 1980)
• NASDAQ: 5046, down 2.8% on week, up 0.8% YTD
• Russell 2000: 1163, down 2% on week, up 2.4% YTD
• 10-Year Treasury yield: 1.77% (from 1.85% week ago)
• British Pound/USD: 1.2518 (from 1.2186 week ago)
• December Crude: $44.17, down 9.5% on week
• December Gold: $1,306.90, up 2.2% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.22 (from $2.22 wk ago, $2.21 a year ago)

THE WEEK AHEAD:

Mon 11/7:

3:00 Consumer Credit

Tues 11/8: Election Day

CVS, News Corp

6:00 NFIB small-business optimism index

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

Weds 11/9:

Viacom, Wendy’s

Thursday 11/10:

Kohl’s, Macy’s, Walt Disney

Friday 11/11: Veterans Day: Bond Markets and Banks CLOSED, Stock markets OPEN

10:00 Consumer Sentiment

Halloween Special: What Would Spook Markets?

With Halloween looming, what might spook markets during the last two months of the year? Let’s start with this week’s Federal Reserve policy meeting. Investors believe that there’s about a zero chance that the central bank will increase rates this week, especially given that the two-day confab occurs less than a week before the presidential election. (The futures market implies a 75 percent chance of a December rate hike.) That said, there could be an argument that the stronger than expected 2.9 percent annualized gain in third-quarter GDP growth confirms that the economy has recovered smartly from the little over one percent rate seen in the first half of the year and could easily absorb another quart-point hike. In minutes from the September FOMC meeting, “Members generally agreed that the case for an increase in the policy rate had strengthened” and the advance reading of Q3 GDP only adds to that case. A surprise November rate hike would quell Donald Trump’s rhetoric that the fed does “political things” and that fed officials are “not doing their job” and it would also underscore Chair Janet Yellen’s assertion, “that partisan politics plays no role in our decisions about the appropriate stance of monetary policy”. While a November rate hike is unlikely, its occurrence would be a major-league negative shock to the markets.

Another factor that could spook markets would be a significant downshift in job creation. This week’s employment report is expected to show that the economy added 175,000 new jobs in October, slightly ahead of September’s 156,000. Over the past year, there have been nearly 2.5 million jobs created and the unemployment rate has hovered around 5 percent. The reason the rate has not dropped more significantly is because of a concurrent increase in the labor force over the past 12 months. However, if the employment landscape dims in the final two reports of the year, it is likely to cause stocks to tumble and it would also increase the chatter about a looming recession.

By far, the biggest near term risk to markets is a different outcome to the presidential election than what is expected. In other words, a Trump victory may cause a significant selloff, according to recent research conducted by economists Eric Zitzewitz and Justin Wolfers. In their paper, “What do financial markets think of the 2016 election?” the authors looked at currency, stock, bond and options markets globally, and concluded “Given the magnitude of the price movements, we estimate that market participants believe that a Trump victory would reduce the value of the S&P 500, the UK, and Asian stock markets by 10-15 percent...and would significantly increase expected future stock market volatility.” To put that into perspective, the day after the surprising Brexit vote, the Dow Jones Industrials fell by over 3.4 percent, or 611 points, before recovering ground. A ten percent drop in the Dow based on Friday’s close would mean a plunge of more than 1800 points! That’s about as spooky an outcome as any investor might imagine.

Proof of the thesis was seen on Friday afternoon. After news emerged of a renewed FBI investigation into Clinton's e-mails, US stocks dropped, the Mexican peso tumbled and the safe haven of gold gained ground.

MARKETS:

• DJIA: 18,161, up 0.09% on week, up 4.2% YTD
• S&P 500: 2126, down 0.7% on week, up 4% YTD
• NASDAQ: 5190, down 1.3% on week, up 5% YTD
• Russell 2000: 1187, down 2.5% on week, up 4.6% YTD
• 10-Year Treasury yield: 1.85% (from 1.74% week ago)
• British Pound/USD: 1.2186 (from 1.2227 week ago)
• December Crude: $48.66, down 4.2% on week, first loss in six weeks
• December Gold: $1,282.10, up 0.7% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.22 (from $2.22 wk ago, $2.19 a year ago)

THE WEEK AHEAD:

Mon 10/31:

8:30 Personal Income and Outlays

9:45 Chicago PMI

10:30 Dallas Fed Mfg Survey

Tues 11/1:

Coach, Pfizer

Motor Vehicle Sales

FOMC Meeting Begins

9:45 PMI Manufacturing Index

10:00 ISM Mfg Index

10:00 Construction Spending

Weds 11/2:

Clorox, Fitbit, Time Warner, Whole Foods

8:15 ADP Private SecotrEmployment Report

2:00 FOMC Policy Announcement

Thursday 11/3:

CBS, GoPro, Kraft Heinz, Starbucks

8:30 Productivity and Costs

9:45 PMI Services Index

10:00 Factory Orders

10:00 ISM Non-Mfg Index

Friday 11/4:

8:30 October Employment Report

8:30 International Trade

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

June Jobs Take Off: Stocks Surge

The better than expected June jobs report was a much-needed shot in the arm for the recently sagging labor market. The economy added 287,000 jobs, including the return of about 30,000 striking Verizon workers, and the unemployment rate rose to 4.9 percent, but did so for a good reason: more people entered the labor force in search of work. Along with a terrible May (revised down to just +11,000 jobs, the weakest month of hiring since the job recovery began in 2010) and a mediocre April (revised up to +144,000), June’s numbers brought second-quarter average monthly job creation to 147,000 – that’s down from 196,000 in the first quarter, 229,000 last year and 260,000 in 2014. The big question now: is the recent trend portending weakness in the economy or is it a natural slowdown, as we begin the eighth year of the recovery?

Other parts of the report complicate the answer. The broad measure of unemployment U-6), fell to 9.6 percent, down 0.9 percent from a year ago, but more than a percentage point above its pre-recession level. Meanwhile, hourly pay increased by 2.6 percent from a year ago, matching the highest level of the recovery.

My guess is that the labor market is tightening and that something weird occurred in May. That said, more data is necessary to determine the direction of the labor market, which also means that the Fed is unlikely to take any action at its policy meeting at the end of this month.

Next question: Would a strong summer hiring season encourage the Fed to consider an increase at the September meeting? Maybe, but European politics may again force a delay in the Fed’s rate hike cycle. If you liked “Brexit,” you’re going to love “Quitaly”. In October, Italians will head to the polls to vote on whether to oust the current prime minister, potentially leading to a general election in which the anti-European Five Star Movement could gain ground and advance their call for Italy to withdraw its membership of the euro, though the party supports EU membership. As the vote nears, Italy is once again confronting the possibility of bailing out the world’s largest bank, Monte dei Paschi, which continues to hold nearly $400 billion of non-performing loans on its books, by far the largest in the EU.

According to Capital Economics, a survey in May “showed that 58 percent of Italians wanted a referendum on their EU membership. Granted, only 48 percent said that they would vote to leave. But the final UK opinion poll last week also suggested that only 48 percent would vote to leave the EU.” In other words, add you should probably add “Quitaly” to your summer lexicon.

MARKETS: Last week, the yield on the 10-year U.S. Treasury note touched a record low of 1.321 percent and the 30-year also checked in with its own record low of 2.098 percent. Yes, that means that if you lend the US government money for THIRTY years, you would receive a paltry 2.1 percent in interest. Meanwhile, stock indexes charged higher on the week, nearing all time highs reached in May 2015. As earnings season begins this week, investors will have to reconcile current prices with a likely fifth straight year-over-year quarterly profit decline.

• DJIA: 18,146, up 1.1% on week, up 4.1% YTD, now above pre-Brexit level (18,011)
• S&P 500: 2130, up 1.3% on week, up 4.2% YTD, 1 point below 05-15 record high
• NASDAQ: 4956, up 2% on week, down 1% YTD
• Russell 2000: 1177, up 2.2% on week, up 3.6% YTD
• 10-Year Treasury yield: 1.366%, a record low close (from 1.45% a week ago)
• British Pound/USD: $1.295, a 31-year low
• August Crude: $45.41, down 7.3% on week, largest percentage loss since Feb
• August Gold:  at $1,358.40, up 1.5% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.25 (from $2.28 wk ago, $2.76 a year ago)

THE WEEK AHEAD:

Mon 7/11:

Alcoa

10:00 Labor Market Conditions

Tues 7/12:

6:00 NFIB Small Biz Optimism Index

10:00 Job Openings and Labor Market Turnover

Weds 7/13:

8:30 Import/Export Prices

2:00 Fed Beige Book

2:00 Treasury Budget

Thursday 7/14:

BlackRock, JPMorgan Chase, Yum! Brands

The Bank of England interest rate decision (the first post-Brexit announcement)

8:30 PPI-FD

Friday 7/15:

Citigroup, U.S. Bancorp, Wells Fargo

8:30 CPI

8:30 Retail Sales

9:15 Industrial Production

10:00 Business Inventories

10:00 Consumer Sentiment

Jobs Report Stinks: No Fed Rate Hike in June

The May jobs report was a stinker. The economy added just 38,000 jobs, the fewest since September 2010. Even adding back the 37,000 jobs lost in the telecom sector, which was primarily due to the recent Verizon strike, May was a dismal month for hiring. Adding to the downbeat news, revisions of March and April reduced jobs by 59,000, pushing down average monthly job creation for 2016 to 150,000, well behind the more than 200,000 thousand gains seen over the past few years. Although the year-over-year change in May was an impressive 2.39 million jobs, the recent trend is worrisome: Over the past 3 months, job gains have averaged 116,000 per month. Additionally, the unemployment rate fell to 4.7 percent, the lowest level since November 2007, but that was due to more people dropping out of the workforce, not because a slew of wannabe employees got jobs. Unfortunately, the weakness was widespread. Manufacturing lost 10,000 jobs, construction shed 15,000 jobs and temporary help fell by 21,000.

Despite recent comments by Fed officials extolling the improvement in the economy, the weakness in this report likely means that the central bank will not raise rates when it meets in a week and a half. It also calls into question the health of the overall recovery in the second quarter, which is estimated to accelerate by about 2.1 - 2.3 percent on an annualized basis.

In the first quarter, we could attribute the paltry 0.8 percent GDP to plunging oil prices, a stronger U.S. dollar and weakness in China. But those factors have largely turned around: crude has soared from $27 per barrel to nearly $50; the dollar has stabilized after rising sharply against other major currencies in late 2014 and early 2015; and although Chinese growth remains on the worry list, there has been a simmering down of tensions.

The economic expansion celebrates its seventh birthday this month, making it the fourth longest recovery since World War II. Although the recovery has been sluggish—GDP has averaged just over two percent a year, the labor market has shown more impressive progress, until recently. Whether or not this is the beginning of the end for the robust gains in job creation is unknown at this point. What’s seems knowable is that the Fed is not going to raise rates amid the current environment.

Last week, Fed Chair Janet Yellen said that the central bank would likely to raise interest rates “gradually and cautiously” because raising them too quickly could trigger a downturn to which the Fed may have limited tools to respond. Given this report, it would seem that caution would be appropriate at the June meeting.

MARKETS:

• DJIA: 17,817 down 0.4% on week, up 2.2% YTD
• S&P 500: 2000 flat on week, up 2.7% YTD
• NASDAQ: 4942 up 0.2% on week, down 1.3% YTD
• Russell 2000: 1164, up 2.5% on week, up 2.5% YTD
• 10-Year Treasury yield: 1.7% (from 1.8% a week ago)
• July Crude: $48.62, down 1.4% on week
• August Gold: $ 1,242.90, up 2.2% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.35 (from $2.32 wk ago, $2.76 a year ago)

THE WEEK AHEAD:

Mon 6/6:

Janet Yellen speaks

Tues 6/7:

8:30 Productivity and Costs

3:00 Consumer Credit

Weds 6/8:

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

Thursday 6/9:

Friday 6/10:

10:00 Consumer Sentiment

2:00 Treasury Budget

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

Is the US Economy at Full Employment?

Full employment is often described as the level of employment at which virtually anyone who wants to work can find employment at the prevailing wage. Given that over the last half century, the unemployment rate in the United States has ranged from a low of nearly 2 percent to a high of nearly 11 percent, what is the specific rate at which the economy has reached the magical level? According to the Federal Reserve, full employment is subjective. It’s “largely determined by nonmonetary factors that affect the structure and dynamics of the job market. These factors may change over time and may not be directly measurable.” In other words, your guess is as good as anyone else’s. In the Fed's March 2016 Summary of Economic Projections, the Committee estimated that the longer-run normal rate had a median value of 4.8 percent, but even if we drop to 4.8 percent when the government releases the March Employment report, that may not cut it.

The Fed also closely watches wage growth and hoping that it picks up from the paltry 2 to 2.5 percent seen during the recovery. Part of the problem is that even though job creation has been robust over the past few years, many of the new positions added have been lower paid ones, which has dragged down the average. As 538 Blog points out, this is perhaps why many American workers without college degrees are so angry. They have gone from working in factories, earning “more than $25 an hour before overtime” to the service sector, where “the typical retail worker makes less than $18 an hour…More than 80 percent of all private jobs are now in the service sector.”

Still, with the pace of average monthly job gains remaining above 200,000 and the labor market tightening, analysts believe that wage growth should accelerate this year. Until it does, most consumers are happy to see low inflation, which allows them to keep more of their paychecks. Indeed, the upward revision of Q4 growth to a still-slow 1.4 percent was due almost entirely from consumers, not from businesses. Consumer spending increased at a 2.4 percent annual pace in the final three months of 2015, up from a prior 2 percent estimate.

On Monday, the government will release data on Personal Income and Spending for March, which could provide a preview of the jobs report. Although wages have been disappointing, the addition of other income, like rental income, non-farm proprietors' income and investment income, the numbers look a little better: Personal income increased 4.4 percent in 2015.

MARKETS: Stock indexes snapped a five-week winning streak and that was before the holiday release of Corporate Profits, which fell 3.2 percent last year, versus increases of 1.7, 1.9 and 9.1 percent in 2014, 2013 and 2012 respectively. It was the first negative reading since 2008, but with energy prices moderating and dollar appreciation slowing, analysts expect that profits should rise this year, which could help the labor market.

• DJIA: 17,516 down 0.5% on week, up 0.5% YTD
• S&P 500: 2036 down 0.7% on week, down 0.4% YTD
• NASDAQ: 4773 down 0.5% on week, down 4.7% YTD
• Russell 2000: 1101, down 1.3% on week, down 3% YTD
• 10-Year Treasury yield: 1.90% (from 1.88% a week ago)
• May Crude: $39.59, down 2.4% on week
• June Gold: $1,218.70, down 2.6% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.04 (from $1.98 wk ago, $2.42 a year ago)

THE WEEK AHEAD:

Mon 3/28:

8:30 Personal Income and Spending

10:00 Pending Home Sales

10:30 Dallas Fed Manufacturing Survey

Tues 3/29:

9:00 S&P Case Shiller Home Price Index

10:00 Consumer Confidence

Weds 3/30:

8:15 ADP Private Jobs Report

Thursday 3/31:

9:45 Chicago PMI

Friday 4/1

Motor Vehicle Sales

8:30 March Employment Report

9:45 PMI Manufacturing Index

10:00 ISM Manufacturing Index

10:00 Consumer Sentiment

Strong Jobs Report Puts Fed in a Quandary

The US economy added a much stronger than expected 242,000 jobs in February and the two previous months were revised higher by 30,000, pushing up year-over-year job creation to a solid 2.67 million. The unemployment rate remained at 4.9 percent, the lowest level since February 2008. The report puts the Federal Reserve in a quandary for its upcoming policy meeting. With job creation averaging 228,000 over the past three months and the labor force increasing by 555,000 in February and by 1.5 million in the last three months, the participation rate rose to a 15-month high of 62.9 percent. According to Capital Economics, the report shows that “remaining labor market slack is getting eaten up very quickly.”

If the central bankers are in fact “data dependent,” then the strong jobs report, along with rising core inflation (the Fed’s favorite inflation measure, the core PCE price index, was up 1.7 percent in January from the prior year), would add to the rationale for increasing the fed funds rate by another quarter of a percent in March.

But by now we know that the Fed likes to err on the side of caution. Officials are likely to cite some negatives from the February jobs report as a rationale for doing nothing in March. Chief among the concerns would be the drop in average earnings in February, which translated into a 2.2 percent annualized increase—that’s down from 2.5 percent in the previous month — and average weekly hours worked, which fell sharply to 34.4, from 34.6.

Part of the issue on wages may be the quality of jobs created in February. Big gains in retail and food and drinking establishments contributed to the weakness. Additionally, although the broader unemployment rate (U-6), fell to 9.7 percent, that is still about 1.5 percent ABOVE the precession level.

Bond investors put the likelihood of a March rate hike at essentially zero, believing that the slowdown in global growth will prompt the central bank to do nothing in a week and a half. But if there is continued improvement in the labor market and inflation marches towards the Fed’s desired 2 percent pace, the central bank may by eyeing April or June for the next increase.

MARKETS: HAPPY ANNIVERSARY! I hate to bring you back to a scary time, but seven years ago this week; US stock markets plunged to their worst levels of the entire bear market of 2008-2009. Although the entire financial system almost went over the cliff in September and October of 2008, it wasn’t until March 9, 2009 that stocks hit rock bottom. On that day, the Dow closed at 6547; the S&P 500 fell to 676; and the NASDAQ was at 1268. Time may not heal all wounds, but it certainly has helped investors...

• DJIA: 17,006 up 2.2% on week, down 2.4% YTD
• S&P 500: 2000 up 2.7% on week, down 2.2% YTD
• NASDAQ: 4717 up 2.8% on week, down 5.8 % YTD
• Russell 2000: 1081, up 4.3% on week, down 4.8% YTD
• 10-Year Treasury yield: 1.88% (from 1.77% a week ago)
• Apr Crude: $35.92, up 9.6% on week, up 37% from the 13-year low in Feb
• Apr Gold: $1,270.70, one-year high
• AAA Nat'l avg. for gallon of reg. gas: $1.81 (from $1.74 wk ago, $2.46 a year ago)

THE WEEK AHEAD: A few key speeches by Fed officials could provide the last clues before the central bank’s March policy meeting. All eyes will be on the ECB—it is expected that Draghi & Co will provide more stimulus to the ailing European economy.

Mon 3/7:

3:00 Consumer Credit

Fed Governor Lael Brainard and Fed Vice Chair Stanley Fischer speak

Tues 3/8:

6:00 NFIB Small Business Optimism

Weds 3/9:

10:30 EIA Petroleum Status Report

Thursday 3/10:

ECB Policy Meeting

Friday 3/11:

8:30 Import and Export Prices