Friday, November 6, 2015

October jobs not a big surprise

The October jobs report came in way above expectations (271K vs. 185K), and even more so considering upward revisions to prior months. Does this show the economy suddenly picked up speed? No. It's most likely just seasonal and/or statistical noise. As I've been arguing for months (and as I predicted yesterday) the monthly vagaries of the jobs numbers have not really changed the big picture of the economy, which continues to be one of disappointingly slow but relatively steady growth of 2-2.5% per year. 

If anything, today's headline should have read "BLS jobs catch up to ADP jobs." Both surveys have been tracking each other very well for the past several years, but the BLS numbers have proved more volatile. They were much lower than the ADP numbers as of yesterday, and now they are above. But both are saying the same thing for the past year and two years: private sector jobs growth is averaging about 225K per month.

The first of the above charts shows the monthly change in private sector payrolls, while the second shows the year over year rate of growth. Essentially, today's report simply confirmed that the economy is "steady as she goes."

If this had been a normal recovery, there would be many millions more employed and the economy would be about $2.6 trillion bigger, But let's not forget that there has been a net increase of about 5 million private sector jobs since the peak of the prior business cycle expansion. We are making progress, but it's painfully slow.

Businesses are not investing much, and the labor force is not growing much. The economy suffers from a failure to thrive, for a variety of reasons that are by now well-known: very high marginal tax rates (punitively high on businesses), increased and heavy regulatory burdens, generous transfer payments, policy uncertainty, and lingering risk aversion left over from the Great Recession.

The Fed can raise rates at the FOMC meeting (the implied probability of which is now 70%), and the sky is not going to fall. When they do raise rates, some of the policy uncertainty will fade, and the economic fundamentals will improve on the margin. This is all good news.


Benjamin Cole said...

Excellent wrap-up, IMHO.

Not sure how a central bank raising rates results in "some of the policy uncertainty will fade, and the economic fundamentals will improve on the margin. This is all good news."

How will higher interest rates improve economic fundamentals? I certainly do not think Janet Yellen has any special insights into the economy. In fact, the Fed has been consistently wrong for years on end, projecting higher inflation and growth than occurred. I would gain zero confidence from anything the Fed did.

I do see a case for normalizing interest on excess reserves. In Japan the central bank pays 0.10% IOER and not 0.25%. U.S. banks have a tidy little sideline in doing nothing. They must have consulted with the USDA before devising this policy. Oh, do you think Fed policy might have been captured by the commercial banking sector? I would never think that, although that is the result.

Love the October higher employment figures, and after all, a nation with "labor shortages" is a happy nation. Would love to see FICA tax cuts here, really promote working and hiring. Remember, half of FICA taxes are paid by employers--they are punished for the act of giving someone a job. To levy taxes on working and hiring is insanity. It is as if we criminalize working and hiring (along with robust housing construction).

I think the U.S, should shoot for years of 4% real economic growth, and if some moderate inflation results, so be it.

But, hey, I like prosperity.

marcusbalbus said...


Benjamin Cole said...

"For the markets “the ‘elephant in the room’ remains concerns about the Chinese economy, particularly given another weak October trade number over the weekend, as well as continued weakness in commodity prices which yesterday saw the Bloomberg Commodity Index hit another 16-year low,” writes Michael Hewson, chief market analyst at CMC Markets UK


a 16-year low? Egads.

And U.S. consumes are paying the same price for autos today they paid in nominal terms.

China inflation just in, at 1.3%.

Time to worry about growth and not inflation?

Scott Grannis said...

The Bloomberg Commodity Index is not an index of commodity prices. "It is calculated on an excess return basis and reflects commodity futures price movements." It only includes commodities that have associated futures contracts, and it reflects the investment returns one would receive by investing in the front-month contract and rolling every month to the next contract. It is designed to reflect how an investor in commodity futures would fare. This can be impacted by a lot of factors (e.g., interest rates, liquidity, backwardation) and not just by movements in physical commodity prices.

Benjamin Cole said...

I do like some commodity stocks that offer a good dividend, like Potash (POT). 7% and change, and if fertilizer prices ever go up again...

Nikkei 225 having a great year...corporate profits strong in central bank

My guess is that the Fed will make a mistake and tighten monetary policy, either passively or actively. This makes US equities market a difficult play...Hong Kong dollar pegged to US dollar and their equities market dead in the water....

Unknown said...
This comment has been removed by the author.
Unknown said...

@ marcusbalbus - "dull" ? Only if you don't know how to profit from the report/info

I stumbled on this site from one of the other sites, I wish I would have landed on this site much much earlier.

Scott - Thanks for the valuable info you are providing!