Friday, March 9, 2018

Early signs of a stronger jobs market

February private sector job gains were substantially stronger than expected (287K vs. 205K), and prior months were revised higher. This is good news, but we are still in the early innings of what is likely to be a more powerful and sustained improvement in the jobs market. That's what I anticipated in my 2018 predictions: waiting for GDP. For the past few months I've argued that the market has priced in the one-time impact of a significant reduction in the corporate income tax rate, but the market has still not yet priced in the expectation of a significant boost to future GDP growth. "Waiting for GDP" is still the meme to watch for, and today's jobs number is the first sign that this meme may in fact be realized, but it's too early to know for sure. Of course, once it's clear that GDP growth could exceed 3% or so on a sustained basis, the stock market will be making new highs. For now, we can be hopeful that this will be the case.

Chart #1

Chart #1 shows the monthly change in private sector jobs from an historical perspective. February was strong, but it's hardly a unique occurrence; we've seen numbers like this from time to time and in the end they have proved transitory, not the start of something big. We'll need to see more such numbers (e.g., job gains of at least 300K per month) before it's clear that the economy has kicked into a higher gear.

Chart #2

Chart #2 shows the 6- and 12-month annualized rate of change of private sector jobs growth. You can't come to any conclusions with just one strong number, you've got to see a series of strong numbers. Jobs data are notoriously volatile and subject to significant changes after the fact. So far, all we've see in recent months is that private sector jobs growth has risen from 1.7% to just under 2%. Hold the applause until jobs growth exceeds 2% by a substantial margin—we're not there yet.

Chart #3

Since the unemployment rate is quite low—4.1%—we need to see a sustained increase in the labor force participation rate. Many millions of workers have "dropped out" of the labor force, and they will have to elect to return if the jobs market is to generate more than 300K new jobs every month. Fortunately, today's jobs number suggests this process may be beginning. Labor force growth has picked up significantly, as Chart #3 shows. 

Chart #4

But it's still early, since the labor force participation rate (the percentage of people eligible to work who are working or looking for work) currently is only 63%, and the rate hasn't changed on balance for the past several years. We'll need to see it increase to 64% or more. Chart #4 gives you an idea of how low it has been (it started to decline in early 2009) and where it could go in the future if optimism returns in a serious fashion—as happened in the boom years of the late 1980s.


ebg investor said...

Scott, thank you for the analysis. It is great and optimistic. What are your comments about tariffs, will they become substantial to have impact on trades and economy? Your view on Cohn resignation and in general on the current cabinet?

Scott Grannis said...

naive, re tariffs: I think I agree with the market here. The tariffs looked awful at first, now we see that there are important countries excluded (Canada, Mexico), and Trump is making a point of saying that he is willing to be flexible going forward if we can strike trade deals that are more "fair." Tariffs are always bad, but these aren't blanket tariffs, and they are subject to change. With luck, a stronger economy will more than offset the headwinds of these tariffs. We'd be better off without them, but if they are a clever negotiating tactic that achieves fairer trade, then I'm not too worried.

The Cohn resignation was undeniably bad, but I respect him for sticking to his principles. He was never a pure supply-sider anyway. I worry that Peter Navarro has been elevated, because he is just plain ignorant of how trade works.

The great majority of Trump's cabinet are good people, and that gives me a lot of encouragement.

Lesson: take Trump seriously but not literally. His bark is worse than his bite.

Benjamin Cole said...

Great post.

If I may cite ancient and forgotten history, in the years 1997, 1998, 1999 and 2000, the US economy expanded at more than a 4% annual rate, topping off a great decade.

The unemployment rate in 2000 was an average of 3.9%.

The Bush and Obama years have darkened the American mood and sense of what's do-able.

Trump has faults galore, but at least he is pro-business, and meets with business groups and leaders. Visits factories.

Trade? Nixon and Reagan were far greater projectionists than Trump. We prospered anyway.

The NY-DC crowd is globalist in perspective. You would think that tariffs were the end of the world. In fact, an economy as large as the US invariably can develop domestic substitutes.

I can remember a time when right-wingers said trade sanctions were ineffective due to domestic substitution. Indeed, South Africa built up a successful coal-to-liquids fuels industry under sanctions.

The US economy would boom under tariffs, though freer trade is probably better.

The US economy doubled in size during WWII with hardly any trade.

Let us hope the Fed and our nation leaders shoot for 3% real GDP growth, a modest goal.

Side note, from CNBC:

"Elon Musk sides with Trump on trade with China, citing 25% import duty on American cars

Elon Musk believes China isn't playing fair in the car trade with the U.S.
The auto executive says the Asian country puts a 25 percent import duty on American cars, while the U.S. only does 2.5 percent for Chinese cars in return.

'I am against import duties in general, but the current rules make things very difficult. It's like competing in an Olympic race wearing lead shoes,' Musk tweets."


The China economy has boomed, boomed, boomed for the last 20 years. Import tariffs? Didn't hurt the China economy.

And if Trump can open up China to Tesla vehicles, is that not freer trade?

PS Musk a smart guy, high-profile guy, built a US industry from scratch, made a pithy comment. Zero echo chamber for Musk's sentiments.

Globalists run the media?

terex said...

Trade w China is far from fair. Same goes for investments. If you have a foreign owned Chinese company you have running costs way above the locals and you must avoid using the local's "cash-tricks" to win bids. And there is so much more. Trade and investments must be reasonably fair. With Trump I now have hope that Xi & Co slowly will make conditions better for foreigners active in China.

And what about Europe and import duties on a lot of goods from U (I think that US cars are charged w 10% i.t. in Germany)? And what about Nato spendnings, etc.

Open trade should be fair or bear another name, such as 'support programs' and then mainly to support developing economies

steve said...

So Scott, so what do you think of Kudlow to replace Cohn? I'm a little surprised he took the position given Trumps's intransigence on trade.

Benjamin Cole said...

Kudlow's first public statement is to the effect that China has earned the enmity of Western economies.

Trump is always interesting, I will give him that.