On Friday of last week the US jobs report had a little something for everyone, but generally I’d characterize it as weak.
Let’s start, though, with the positive. The unemployment rate declined to 6.7%, the lowest level since the fall of 2008. If you are a politician in either party that wants to make people feel good about the economy, that will be the number you focus on.
That being said, most other pieces of the report were very weak:
- Nonfarm payrolls were up 74,000, which was below even the weakest forecast from Wall Street for the month.
- Hourly earnings were up 0.1% for the month and 1.8% year over year, barely ahead of inflation as measured by CPI.
- The average hourly workweek declined to 34.4 hours and has remained soft since the end of the recession. (By the way, that is one to keep an eye on with the definition of full time work (30 hours) under the ACA.)
- The underemployment rate is 13.1%. This remains elevated relative to pre-recession levels.
- The labor force participation rate declined to 62.8%. That is tied with October for the lowest level since 1978.
- Finally, 38% of unemployed Americans have been out of work for more than 6 months.
A few additional points to make:
- The weather was pretty awful in December, which is definitely in the numbers. Snowfall was 21% above average for the month. As an example, the construction industry shed 16,000 jobs in the month after a run of positive months, and transportation and warehousing also declined which could be impacted by poor weather.
- The unemployment rate is math. The formula is simple: Unemployed/(Employed + Unemployed). However, the number of people who are no longer actively searching for work would not be included in the labor force participation rate (part of the denominator). During an economic recession, many workers often get discouraged and stop looking for employment; as a result, the participation rate decreases. That is why the unemployment rate is dropping with really poor gains in nonfarm payrolls. People are getting discouraged and giving up.
- The employment to population ratio is a more comprehensive measure. It measures the proportion of the country’s working-age population (ages 15 to 64) that is employed and includes people that have stopped looking for work. This is currently 58.6% and has been stuck near that level for 4.5 years. Prior to the credit crisis it averaged closer to 62.5%.
- Prior to the December report, the employment numbers had been getting better. Not great, but better. Let’s hope the short Christmas season and bad weather are reversed over the next several months.
In and of itself, this number argues the Fed will remain ultra-accommodative. However, one month doesn’t make a trend. I believe that if absolutely nothing else happens between now and the next meeting (January 29th), the Fed will stand pat on the $10 billion/month taper announced in December. Of course, we still have inflation data, retail sales and other important data points to come and we had a very strong ISM report (57) on January 2nd. Current futures quotes show the consensus view is for 0% interest rates into mid to late 2015 at least. The Fed will need to undo the tapering prior to actually raising rates.
Two thoughts here. First, while equity valuations aren’t “cheap,” they also aren’t overextended. 0% interest rates continue to create a positive environment for equities. If history is a guide, the big move in bond yields happens once the Fed actually starts raising rates. Rising rates may hurt your statement prices, but if you are a buy and hold bond investor, ongoing bond yield should be your primary consideration.
Until next time –