Labor Market Finally Improves
11/30/09
And I thought I was being too optimistic last month. The November payroll data were so strong that they caught everyone by surprise. Even bulls/optimists like me had not expected a job loss of only 11,000 in November. The consensus estimates clustered around -119,000. The unemployment rate fell to 10.0%. Even more surprising was the fact that the birth/death model adjustments only added 30,000 jobs for the month and that other seasonal adjustments really had no significant impact on the number. In other words, this positive surprise was even more surprisingly - clean. A few negative points remained, like the median duration of unemployment, which rose to a record high of 20.1 weeks and the percentage of unemployed for longer than 27 weeks, which also rose to a record high of 38.3%. The positive surprises however outweighed the negatives. Revisions to the jobs reports for September and October for example shaved off a combined 159,000 unemployed for those two months. Temporary employment continued to gather strength and rose by 52,000. Remember that temporary employment leads permanent employment by some three months. November was the fourth month of rising temporary employment and it seems that we are almost at the point now, where the job market is starting to create jobs again. These labor numbers are significant. The small loss in jobs and drop in unemployment rate is superb. It could force economists to project job gains in December, perhaps, and in January for sure. The stock market reacted with a sharp short covering rally which then was sold. That sell-off again was bought again before we petered out towards the end the session. Market participants are still not sure if they can trust this advance, which I find encouraging. It means that the most hated bull market in history can continue to proceed upwards without too much frothiness. Let us take a new look at the various job market reports.
The first chart shows you the Non-Farm payroll report. During the month of November, the number of employed people dropped by 11,000 and the three month average of non-farm payrolls rose from -134,000 to -87,000. Economists had estimated a contraction in payrolls of 119,000. The second chart shows you the U-3 report which measures the total unemployed, as a percent of the civilian labor force (official unemployment rate). While this measure of unemployment has reached a higher high than during the previous two recessions, it has not reached the 1982 peak. It seems doubtful now, whether it will do so. Time is running out for this official measure of unemployment. There are of course other measures of unemployment, which are used and discussed on the BLS website. One of those measures is the U-6 report, which attempts to measure the degree of underemployment in the economy. Data for this report go back to 1994 and are thus far of limited value for the current recession. Suffice it to say that this most inclusive measure of unemployment is still at 17.2%, an extremely elevated level. High unemployment was the main argument used by every bear in the universe to rationalize their stance. The stock market's sugar high that was financed by government programs, quantitative easing and low interest rates would ultimately unravel because of rising unemployment and collapsing retail sales. Now that unemployment seems to have peaked, they need to concentrate on other issues. Some of those I heard recently were, that the Fed would have to tighten and thus PE ratios would have to contract. The next one is that more stimulus may not be needed and monetary measures like M2 and MZM would decline, causing an outflow out of equities, which incidentally has been happening all year despite the rise in stock prices. What a wonderful contrarian indicator that is. Another argument says that a rising dollar (due to rising interest rates and thus improving interest rate differentials to other countries) will be a negative for earnings of international companies. Many other arguments have been uttered all year. Don't let the bears confuse you. This unemployment report is a clear positive, not a negative. Rising (or at least stabilizing) employment will improve the balance sheets of banks and consumers alike and now that is going to be the main argument for the bulls and no longer for the bears. Better employment numbers afford Bernanke eventually enough cover to remove various stimulus measures by raising interest rates, but until we reach that point, we may be approaching Christmas 2010. The following charts give you a glimpse why we may count on continued easy monetary policy and continued stimulus from the Fed.
The first chart shows the employment-population ratio. The general uptrend from the early '60s was due to women entering the workforce. In 1964, about 32% of the workforce were women, today the percentage is close to 50%. The employment-population ratio has fallen to its lowest level since 1982. The chart also shows how anemic the job growth was after the 2001 recession. The long term pattern is clearly cause for concern. Will it affect the economy in 2010? Probably not. Will it affect Bernanke's decision making process? Probably. His mandate is full employment and low inflation. Structural unemployment as depicted here will give him (and all the politicians on the hill) ample cover to keep interest rates low for an extended period of time. The Economic Cycle Research Institute (ECRI) has predicted a vigorous recovery from the trough all along. The institute's long term employment outlook, however, is everything but optimistic. Another good number to track in recessions and recoveries is the aggregate number of hours worked across the whole economy (second chart). By calculating an index which looks at both employment and the workweek, we get a complete picture of the total hours worked each month. This indicator is seen as a monthly proxy for GDP. By definition, the quarterly change in the amount of goods produced is equal to the change in man-hours plus the change in productivity. As productivity is somewhat predictable from quarter to quarter, the aggregate hours worked index provides a helpful monthly read on the overall economy. The chart shows us that the index (and the economy) have stabilized, but that we are not recovering any ground yet. Bernanke knows as well that plenty of slack remains in the economy and that unemployment remains first and foremost on voters' minds, which in turn will make it priority number one for his immediate employer. Bernanke also knows that strong headwinds remain and that he better be absolutely certain, before he spooks the capital markets by removing liquidity. In short: I have my eyes open but I refuse to turn bearish on the economy or the stock market. The trend is your friend and I have to stay with it. Opportunities are still plentiful and were are not going to become an empire in decline just yet.
Hermann Vohs
"The employer generally gets the employees he deserves."
Walter Gilbey
Hermann Vohs is president of Cales Investments, Inc., a registered Broker-Dealer. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. Hermann Vohs and/or the staff at Cales Investments, inc. may or may not have investments in any of the markets cited above. Hermann Vohs can be reached at 303-765-5600.
This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities.
