Heated Air


“Think but this, and all is mended.” – William Shakespeare, A Midsummer Night’s Dream

It’s a long-standing practice of this column to write shortened holiday editions of MarketWeek for the major holidays, and so this week will have a commentary shorter than usual. However, I can and will cover the jobs report and labor market in some depth below.

It was a fairly textbook rally last week, with a first-day-of-the-month rally on Monday and the usual pre-July 4th move up. The markets were helped along by positive news on the labor front, with both the ADP payrolls report and the Labor Department (BLS) reporting approximately the same increase of roughly 190,000 workers, beating expectations in both cases. Another plus was European Central Bank (ECB) President Mario Draghi promising that boy, he sure could do more if he really wanted to, and as usual the waves parted for him.

The business press was gushing over the jobs report on Friday, with much chatter about what a “strong” and “solid” report it was and the “surge” in hiring. In the Economic Beat section, where I dissect the report, I will make the case that the job market is in fact not really any different than it was a year ago. Others are going to reach some of the conclusions that I did and similarly push back, but broadly speaking you should expect that a storyline about the strength of the US economy is going to be the de facto wisdom in the business press and investment strategy pieces for at least the next two or three weeks.

With that in mind, one should also expect the strong-dollar trade to keep going, which will mean weakness for commodities, particularly copper and gold. Oil is being propped up for now by the situation in Egypt, but how long that will last no one can tell. It could correct quite quickly once the situation stabilizes. Stability is admittedly not the word that comes to mind of late when thinking of the region, yet the army may be able to get the upper hand soon.

I refer you to my Seeking Alpha column for more on the broad picture, but in brief expect equities to float higher on the hot air through the next couple of weeks, commodities to remain under pressure and bonds to be weak. I hope you are all enjoying a long summer weekend.

The Economic Beat

Despite the apparent good beat from the jobs report, with a headline total of 195,000 new jobs – seasonally adjusted – versus expectations for about 165,000, the data suggest that the economy and job market are no different than a year ago.

I’ve been noting in recent months that the 2013 job totals have started to look very much like the revised 2012 job totals (they were re-benchmarked in February). The latest numbers bear that out, and I strongly suspect that the difference between this year and last is not in the aggregate real number of jobs, but in the Labor Department’s estimation methods. Don’t misunderstand – I am not saying the BLS is getting up to shenanigans with the numbers. It’s more likely the exact opposite, with the department having the laudable goal of trying to get more accuracy and consistency. What’s important is not to misinterpret the 2013 estimations as signaling something different.

Time for some examples. Looking at the unadjusted data for the establishment survey, the actual job count has increased through the first six months by 0.93% over December 2012. You might think it would be larger, but we lose about 2% of the counted workforce every January, a result that is smoothed over by the seasonal adjustments. Through the first six months of 2012, the gain was a remarkably similar 0.95%.

Take note that that’s not the way it was reported a year ago – at the time, the job totals being reported were lower. The year-on-year June gain was 1.67%; a year ago it was 1.59%. It very strongly suggests to me that 2013′s raw data is much the same as it was in 2012, with the BLS applying newer estimation methods consistent with its benchmark revision. Most people are going to recall the original estimates and not consider the revisions, reinforcing the halo effect of “surge,” “solid” and “strong.”

Consider some more examples. A year ago the work week was 34.4 hours; it is now 34.5. Hourly earnings are up about 2% in nominal terms. The latest measure of the so-called U-6 rate, an alternative measure that lumps in “underemployed” people, rose sharply to 14.3% (14.6% unadjusted). A year ago it was 14.8%.

There’s more. A year ago, the unemployment rate was 8.2%, versus the 7.6% being reported now. However, a funny thing has happened along the way. The civilian labor force has grown by 0.44% in the last twelve months, but the number of people “not in the labor force” – and hence not counted in the rate – rose by 1.9% (2.1% unadjusted). If you were to add the increase in people “not in the labor force” to the ranks of the official unemployed, you would obtain an unemployment rate of 8.7%. Assume that the “not in the labor force” segment grows at the same rate as the overall growth in the civilian labor force, and the unemployment rate would be 8.2% – the same as a year ago (the rate is higher using unadjusted data).

Look at the quality of the jobs. The household survey showed an increase of 322,000 part-time workers for economic reasons. Comparing this with the establishment survey, we see that 75,000 new jobs, or nearly 40% of the total, were in the leisure and hospitality segment. 37,000 were in retail trade (really?) and another 23,500 in health care and social assistance. In other words, 2/3 of the increase was at the bottom of the scale in pay and needed expertise, summer jobs making up a large part of that. Two days earlier, ADP reported a 1,000 increase in manufacturing jobs for the month and set commentators buzzing about the strong auto industry saving our bacon. The BLS reported a contrasting loss of 6,000 overall, though autos did improve.

There was good news in the upward revisions to April and May, but the net effect is to align 2013 almost exactly with 2012. In sum, it doesn’t appear as if the underlying pace of the economy is much different than a year ago, at least not in the labor market. However, expect the press to very much carry on as if it is. The labor turnover survey is due next week, and has shown little change recently.

The two ISM surveys in manufacturing and non-manufacturing aren’t showing any strength – the manufacturing survey did edge back up to 50.9, meaning it was mostly unchanged from the month before, while the non-manufacturing segment eased to 52.2 from 53.7. It was the lowest June reading in 4 years (the manufacturing number, by contrast was a tad better than a year ago). Factory new orders were revised back down to 2.1% for May, but business investment orders were revised up to 1.5%.

Jobless claims were steady, auto sales reached their highest run rate since 2007, but weekly retail sales reports appear soft. International trade data continues to show softening global trade conditions.

Next week will bring the reports on price changes in trade, consumer and producer indices, along with the wholesale trade report; none of them rate to be enough on their own to derail the market’s new feel-good spirit. I wish you a happy weekend!

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