The November 6th job report was a home-run! Or was it?
The headline number smashed expectations of creating 271,000 jobs, nearly double the 142,000 September job number, and well above the 175,000 to 190,000 expected. The big job gain continued Wall Street’s pattern of what is good is bad, and what is bad is good. The headline number out of the gate was a great number, which spurred selling across the commodity sector and in all equites except for the financials as the automatic assumption now is that the FED will be raising rates in December. As the market continues to be “fed up with the FED,” no matter what happens in market will likely not be received well.
The FED continues to target inflation above 2% and “strong” wage growth and employment as the key factors in raising rates to “return to normalcy.” The FED has not raised rates for over 9 years, so what is “normal”? Low rates are the new normal, and as we have seen the market is not going to let rates go up without a fight. The question that remains, “Is December the right time?”.
The problem with the jobs data is that once you lift the hood and look around the headline number is not that good. Though 271,000 is a big number, the high paying breadwinner jobs still have not recovered from the recession. The reported number of high paying jobs in mining, energy and manufacturing declined by 4,000, while the count of low-pay, part-time waiters and bartenders gained 41,000.
The “Leisure and Hospitality” category of the jobs survey is somewhat broader as it also includes bellhops, hotel maids, parking attendants, hot dog vendors, stadium maintenance crews and the rest of the lodging and entertainment complex. These are all worthy and necessary endeavors, but they are mostly gigs, not jobs. During October the average workweek in Leisure and Hospitality was just 26.3 hours.
In the “Leisure and Hospitality” category the average gross earnings are $380 per week compared to $1,035 in manufacturing, $1,385 in mining and energy and $1,604 in the utilities category. On an annualized basis we have losses in the breadwinner sector of jobs that average $83K, while we rack up big gains in leisure and hospitality where the weekly rate annualizes to $19k or around 60-75% less than bread winner jobs.
Not to sound like the government or media is in on a big conspiracy, but numbers and statistics can be very misleading if you really don’t dig into them. Paul Roberts wrote an article last week that looked at the true numbers, and confirms what we have been talking about for months, and it raises some very interesting points.
“What is wrong with these numbers? Just about everything.” First of all, 145,000 of the jobs, or 54%, are jobs arbitrarily added to the number by the birth-death model. The birth-death model provides an estimate of the net amount of unreported jobs lost to business closings and the unreported jobs created by new business openings. The model is based on a normally functioning economy unlike the one of the past seven years and thus overestimates the number of jobs from new business and underestimates the losses from closures. If we eliminate the birth-death model’s contribution, new jobs were 126,000.
Next, consider who got the 271,000 reported jobs. According to the Bureau of Labor Statistics, all of the new jobs plus some 378,000 went to those 55 years of age and older. However, males in the prime working age, 25 to 54 years of age, lost 119,000 jobs. What seems to have happened is that full time jobs were replaced with part time jobs for retirees. Multiple job holders increased by 109,000 in October, an indication that people who lost full time jobs had to take two or more part time jobs in order to make ends meet.
Now assume the 271,000 reported jobs in October is the real number, and not 126,000 or less, where are those jobs? According to the BLS not a single one is in manufacturing. The jobs are in personal services, mainly lowly paid jobs such as retail clerks, ambulatory health care service jobs, temporary help, and waitresses and bartenders.
For example, the BLS reports 44,000 new retail trade jobs, a questionable number in light of sluggish real retail sales. Possibly what is happening is that stores are turning a smaller number of full time jobs into a larger number of part time jobs in order to avoid benefit costs associated with full time workers.”
Not only is the true jobs number much “uglier” than the headline build, but consider that 94.5 million people have dropped out of the work force, giving us the lowest labor force participation rate since the recession of the 1970s after many females entered what was a historical male driven work force.
When you dig a bit deeper the numbers start to make a bit more sense as naturally people are picking up part-time and second jobs to cover breadwinner losses. The next thing that also begins to make sense is the rapid growth of consumer driven borrowing.
The Federal Reserve’s credit numbers showed American consumers borrowed at an all-time record of $28.9 billion in September, besting the previous high-water mark set in November 2001.
The FED has always been very concerned about consumer credit, as the image goes, the FED wants “take away the punch bowl” from the party before it gets out of hand, and the best way to do that is to raise rates. In the past borrowing has set up bubbles, but if you look again at these numbers, the recent surge has essentially been driven by car and student loans, which increased by more than $22 billion, with revolving debt increasing by $6.7 billion.
The economy is getting better; even if job growth is at the low end, consumers have been putting off purchases of things they need, such as replacing cars that have been having differed maintenance since before the recession (auto sales have been spectacular this year), and they are going to school to get an education to help move away from low end jobs to breadwinner jobs. Raising rates is not going to stop a credit party that is flowing with prime cuts of steak, lobster tail, and fine wine, but it is going to cut into a party made up of Hamburger Helper and fish sticks.
We beat-up on the FED all the time, and it is not like the FED doesn’t lift the hood and think about these issues, which is why we keep saying that there is no right or wrong answer with regard to rate policy. At this point the only right answer is one that gives clear direction to the market. The right answer is not higher or lower rates, but certainty. Regardless if the jobs number was good or bad, we need to start morning moving forward or backward, which would be a pleasant change from the aimless wandering path we have been on.