- Analysis of Friday’s Jobs Report
- Manufacturing versus Services job creation and the myth of lost wages
- Discussion on full employment and labor force participation rates
This week was all about jobs and fortunately, we got some. On Friday, we had the release of the monthly Employment Situation Summary from the BLS or what is more commonly known as the “jobs report.” The jobs report has always been widely watched, but has been a true focal point for the last couple years. Since QE began to wind down and now as Fed lift off has come into play, labor and inflation data have taken center stage. This month was business as usual with financial media gearing up all week for the report and Twitter finance flooding the net with the popular hashtag #NFPguesses. Finally 8:30 Friday morning came along and we got a +223,000 increase in nonfarm payroll employment versus 228,000 expectations. I myself was expecting a higher number given the solid services data we got in April. Equities and bonds loved the report initially as both rallied, but by the end of the day stocks were the last man standing. TLT, the long bond proxy ETF actually closed down for the day as it finished up a very active and rough week.
So let’s talk job report internals. Headline NFP came in at +223,000 with the bulk of that from the private service-providing category at 182,000. Within private services, professional/business and education/health services drove two thirds of the increase. The job growth was not in all waiters and bartenders as some financial websites like to so arrogantly promote.
On a quick side note, I have a couple issues when financial media and others discount (or just outright poo-poo all over) wait staff jobs. First of all, and most importantly, an increase in wait staff jobs is being driven by an increase in end-user demand which is a direct reflection of a healthy economy. Second, waiters and bartenders are not only honorable professions, but can also be very lucrative for those that choose to make the effort. As an example, anyone familiar with the NYC steakhouse scene has come across the legendary Mr. Patrick Ford in the grill room at Smith & Wollensky in midtown Manhattan. Pat Ford exemplifies a long-standing tradition of bartenders that not only serve drinks, but make customers want to come back to enjoy the environment they create with their humor and camaraderie.
With that off my chest, we can get back to the data and see what else we can dig up. March and April job reports have clearly been driven by the services sector. Corroborating this, we have gotten other reports from Markit and ISM that have shown an increase in services activity along with a decrease in manufacturing. Recent declines in manufacturing activity have been tied to the strong dollar, but the long run decline is because we have transitioned to a consumption / services based economy. This is very important to note when we analyze labor data. I don’t think people should be so alarmed by the drop in manufacturing jobs since it’s a function of a structural change in the economy. It’s no secret that personal consumption expenditure (PCE) drives 2/3 of domestic spending and that exports account for roughly just 14% of GDP.
*Chart shows decline in manufacturing labor versus growth in services labor
People will make the argument that all the high paying manufacturing jobs have been replaced by low paying service jobs, but that’s just plain wrong. If there was a real loss in wages, then I would expect the below chart to have flattened or declined since 2000.
*Nonsupervisory employees are those in services as defined by the BLS
Manufacturing jobs are good jobs, but so are service jobs. It really depends on the type of economy and society that you are talking about. In a developed consumer based economy like America, it is fitting that we would have more of a service based labor force.
The somewhat soft side of the jobs report were the minimal increase in average hourly earnings and unchanged hours worked. Though, AHE are up 2.2% over the past year which is still good and also shows some inflation.
Going back to a point I’ve been bringing up the last couple weeks is the notion of the labor market being at or near full employment. When we look at weekly claims data and the growth in payrolls since the crisis years of 2007-2009, it’s really starting to look like we may have reached it. The main argument most economists make against being at full employment is the low labor force participation rate (LFPR). As Gene Epstein has pointed in this week’s Barron’s Economic Beat, the LFPR has been declining because of the growing 55 and older segment of the workforce and not because of eligible people just dropping out for lack of work. So far that’s been the most clear and provable theory on LFPR that I’ve come across.
There were several other data points in the week outside of the jobs report that also need to be mentioned. The best surprise came on Monday and was the Factory Orders report for March that showed a headline increase of 2.1% from February with some pretty solid internals. New Orders were up a healthy 4.4% after having been down 1.2% the prior month, while shipments of durable goods were up 1.2% after having been down the previous two months. Shipments of nondurable goods were dragged down by oil prices. With that, given the rebound we have seen in oil over the last couple weeks, various economic stats for April and May should look a lot stronger.
International Trade data released on Tuesday showed our trade deficit widening to $51.4 Bn. At first, the reaction was negative as this would cause a further reduction in Q1 GDP. However the import figures do show an economy that continues to increase consumption. Leading in the import category were cell phones, textile apparel, furniture and other household goods. All of these categories were leaders in the most recent retail sales report. The export side was dragged lower primarily by the strong dollar. Also on Tuesday were service reports from ISM and Markit. Both showed gains, but the Markit report really showed some strong internals with input prices, new business and labor demand all well in expansionary territory. The labor data in the Markit report meshed nicely with the services growth in the jobs report.
Just prior to Friday’s jobs report, we got another very solid weekly unemployment claims number at 265,000. I keep saying it, I know, but these claims data are dead in line with a full participation labor force.
It was another crazy week but fun as always. Equities finished the week close to their all-time highs and bonds (Treasuries) squeaked in one up day out of what has been a rough two weeks with yields rising almost every day. Lots of data coming up this week with Yellen’s personal favorite JOLTS report and my personal favorite the NFIB Small Business Optimism Index both on Tuesday. Then we get retail sales, PPI and industrial production later in the week. The phrase sell in May and go away may be very relevant this year, except this time it’s for bonds…