It’s been a while since I’ve been able to get something posted as I was traveling for a bit, so It’s really nice to jump back in with several items that are feeding my confirmation bias…So another first Friday of the month has come and that means our favorite labor indicator, Non Farm Payrolls, came out and oh what a doozie it was. NFP came in at 271K for October, well ahead of expectations. To give some context on how strong the number was, the average monthly gain since the recovery really started in January 2010 has been 185K. This is important because the recession officially ended in June 2009 as per the NBER, but we were still shedding jobs at that point. If we were to go back those six months, the average would drop to just 146K making October’s 271K that much more of a strong print.
The long term picture of payrolls…If not full employment, it’s darn close.
This strength in payrolls brings me to the idea of the economy having finally reached its critical mass versus still needing to hit “escape velocity.”In physics, a critical mass is the minimum amount of matter needed to sustain a chain reaction. In economic terms, critical mass would be the point where an economy has built up enough of its primary driver to sustain itself until the next downturn. In the U.S., that primary driver is consumption. We know consumption can only be fueled by jobs and income. That said, when we look at the gains in payrolls, the low levels of unemployment claims and the high level of services consumption in the economy, we have indeed attained our critical mass.
A topic that I’ve been discussing here and on Twitter since June is the importance of service components in labor and inflation data. In labor data, the service category covers occupations that range from lawyers, accountants, architects, engineers, computer programmers, medical and education professionals, waiters and bartenders…even to CEO’s. Now, to put services labor in perspective versus its “hard” labor peers, lets look at the total persons employed in various industries and their earnings generated as of October payrolls. Industries are ranked by total earnings.
Items to note:
- Four of the top five earning industries fall into the services category.
- Mining and logging contribute the least to total earnings while the overall economy is still having healthy growth.
- Increases in food services and administrative support services are a knock on effect of increased consumption and business’ needing to support increased demand.
People always bemoan the loss of manufacturing jobs and their associated wealth, but the data does not support it. Professional and Technical Services (PTS) average earnings are 38% greater than manufacturing wages and will overtake manufacturing in terms of headcount in the near future. Also, the broader services category, Professional and Business Services, already generates nearly 22 billion dollars in weekly earnings.
X Marks The Spot
The chart above shows us the long term employment change in manufacturing versus PTS. This trend along with the higher wages associated with PTS demonstrates a healthy transition to a services-based economy. The bottom line here is that wages and jobs are growing in the right places.
Services In Action
When we consider how much more of a services based economy we are today compared to 1997 and 2005, this chart is showing a strong economy.
This past week we got the two major data points for gauging the services economy. The ISM Non Manufacturing Survey and the Markit Services PMI. The ISM report came in at a very strong 59.1 with employment and new orders components pushing highs, while the Markit survey came in at 54.8. In these surveys, anything over 50 represents overall expanding activity which is something many people seem to forget. So when financial media sites say “a plunge in activity from 55 to 53,” it’s simply a case of negative framing at its best. That said, the reading of 54.8 in the Markit survey is still a healthy reading, but you wouldn’t think so after reading the report. Looking at the data in ISM NMI, we clearly have strong services consumption going on. This month, the ISM Employment index gave us a great preview of the NFP report. It’ll be interesting to see if that holds up next month. The point here is that we are a services-based economy, and I can’t stress enough the importance of looking at these services indicators.
So Now What ?
Given the data we’ve gotten recently and the October FOMC statement, a December rate hike is definite. The only way that a hike does not happen is if we get some type of macro event that causes real global turmoil. Since the Fed backed off its global macro fund stance that it had in the September statement, it will take more than a Chinese stock market sell off to sway them now. Coming up this week, we get one of my favorite indicators, the NFIB Small Business index along with JOLTS, weekly claims, retail sales and PPI. There are a couple other data points, but these are the ones I’m focused on. NFIB is a great check on small business which helps fuel consumption on a regional level across the country so we need to pay attention to that. The moral of the story here is to buy the dips in equities and sell the rips in bonds. It’s good to be back in the swing of things…