Volume 62, Number 1
Payroll employment rose a robust 200,000 in December with a modest upward revision of 8,000 to the two previous months. Meanwhile, the unemployment rate fell to 8.5%, continuing the steep decline from 8.7% in November and 8.9% in October. We are greatly unimpressed. There are many caveats to the data that suggest the recent improvement in hiring is both unreliable and temporary. After scrubbing the data clean of aberrations, it appears to us that both employment and wage growth have slowed in the fourth quarter despite strong economic growth. Profits may be strong in the fourth quarter, but the income to sustain the consumer in 2012 appears to be lacking. We see the economy continuing to struggle with real GDP growth at 2-2.5% and inflation slowing as real US income growth is limited and the consequences of the European recession hit global pricing power. We see nothing in recent economic data to assuage our concerns about weakness in home prices — and the most recent denial by the Administration of a large refinancing program only exacerbates our feeling that hope springs eternal in the equity sector, but that the reality is unremittingly bad. As Japan has proved during its two decade long malaise, an economy without a vibrant banking sector experiences no growth. The banking system is crippled in the US, about to implode in Europe, and under duress in both Japan and many of the emerging markets starting with the BRIC countries. We continue to see the glass as half empty, with the risks on the downside.
Lies, Damn Lies, and Statistics
The author of the above quote, Samuel Langhorne Clemens, was one of his eras greatest speculators, losing more than one fortune which forced him to keep writing Mark Twain books long after had wanted to quit. The stories and his view of the world darkened as his investment endeavors failed. We have spent a career mining the exotica of data like today’s employment report and learned long ago that only economists care about much below the headline. But, therein lies the rub. As with most data, it is what is below the surface that carries the most information.
Today’s hopeful 200,000 increase in payroll employment is artificially boosted by a 42,000 increase in couriers and messengers. The same thing happened last year, when December employment was lifted by 46,000 courier jobs, only to see a decline of -49,000 for that category in January. In 2009, December jobs were boosted by a 30,000 increase in couriers, and January saw a -41,000 decline. We do not know why seasonal adjustment is not catching this obvious Christmas surge associated with deliveries of goods ordered online, but we can be certain that it will reduce employment next month by about -40,000 jobs. Bottom line, excluding the clearly non-repetitive surge in couriers, employment rose just 158,000 jobs in December, roughly in line with expectations. The three month average ex-couriers was 122,000, down from the 147,000 average in the third quarter. Note that even without adjusting for couriers employment slowed in the fourth quarter, suggesting over-hiring in the third quarter when GDP rose at a meager 1.8% annual rate.
A slowdown in wages for production workers confirms that businesses are still being stingy with compensation. Production workers saw no change in wages in December after a modest 0.05% gain in November. A shift into lower paying jobs in retail and leisure may explain part of the weakness, but wage gains have been slowing steadily through the year – and benefits are being cut as well – as firm are maintaining strict cost control despite significant cash flow and record high savings. Looks to us like private sector businesses have no more confidence in the banking system than we do and are holding precautionary balances that essentially ensure they do not become dependent on a suspect banking system if another Lehman-like event is sparked by the European crisis.
Bottom line, the averages of the past six months suggest that the combination of job growth, increased hours per worker, and modest pay gains will lift wage and salary income in the private sector at just a 3.6% annual rate. Overall consumer income will grow even slower as the government sector continues to shed workers. Moreover, first quarter income growth is likely to be further depressed by smaller bonuses in the beleaguered financial industry. Even with a slight improvement in access to credit as household debt ratios and credit card delinquency rates fall, we do not see the consumer as capable of generating more than 4-4.5% nominal growth. Headline inflation –particularly on imported goods — needs to fall significantly for this to translate into sustainable economic growth.
The apparent improvement in the closely watched unemployment rate is also curious. Over the past two months, the unemployment rate (which saw annual revisions this month) has declined from 8.9% to 8.5%. The details of the household report show that over that same period, the unemployment rate for men over 25 fell sharply from 8.1% to 7.2%, while the rate for women remained unchanged at 7.3%. Bottom line, the household employment for men over 25 soared by 753,000 over two months and labor force rose just 98,000 This rapid end to the “mancession” suggests that the male over 25 unemployment rate is now lower than the female rate for the first time since March 2008. And this comes over two months when payroll employment in heavily male oriented goods sector rose an average 21,000, the same as during the previous six months when there was no narrowing of the male-female gap. A sharp drop in male unemployment from November 2010 through March 2011 was associated with strong gains in goods producing jobs and a booming ISM. The household data are notoriously volatile, so we always look for some level of internal consistency and support from a preponderance of other evidence before we sign on to a particular trend. To say this looks somewhat suspect is like saying Ted Williams could hit some.
Finally, we are concerned that many of the leading indicators of employment are flashing the wrong signals in December. Temporary employment fell -8,000 in the month. Overtime hours in manufacturing fell back to 3.2 in December from 3.3 in November. The household measure of private sector jobs gained in the wage paying sector is below the payroll figure. Labor force growth was still negative in December and up at only a 0.1% annual rate for the twelve months of 2011. There is nothing in the labor force or income data that suggest enough strength in buying power to absorb the 650,000 new housing starts being put on the market. This leaves the banking sector still under a cloud and no driver of growth. Thus, until corporate America loosens its purse strings and starts to redistribute its sizable savings to the consuming public – most likely through increased investment – we see little reason to expect above trend growth. For businesses to invest, they have to see enough growth to expand capacity. This month’s employment report, along with the prior two, suggest that except for seasonal hiring in couriers and retail, businesses felt they over-hired in the soft third quarter and are cutting back to maintain productivity growth. It’s tough to find a positive investment story in that scenario.
Dear Clients and Friends,
On February 8th, 2012, the Global Interdependence Center, in conjunction with the University of Memphis Fogelman College of Business and Economics, will present a full day conference “Food and Inflation: Truth and Consequences.” McVean Trading is proud to be a sponsor of this event, which features speakers from the Federal Reserve and industry experts from the agricultural community. The conference is followed by an open bar reception and dinner, in conjunction with the Economic Club of Memphis, featuring Dennis Gartman, editor of the Gartman Letter, as the evening’s speaker. Registration to the conference and dinner is open to the public at the Global Interdependence Center website:
A block of rooms at the conference venue, the University of Memphis Holiday Inn, are also available through the GIC website. Registration includes a one year membership in the Global Interdependence Center, which hosts a series of events in the US and abroad on topics of importance to the financial services industry. McVean Trading hopes that many of our clients and friends will take advantage of this exciting and timely opportunity to attend and debate with the experts on the key issues facing the agricultural industry and the economy today.
Looking forward to seeing you soon in our hometown,
McVean Trading & Investments, LLC