Tower Private Advisors
- Festival of charts
- Earnings season about to kick off
- 200,000 jobs added in December
- Unemployment rate drops to 8.5%
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Capital Markets Recap
- Fed Policy Makers Urge More Housing Aid – indeed, Bank of America rallied hard on Thursday (+9.7%) on hopes of a White House plan to ease refinancing of existing mortgages. An unnamed source at Tower Bank with the initials Steve McElhoe said something like… current for three months on payments=refinance with no appraisal, no credit check. Click here to send Steve an e-mail to get in line.
- Stocks Show Too Much Earnings Pessimism, Citigroup says – “investors appear to be bracing for a 20 percent earnings decline in 2012,” Buckland wrote. “This seems too pessimistic, even for recessionary Europe.” Bloomberg published the following chart showing that world stocks are 23.5% below their average price:earnings ratio of the last forty years.
- Inventory Restocking to Propel U.S. Manufacturing
- Lampert Cuts AutoZone as Clients Pull Money Amid Sears Losses – Eddie Lampert is the CEO of Sears and also runs a hedge fund. Thought at one time to be the savior of Sears, he has instead been a flop.
- Earnings season kicks off next week, with six of the S&P 500 companies reporting. As usual, Alcoa will lead the charge.
- In my opinion, the barometer for the crisis in Europe is comprised of yields on Spanish and Italian sovereign debt. Recently, those rates have begun to kick back up, as can be seen below.
- The Federal Reserve’s Open Market Committee released the minutes of its December 2011 meeting, and here’s what they looked like, according to Wordle. Wordle clouds are created from text, with the most frequently occuring words showing up the largest.
As I mentioned last week, there weas really one report that mattered today, and that was/is the Nonfarm Payrolls report. As they say, it came out better than expected. Economists had expected 155,000 jobs to be created; the survey said 200,000 jobs were created, 212,000 of them (hello?) were in Private Payrolls. Some higher level math indicates that the government sector contracted in December by (-)12,000. Manufacturing payrolls grew by 23,000, far better than the 6,000 increase economists had expected. That data all comes from the Establishment Survey, a survey of about 160,000 companies and government agencies. The Unemployment Rate, however, comes from the Household Survey, which surveys about 60,000 households (source: Shadow Government Statistics). As you might imagine, the establishment survey doesn’t catch any self-employed or workers from home, nor does it capture the smallest employer.
There are three important numbers in the household survey:
- Civilian noninstitutional population (16 years and over)
- Civilian labor force
The labor force is made up of those who are employed and unemployed. Easy enough, right? Not so fast. If you were camped out in Freimann Square during the week of the survey, holding up a sign that says, “We are the 99%. Give us back our government,” you might have had a hard time looking for a job during the survey week. According to the Bureau of Labor Statistics, you would have been considered neither employed nor unemployed; you would be considered “a person not in the labor force.” To be considered unemployed you have to have lost a job and be actively looking for a new one.
From these three statistics, two bigger statistics are determined. The Unemployment Rate is #3 divided by #2. The Labor Force Participation Rate is #2 divided by #1. Several dynamics arise from this. First, the population is generally always rising; it’s inexorable. Second, the labor force fluctuates based on, generally, the economy. Employment rises as the economy improves; those looking for jobs expect better job hunting prospects as an economy improves. Both conspire to swell the labor force and vice versa. The third changes in the same way. From the other side, as the economy weakens more lose their jobs and continue to look for new ones; they are the unemployment rate. Others get discouraged, give up looking for jobs, and, thus, leave the rolls of both the unemployed and the labor force.
All that leads to a conundrum or paradox or whatever you call it. A deteriorating economy can produce a lower unemployment rate, and an improving economy can produce a rising unemployment rate. Consider a country with a population of 100,000. In our country, in month one, 60,000 are considered to be part of the labor force; 30,000 of them are unemployed by looking for employment. Therefore, the unemployment rate = 50%. In month two, bizarrely, the population remains unchanged at 100,000, but half of the unemployed have given up looking for jobs. The labor force falls by 15,000 to 45,000, while the unemployed fall from 30,000 to 15,000. To get the employment rate we divide the unemployed (15,000) by the labor force (45,000), and, voila, the unemployment rate falls to 33%! In contrary fashion, an improving economy can produce a pool of unemployed–via increasing job seekers–that grows faster than the labor force and, thus, raises the unemployment rate.
That’s all a long-winded–as usual–way of saying that we have to look at more than just the unemployment rate. We also have to consider the labor force. In December, it fell by 50,000 (-0.03%) from November. The unemployed, however, fell by far more, 226,000 (-1.70%), leaving us with an unemployment rate of 8.5%, down from 8.7% in November. We should, eventually, see a rise in the unemployment rate as new job seekers swell the ranks of the unemployed.
What follows is a series of charts related to the labor force.
First, here is a look at the Labor Force going back to 1984. It’s not seasonally adjusted, but from the repeating, saw-tooth line, it’s clear there are seasonal patterns. The labor force swells when school’s out and shrinks when it’s back in session, etc.
So, that’s why certain series are reported as Seasonally Adjusted. In the chart, below, the same series has been seasonally adjusted.
For all the conspiracy theorists–and they’re out there…”but the non-seasonally adjusted data tell a different story…”–here’s what they look like together.
On the next chart you’ll see the labor force along with the population. Notice the unrelenting advance of the population. Notice the erectile disfunction in the labor force…just sorta peters (sorry) out after 2007 and doesn’t come back.
Dividing the labor force by the population produces the Labor Force Participation rate, which is shown in the bottom panel, below. I mentioned in early December that the labor force participation rate hasn’t been this low since 1984.
Here’s one last look at labor force participation. The same percentage of a number that’s 36.6% larger is a number that’s 36.6% larger–brilliant, I know. That leaves us just 206,000 short of 100,000,000 who are not in the labor force that could be. I think that’s pretty scary, and if you want to know what’s even scarier, read the series of articles referenced in this post. Some jobs have been completely destroyed, vaporized.
Key indicators to watch
- NFIB Small Business Optimism (Tuesday) – December
- JOLTS – Job Openings and Labor Turnover Survey – (Tuesday) – November
- Initial Jobless Claims (Thursday) – weekly
- University of Michigan Consumer Confidence (Friday) – preliminary January
Graig P. Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors
With offices in: Bangkok | Fort Wayne | Paris | Craigville