3 Facts From The U.S. Labor Markets And Reality Of The U.S. Economy

by: Constantin Gurdgiev

Three interesting snapshots of the U.S. economy: Non-farm payrolls, initial jobless claims and labor productivity. Individually - they are important to traders. Jointly, they are important to investors.

But, first, what has been happening.

Let's start with jobless claims. Initial jobless claims rose in the last week of January by 8,000 to a (seasonally-adjusted) 285,000. This was worse than consensus forecast by some 5,000 jobs. And worse, the four-week average rose to 284,750 at the end of January, up 2,000.

For history wonks, numbers below 300,000 are considered a sign of a tight labor market, so no surprise here that claims can rise with a bit greater volatility when the labor markets are running some overheating.

But the last two weeks of January also marked something that has not happened in the markets in some three years - they marked two consecutive weeks of y/y increases in new claims. As always, weather is being blamed, and as always, two weeks are just two weeks. So far, nothing hugely significant. Just a hiccup.

Which brings us to today's release of NFP. Going into it, consensus forecast was for a 180,000 new jobs print (Marketwatch) and 190,000 (Bloomberg and Reuters) for January, to compensate for a large 292,000 print in December. What was delivered? Revised December non-farm payroll figures to 262,000 and the January figure of 151,000. The revision to December was large, but smaller than under-shooting in January. The January preliminary estimate came as the third weakest preliminary figure printed in the last 13 months.

Yes, everyone is running around with 4.9% unemployment figure - sub-5% expected. Good news. However, U-5 unemployment (total unemployed, plus discouraged workers, plus all other persons marginally attached to the labor force, as a percent of the civilian labor force plus all persons marginally attached to the labor force) rose on seasonally-adjusted basis from 6.1% in November and December 2015 to 6.2% in January. And U-6 Unemployment (U-5, plus all employed part time for economic reasons) was static at 9.9% for the third month in a row, having previously been at 9.8% in October 2015.

And average hourly earnings were up 2.5% y/y (same as previous month growth) and m/m growth of 0.5% (better than 0.3% consensus forecast and way better than 0% growth in December). These look like positives. Another positive is labor force participation - up to 62.7% in January, against 62.6% in December. But this positive is questionable: not a seasonally adjusted participation rate in January 2016 was 62.3% which is lower than the same for January 2015 at 62.5%.

So now we have: wages up, unemployment rate down, claims down by a lot less than expected, and participation rate is virtually flat. All at high levels of employment.

Which gets us around to the last bit: productivity. Per the U.S. latest data, non-farm labor productivity has fallen a whooping 3% y/y in 4Q 2015 - third biggest decline in productivity for any period since 1Q 2007 and the largest 4Q decline in productivity over the same period. Consensus was for a 1.8% drop on foot for a 2.2% rise in 3Q 2015. The Unit labor costs went up 4.5% over the same period of time (against consensus forecast of 3.9% rise and up on 1.8% increase in 3Q 2015). Labor costs were up in three quarters of 2015.

Problems with productivity growth have been plaguing the U.S. recovery - in 2015, non-farm productivity was up only 0.6%, which is massively below historical averages (more than x3 2015 rate of expansion).

Here's the real problem, folks: The U.S. economy is struggling to sustain growth absent real investment and absent new technological improvements. It is that simple. And the job markets are starting to show the strains of this. Productivity growth being weak, while employment rising and remaining high along with rising labor costs means only one thing: the U.S. is currently running above its potential rates of growth. It is, in other words, overheating. And that at roughly 2% annual growth rates against pre-crisis averages above 3%. One of two things will have to happen:

  • One: Employment moderates and labor costs growth abates; or
  • Two: Business investment has to rise (note: explicitly not public investment, because raising public investment in these labor markets conditions will simply exacerbate the twin problem of tighter labor markets and low productivity growth).

Good luck taking an investment strategy on one. Which leaves us with taking a strategy on two… or going defensive on an expectation that stagnation will be setting in.