A Tapering Economy?

Includes: DIA, SPY
by: Max Fraad Wolff

The Bureau of Labor Statistics, BLS, reported net new Non-Farm Payrolls of 169,000 with a U3, narrow, unemployment rate of 7.3% in August 2013. August payrolls were on the bottom of the consensus range and below the 2013 average of 184,000 per month. We were treated to a large downward revisions to the June and July payroll reports. June 2013 payrolls were revised down by 16,000 jobs and July payrolls were revised down by 58,000 to 104,000. The broad U6 measure of unemployment, that counts involuntary part-timers and the marginally attached, fell to 13.7%. Wage growth continues to run at or below inflation. Thus, we continue to have anemic jobs growth and no real wage growth.

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We continue to see multi-decade lows in labor force participation. This has become a familiar, if seriously problematic, feature of the long weakness after 2007. This continues to suggest that the employment picture remains weak and will have long-term negative consequences. The costs of structural labor market failings are falling heavily on lower skill workers, the young and the long term unemployed. The long absence of robust hiring and a complete lack of real wage growth, work against a rising participation rate and an economy that performs for the average American.

The Payrolls numbers by industry offer caution. The government sector, perennially weak for several years, showed strength, 17,000 net new jobs in August. A closer look reveals that more than 100% of the positive hiring was local educational hiring and is largely driven by specific and season factors. Leisure and hospitality, retail, health and education continue to dominate job growth. Many of these positions offer fairly low wages and prospects for advance. This is contributing to a lack of wage growth and general sense among the middle class that the economy is not robust. Construction and manufacturing were not strong across the summer of 2013.

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A day before the Non-Farm Payrolls, the Bureau of Labor Statistics, BLS, reported 2Q2013 productivity. Productivity rose in the second quarter by 2.3%. In manufacturing productivity rose as output decreased but hours worked decreased more. Thus, we see employers continuing to be able to get more out of employees on a compensation adjusted productivity basis. This is consistent with continued elevated profitability but relatively weaker employment and wage growth. Real hourly compensation increased by .3% between the second quarter of 2012 and the second quarter of 2013. The complete lack of wage growth has been a defining feature of the last 5 years and is a significant drag on households and wage driven consumption. This leaves households, consumption and growth overly reliant on wealth effects and low cost borrowing.

Today's payroll numbers will be processed in the context of interest in Federal Reserve tapering policy. All eyes are on the Fed ahead of the 18 September meeting and announcements on the pace of Fed asset purchasing. We have seen the Fed running at $85B in monthly asset purchasing and the expectation is for a reduction of $10B or more in monthly activity by yearend 2013. There has been mounting evidence that the asset buying has not had the broad macroeconomic positive effects hoped for. In addition, there have been significant domestic and international asset price effects, many of which are not desirable. Thus, we are likely to see tapering. However, today's job report signals that the economy continues to meaningfully underperform on job creation and wage growth. This leaves us overly dependent on low interest rates and wealth effects that will be tapering down in the months to come.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.