January Jobs Report: Headlines Still All Right, But The Internals Deteriorate As The Business Cycle Matures

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by: Robert P. Balan

Summary

The January jobs report is more nuanced than the headlines imply, if we account for revisions to November-December, which reduced jobs by 39,000, and the rise in UR to 4.8%.

There was little upside progress on wages; average hourly earnings increased just 3 cents (2.5% annualized) despite 19 states increasing minimum wage laws; average work week unchanged at 34.4 hours.

Total jobs opening and hires (per the JOLTS Report) are on the decline, and have been so since February 2016, hardly indicative of further growth in payrolls down the road.

The Business Cycle up-phase shows signs of aging; still upbeat about risk asset prospects into late 2017, but start rotating into hard assets that do well in the late cycle.

The January jobs report on Friday stated that net non-farm payrolls increased by 227,000 jobs overall while the civilian unemployment rose to 4.8%. Comparative data have been good: the private non-farm payrolls sub-component added 237,000; net private sector jobs rose 0.19% month on month, increasing 1.80% from a year ago; employment in January was 6.30% higher than the previous peak level of employment reached in December 2007, just before the onset of the Great Financial Crisis (GFC).

Most of the news headlines have celebrated the fact that the January 2017 employment creation beat expectations (227,000 new jobs versus 180,000 consensus). However, the January jobs report is more nuanced than a simple reading of the headlines, and contains some internal data which, taken collectively, suggest that the current Business Cycle may be starting to show signs of aging. Here are a couple of such nuanced details - (1) if we incorporate the 39,000 total revisions to the November and December data, the average comes down closer to expectations, and the three-month moving average becomes less impressive than what the headline numbers imply; (2) The Unemployment Rate ticked up to 4.8% from December's 4.7% - seemingly inconsequential, but this looms large as it signifies a loss of momentum for the downward trend in the Unemployment Rate - a sign that the Business Cycle is becoming mature.

There are other developments which need to be monitored closely: (1) there was little upside progress on wages, with average hourly earnings increasing just 3 cents and 2.5 percent on an annualized basis. The average work week remained unchanged at 34.4 hours. Wage growth declined despite 19 states increasing minimum wage laws in January; (2) employment in the key working age group of 25-54-year-olds fell 305,000, but this was partially offset by a 195,000 increase in 55+ employment cohort. Normally, it should be the reverse - so more near-retirement people working and fewer people in prime working years in the active labor force isn't a positive sign at all;

(3) the pace of job growth continues to slow in relative terms - total payrolls that rose in January is up 1.6 percent year over year versus 1.9 percent in the Q1 2016, which is typical with an economic recovery that is starting to age; (4) there was an increase in those working part-time (by 232,000) because they cannot find full-time work. In a healthier jobs environment, the number of those working part time should be declining. In this regard, the underemployment rate (reference: the U6) rose to a three-month high of 9.4 percent from December's 9.2 percent. It is worthwhile watching the jobs data sets discussed in item number (4) because these are the metrics that Fed Chair Yellen watches closely, and are supposed to influence her decisions regarding monetary policy.

One of the biggest challenges facing continuation of friendly jobs report is the continuing mismatch between available labor and business needs. Small businesses have been complaining for some time that it is increasingly difficult to find qualified talent for the position they are looking to fill. Nearly two-thirds of small businesses surveyed by the Wall Street Journal complain that they are spending more time training workers than they were a year ago.

Even data that appears benevolent at the surface has to be critically examined for possible adverse ramifications in the future. One such example is the growth in Civilian Labor Force Participation (CLFP). The BLS said that CLFP increased by 584,000 in January, and the labor force participation rate rose by 0.2 percentage point to 62.9 percent. Total employment, as measured by the household survey, was up by 457,000 over the month, and the employment-population ratio edged up to 59.9 percent. That was taken as good news - more people are joining the labor force. But in terms of metrics like the Unemployment Rate (UR), that is not so good a news -the rise in CLFP will mathematically start pushing the UR after a few quarters, all conditions remaining the same. With the labor force participation rate rising, even as job openings become scarcer, employment conditions are actually being dealt a double negative whammy, and the UR could start reversing quickly to the upside, if both negative factors show up at the same time.

There is now a record spread between job openings and hires in the monthly Job Openings and Labor Turnover Survey (JOLTS) report. This issue will continue to be a drag on employment growth as well as a negative to domestic economic growth. This is happening even as the total jobs opening, and hires, as indicated in the JOLTS Report, are on the decline, and have been so since February 2016. This is hardly indicative of further growth in payrolls down the road. The separations data has also flattened, signifying that employees have gotten less sure about quitting their jobs now as they may not be able to find employment elsewhere, as job availability is starting to tighten.

The JOLTS Report is not the only worrisome metrics with regards to the labor market. We go back to First Principles and identify the crucial data sets which influence the jobs market at the outset, and there nothing more primary in this regard than credit extended by commercial banks, the steepness of the yield curve, and the banks' consequent Net Interest Margin (NIM), an important benchmark which motivates the banks to increase lending or not. NIM is a measure of the difference between the interest income generated by banks or other financial institutions and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets - Wikipedia.

Collectively, if the amount of banks' non-performing assets are high, their NIM will go down if the interest earning assets are steeply reduced by non-performing assets, and vice versa. A steeper yield curve provides better conditions for the banks' NIM to rise, which reduces the need for larger portfolios for riskier loans - hence loan levels fall when the yield curve steepens. The linkage to the job sector flows from the steepness of the yield curve to the amount of lending then to the jobless insurance claims and the unemployment rate. Put another way, when the yield curve steepens, commercial lending volume falls, and the tighter credit situation impacts hiring and payroll growth after a lag, with concomitant effects on unemployment and jobless insurance claims.

Conclusion:

The deteriorating internals of the jobs report in January may be manifestation of the worsening of the macro data which have a significant impact on jobs. Bank loan data is starting to fall, not only YoY but also on nominal levels, even as the US yield curve continues to steepen (the long-end is rising faster than the short-end). The banks' NIM is also rising, and so financial entities find other, presumably more profitable, ventures (as in increased financial leverage) relative to outright lending to a riskier class of borrowers. Developments in lending usually take several quarters to manifest in the jobs market, so it may be that we have a few more months of jobs growth.

But it is increasingly becoming clear that the upswing phase of the current Business Cycle is starting to show signs of aging. That is the message we are getting from the jobs report internals and the train of events that was set off by the impact of the steepening long yield curve (via the NIM). While we remain upbeat about the prospects of risk assets into late 2017 - making accommodations for a brief pause in Q1-early Q2 - it may be necessary thereafter to start rotating again into assets that do well during the late stages of the Business Cycle, like hard assets, including commodities.

Disclosure: I/we 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.

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