Understanding the Latest Employment Reports
Last week’s Employment Situation reports disappointed some investors and analysts. They’re misinterpreting the data.
The government reported only 138,000 new jobs created. Also, last month’s reported 211,000 new jobs were revised down to 174,000, well below the numbers of the past year, thus raising concerns among some observers about reduced growth.
In addition, average hourly earnings increased only 0.2%, without any change in the average workweek. There’s no doubt that economic growth declined during the last year. But there’s not much to be concerned about.
Slower jobs growth should be expected. The economy is at full employment and then some with the unemployment rate declining to only 4.3%. Sure, there are a number of people in part-time jobs who’d like to be in full-time jobs. But there’s no mass of unemployed people looking to get back into the workforce. In fact, the number of people looking for jobs is near historic lows.
Also, businesses report in surveys that it is difficult to find employees to fill the jobs they have available. We see this situation in the JOLTS (Job Openings and Labor Turnover Survey). JOLTS found hiring lags job openings by about 1 million. Employers can’t seem to find employees to match the skills they need, though job openings continue to grow at a healthy clip. The wide gap between job openings and hiring has continued for about two years.
This makes it likely that in the coming months, businesses will have to increase wages more than they have in recent years.
We see some shifts in the economy. Housing has slowed a bit, but manufacturing has improved. The service sector continues to be strong, with some monthly ups and downs. Overall, demand for goods and services remains close to what it has been recently and is likely to continue. This is especially true for businesses with international markets, since growth is improving outside of the United States.
What we’re likely to see over the next year, and perhaps longer, is businesses increasing their investments in plants and equipment.
Business investment has been at very low levels since the recovery began, because there were so many unemployed people. Businesses could increase output by hiring more workers, and the workers were relatively inexpensive. The downside of this practice was that productivity declined. With productivity down and wages likely to increase, businesses need to invest more in equipment to meet demand.
We’ve started to see business investment increase a bit in recent months, though not every month. I expect that to continue.
The Data
Speaking of productivity, it was flat for the first quarter. Also, unit labor costs rose 2.2%. That indicates lower profit margins for businesses and a need to boost productivity.
The increases in business equipment investments didn’t take place in April. Factory Orders declined 0.2%. After excluding the volatile transportation sector, they increased only 0.1%. The important core capital goods segment also increased a mere 0.1%.
The PMI Service Index increased to 53.6 from 53.1 for the mid-month flash. Overall, the report was positive but indicates solid growth instead of strong growth.
The ISM Non-Manufacturing Index was 56.9, down from 57.5. The decline was expected, and the number still indicates strong growth. The ISM reading has been higher than the PMI reading for a while. Most components of the ISM survey were very strong.
New unemployment claims declined by 10,000 in the latest week. That wipes out most of the recent spike in new claims and keeps the weekly number and four-week average near historic lows.
The Markets
The S&P 500 appreciated 0.92% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 0.84%. The Russell 2000 rose 1.96%. The All-Country World Index added 0.88%. Emerging market equities rose 1.09%.
Long-term treasuries gained 0.45%, while investment-grade bonds rose 0.26%. Treasury Inflation-Protected Securities (TIPS) fell 0.08% and high-yield bonds appreciated 0.14%.
The dollar lost 0.15% but energy-based commodities fell even further to drop 2.67%. Broader-based commodities slid 1.20% but gold jumped 1.97%.
Bob’s News & Updates
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