Hardworking Employees Drive a Lackluster Job Recovery
It's one of those weeks when the flow of economic indicators was so uniformly positive that I just have to pinch myself to make sure I'm really here. An employment report showing job growth that was double expectations was certainly a highlight, but some of the behind-the-scenes numbers in that report were even more positive than the headline numbers.
Even the manufacturing sector, which had been a little weaker lately, turned in a very positive new orders report and a positive purchasing managers' report, much to the surprise of most analysts. In addition, auto sales for October also showed surprising power. The purchasing managers' survey for the services sector also managed surprising strength.
On the negative side of the ledger, initial unemployment claims continue to bounce around in an indecipherable pattern and were up again after several weeks of solid improvement. Personal income was just a tad disappointing at first blush, but that was largely driven by the absence of "catch-up" unemployment money paid in August and not repeated in September.
Stunningly good hours worked, employment, and wage data all but ensure a far better income report for October.
Quantitative Easing and Election Drove the Markets
I have been a bit more cautious over the last month or two as both consumer incomes and the services portion of the economy showed lackluster results. Last week's data certainly helped allay some of those concerns. The U.S. stock market also had a great week, but my gut tells me that was probably more because of the election and the final announcement of the widely anticipated quantitative easing program from the Federal Reserve, and not the economic indicators. I was greatly relieved that the Fed decided to go with a more muted program extended over more months than anticipated rather than a large and short-lived "shock and awe" strategy. I am still not a fan of this program that seems destined to blow yet another asset bubble, and I fail to see why the market is so in love with it.
Economic News Good, but Market Looking Rich
As a quick reminder, my role is to forecast the economy--not the stock market. I generally leave stock market forecasting to our individual analysts. While the economy looks a lot better to me than it did a week ago, the Dow is now higher than it was just before the Lehman crisis in the latter part of 2008. Looking at the S&P 500 on a 10-year average P/E basis, the market is beginning to look a bit rich at over 22 times earnings compared with a long-term historical average of about 17.
Tax and Unemployment Issues Remain
As good as everything was this month, I need to remind myself that this is just one month's worth of data, and there is always the possibility that the situation will quickly and inexplicably reverse itself as it did this spring. Expiring unemployment programs are beginning to scare me a little, too. I am already beginning to see the number of people collecting unemployment begin to fall; unfortunately, it's most likely because they've hit their 99-week limit and not because they have found jobs. While this will shrink the deficit, it will also shrink consumer incomes. Uncertainty about tax policy for 2011 is also an issue, as a lame duck congress will have to grapple with what to do about the Bush tax cuts. If they can't agree on what to do, taxes will automatically go up in 2011.
Job Growth Doubles Consensus Estimate
The employment report for October was surprisingly robust. Employment grew by 151,000 jobs, far ahead of expectations of 70,000 jobs and shrinkage of 41,000 jobs the previous month. Private sector jobs grew by 159,000 people, marking the fourth month in a row of private sector job growth in excess of 100,000 jobs. This now obvious trend was not so obvious last month, as both the August and September job reports were revised sharply upward as well.
Within the report, it appears that the long-suffering construction sector has stopped bleeding jobs, and construction employment was actually up in October. This squares with the two most recent construction reports from the Census Bureau that showed modest increases in overall construction spending. Service jobs improvement was robust, while the manufacturing sector saw no change in employment. This is highly supportive of my thesis that it is the services sector that will have to drive us forward from here. Retail, professional services and temporary help, and health care were particularly strong this month. Morningstar's retail team has indicated that retailers are gearing up for stronger holiday sales by hiring more people and hiring them earlier in the holiday season.
Better Wages and Hours Add to This Month's Employment Growth
Two areas of continuing strength are the numbers of hours worked and the real hourly wage. Compared with the previous six economic recoveries, this recovery has shown the strongest improvement in this all-important category. Employers favor longer hours because it gives them great flexibility to cut back hours instead of the much more painful process of firing people in case of another downturn. In addition, many benefit costs, especially health insurance, depend on head counts and not wages and hours. Therefore, the cost of working an employee a little harder is much lower than hiring a new employee. But we heard last week at Morningstar's Stocks Forum that employees are also demanding more hours. Fastenal, an industrial distributor, was one of the firms saying current employees were suggesting that management go light on hiring in exchange for a better bonus payment.
If hours worked per employee had remained flat this recovery instead of moving to 33.6 from 33.0, employers would have had to hire an additional 1.9 million workers. That is a truly huge number, given that the total of jobs lost this recession numbered more than 7.5 million and the jobs recovered since the official end of the recession is a meager 147,000.
Total Growth* from Official Recession End to 17 Months Later | |||
Recession | Hours Worked Growth (%) | Real Hourly | Employment |
1970 | 0.5 | 5.0 | 3.6 |
1975 | 1.1 | 1.2 | 3.8 |
1980 | 0.6 | 0.5 | -3.1 |
1981 | 1.4 | -0.2 | 5.2 |
1990 | 0.6 | -1.1 | 1.6 |
2001 | 0.0 | 0.9 | -0.8 |
Average | 0.7 | 1.1 | 1.7 |
2007(e) | 1.8 | 2.1 | -0.1 |
* Not annualized |
The wage number for October and the entire recovery also showed exceptional strength. I estimate that real hourly wages have increased by 2.1% this recovery, almost double the recovery average. So those with jobs are working hard and making more money, at least partially at the expense of a higher employment rate.
Balance of Trade on Tap for This Week
This week is an exceptionally slow week for data as Veteran's Day will push the official government retail sales report into the following week. This leaves the Balance of Trade report as the single most critical report of the week. Consensus suggests the balance will shrink modestly to $46 billion from $47 billion, but I don't think anyone honestly knows the answer to this hard-to-project number. I fear a stronger consumer will drive up imports. But on the export side, I am also hopeful that large capital goods shipments to emerging markets will kick in soon, although we may have to wait another month or two to see that. Boeing wouldn't be much of a help this month as October shipments were biased to domestic buyers.
This is an edited version. The article originated from Robert Johnson’s column at Morningstar.com.
