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August 4, 2015 / Toby Dayton

LinkUp Forecasting Strong July Jobs Report & September Rate Increase

Not since early in the Spring of 2013 have so many people been so intently trying to read the tea leaves in an attempt to discern what the Fed Chair might do in the months ahead. Back then, the tea leaves consisted of monthly non-farm payroll (NFP) reports released by the Bureau of Labor Statistics (BLS) and the objective of a proper reading was determining when the Fed would begin tapering QE III which was scheduled to be phased out when unemployment reached 6.5%.

Tasseography today has crescendoed to a cacophony of noisy data streams including NFP, JOLTS, jobless claims, the labor force participation rate, long-term unemployment, wage inflation, general inflation, productivity, GDP growth, durable goods orders, consumer spending, consumer sentiment, the S&P/Case-Shiller home price index, and just about anything else anyone can think of that might hold a clue as to when Fed Chair Yellen might begin raising interest rates. While the consensus view is September, Yellen told members of Congress last week during testimony on Capitol Hill that, “While labor market conditions have improved substantially, they are not yet consistent with maximum employment.”

The number of variables in play as the Fed weighs the timing of its move is as long as the list of Republican Presidential candidates, and the picture those variables paint is just as discombobulated and unruly as the stage in Cleveland on Thursday night is certain to be during the first Republican debate. The challenge of deciphering so many signals is problematic enough on its own, but it becomes exponentially more difficult given that each signal not only presents a different picture depending upon the viewer’s perspective and the angle it’s viewed from, but also because each signal often conflicts with signals being emitted from other data points.

But despite the chaos that seems to be as inexplicable and disconcerting as Trump’s poll numbers, I’ll walk through the tea leaves as we read them and try to paint the picture of the current environment as we see it.

The backdrop of the overall jobs market is very good

There is no doubt that, viewed from the widest angle, the labor market is in very good shape relative to the past 5 or 6 years. The economy has added jobs for 57 consecutive months, a stretch that has seen a total of 11.5 million jobs added to the economy since October of 2010. Even more encouraging is the fact that momentum has been growing, with job gains in 2014 rising 30% over the prior year to an increase of 3.1 million jobs.

Job Growth by Qtr By Year Q2 2015

Job growth is slowing down in 2015

Unfortunately, however, when you narrow the lens a bit and take a closer look at more recent trends, it’s also clear that job growth has slowed a bit in 2015. Through June, the economy has added only 1.25 million jobs, a 13% drop from the same period a year ago. A bit more alarming is the fact that job growth in the 2nd quarter is 22% behind Q2 2014.

Jobs By Quarter 2011- Q2 2015

So while the labor market is definitely in good shape, the longer-term trend lines looking forward are not quite as obvious.

Unemployment is at 5.3% (but…)

One of the great debates raging at the moment is how much slack remains in the labor market and whether or not the economy is at full employment. Unemployment currently sits at 5.3%, the lowest it’s been at any point during the recovery, but higher than 4.7%, the rate just before the recession began. The current unemployment rate is also very close to the 5.2% rate that most economists consider to qualify as ‘full-employment’ or the maximum employment level before employers have to begin raising wages to fill openings (often referred to as NAIRU or the non-accelerating inflation rate of unemployment).

But today’s unemployment rate masks some critical underlying trends that have troubled Fed officials, economists, prognosticators, and other ‘seers.’ Those trends include such factors as long-term unemployment, under-employment, and the seemingly complete absence of any growth in wages that one would expect to see as the labor market reach peak levels. The U6 unemployment rate, which factors in ‘marginally attached’ and underemployed workers, sits at a still-alarming 10.5%. That’s well below the 17.1% seen in Q2 2010, but still very high and clearly indicative of slack that remains in the labor market.

Wage growth is nonexistent

Despite the steady string of solid monthly job gains, wage growth has been perplexingly low, much to the consternation of economists. On Friday, the BLS announced that the employment-cost index rose a shockingly low 0.2% on a seasonally adjusted basis in the 2nd quarter. That was the smallest quarterly gain since record keeping began in 1982. Total compensation was up 2.0% compared to Q2 a year ago, but that’s a slower pace than the 2.6% year over year growth from the winter.

As the WSJ reported Friday, PNC economists Stuart Hoffman and Gus Faucher wrote in a note that, “At this stage in the business cycle, with significant improvement in the labor market, wage growth should be accelerating. Weak wage growth is also puzzling given recent announcements from big companies, such as Wal-Mart and Target, that they are raising workers’ pay.”

Productivity has fallen for 2 quarters in a row and hasn’t risen in a decade (but…)

One of the reasons some believe wages haven’t budged is because productivity in the U.S. economy has stagnated. From 1948 to 1973, U.S. productivity rose an average of 2.8% per year, but dropped to half that in the 80’s despite the onset of the computer age. Between 1995 to 2004, it rose to 3% presumably due to technology and the internet, but fell to 2% again between 2005 to 2009. Since the Great Recession, U.S. productivity has dropped to less than 1%. In a speech in May, Fed Chair Janet Yellen stated that over time, “sustained increases in productivity are necessary to support rising incomes.”

But in a great WSJ article entitled U.S. Productivity: Missing or In Hiding?, Google economist Hal Varlan is described as leading a chorus of people in Silicon Valley who claim that the government’s antiquated measures of productivity (that are based on GDP – an economic indicator conceived in the 30’s) are sorely outdated and do not even begin to account for the massive productivity gains achieved through the torrent of technology-driven innovation, quality enhancements, and efficiency impacting the economy over the past decade.

And yet, it has to also be noted that it is those very same technology advancements that are, in many cases, making certain jobs obsolete, suppressing labor demand in particular industries and job categories, and dampening wage growth as technology increasingly competes with people.

Business are finally beginning to invest (but…)

The Commerce Department announced last week that new orders for durable goods rose a seasonally-adjusted 3.4% in June from a month earlier, not only surpassing economists’ predictions of a 2.7% rise, but marking the first increase since March. The Fed also reported that industrial production rose in June and The Institute for Supply Management reported renewed optimism in its survey of purchasing managers.

But as the WSJ pointed out last Tuesday, “The promising signs mask some continuing uncertainty. Durable-goods figures can swing widely from month to month and are subject to large revisions. Much of the June increase came from the heavy-weight transportation sector and reflects a one-time surge in aircraft orders tied to last month’s Paris air show.” The article goes on to report that excluding transportation, new orders rose 0.8%, the largest increase since August 2014.

And yet, the very same WSJ article quotes Amherst Pierpont Securities chief economist Stephen Stanley, “The June results provide the first glimmer of hope for business investment in equipment in quite some time, but so far, it is no more than a glimmer.” Overall, new orders are down 2% in the first half of the year compared to a year ago. Lindsey Piegza, chief economist at Stifel Economics wrote in a note to clients that, “Without business development, hiring will remain lackluster and, more importantly, income growth will remain stagnant, continuing to restrain the American consumer.”

Consumers are spending more and Home sales are rising

Contrary to Piegza’s gloomy sentiment, consumers did, in fact, start to spend more in the 2nd quarter. Consumer spending in Q2, which still accounts for two-thirds of U.S. economic activity, rose at a 2.9% rate as compared to 1.8% in Q1, while the savings rate fell to 4.8% from 5.2%. Whether or not the additional spending was driven by falling gas prices, improved outlook, pent-up demand, or one or more of countless other factors is open for debate, but the fact remains that consumers are spending more and the economy is expanding.

As an aside, it’s interesting to note the correlation between growth in consumer spending and rising demand for labor in the retail sector. In fact, our bullish analysis of retail labor demand last Summer accurately presaged strong retail sales during the holiday season, and this year’s numbers have only gotten stronger.

Retail Job Growth July 2015

If correlations hold true again this year, which we fully expect them to, we can expect strong retail sales again for at least the remainder of the year.

Home sales are at the highest level of the current expansion

Home prices continue to climb, as indicated by the Standard & Poor’s/Case-Shiller composite home price index which rose 4.9% year-over year in May, the same level as April but below the consensus estimate increase of 5.6%. David Blitzer, chairman of the index committee at S&P Dow Jones Indices said in a statement that, “As home prices continue rising, they are sending more upbeat signals than other housing market indicators.” But as the New York Times pointed out, “[Blitzer] called first-time home-buyers ‘the weak-spot’ for the price plateau.”

The economy grew by 2.3% in the 2nd quarter (after an abysmal 1st quarter)

Although the Commerce Department initially reported that the economy contracted 0.2% in Q1, a number that was later revised to a positive 0.6%, the fact remains that GDP growth was horrendous in Q1. Fortunately, the economy snapped back to life (or in any event, it finally stopped snowing in Boston and the L.A. port strike was resolved) in the 2nd quarter, growing at a rate of 2.3%, driven almost entirely by strong consumer spending.

In regard to the GDP revision, it should also be pointed out that the frequency of revisions to government data creates a entirely unique set of challenges in trying to read economic tea leaves. As a Reuters article stated, “The revision to first-quarter growth reflected steps taken by the government to refine the seasonal adjustment for some components of GDP, which economists said left residual seasonality in the data, as well as new source data.” Between seasonal adjustments, flawed data sets, antiquated methodologies, and time lags, just to name a few deficiencies, relying on government data can be as befuddling as Schrodinger’s cat.

ISM’s Purchasing Manager Index (PMI) is sending mixed signals

In July, ISM’s Purchasing Manager Index came in at 52.7. And although a reading above 50 indicates, in theory, a positive outlook for business spending and the economy in general, July’s number is below June’s and quite a bit below July of last year.

ISM PMI

In looking at PMI trends since January of 2014, it’s tough to know whether to be encouraged about being up from lows earlier in the year or discouraged by being so far below peak levels in the 2nd half of last year.

Consumer confidence drops most in 4 years (but…)

Despite the growth in the economy, the Conference Board announced last week that consumer confidence fell the most in any month in the past 4 years, surprising most economists who had expected a positive report. The Conference Board cited a ‘less upbeat’ jobs outlook and sluggish home sales that had stalled in May. But as Ryan Sweet, senior economist at Moody’s, was quoted as saying in the New York Times, “This seems to be an aberration. Consumers were probably freaked out by the problems in Greece and the Chinese stock market, and the volatility on Wall Street.” I’d certainly like to think so, but I’m not so sure that the average consumer is too worried about the European Union or the Chinese stock market.

The University of Michigan’s consumer sentiment index also fell in July, but was still up nearly 14% from where it stood in July of last year. Furthermore, the Michigan report found that households fully expect their incomes to rise over the next 2 years, in sharp contrast to the findings of the Conference Board.

Jobless claims fall to lowest level in over 40 years

On Friday, the Labor Department announced that jobless claims for the week ending July 18th fell by 26,000 to a seasonally adjusted 255,000, the lowest level since 1973. As Jim O’Sullivan, an economist with High Frequency Economics, stated in the WSJ, “This week’s claims reading may have been exaggerated on the low side but there is certainly no sign of the labor market losing momentum. The message: Employment growth remains more than strong enough to keep the unemployment rate declining.”

Chris Rupkey, a U.S. economist for Bank of Tokyo Mitsubishi UFJ stated rather bluntly that, “Current labor market conditions are the tightest in a generation. To argue that the economy is not yet at full employment, ‘good times’ levels, those arguments are simply incomprehensible.”

But then again, July claims are always volatile due to the way the auto industry works with temporary layoffs and rehiring. Earlier in July, jobless claims matched the highest level since February, and the 4-week moving average which smooths out week-to-week volatility, has not changed much at all since the spring.

New & total job openings in LinkUp’s job search engine

I’d love to say that by turning to our own data, we can gain a much clearer picture of where things are headed but it’s not quite that simple. Our reading of the tea leaves is very clear, and the pieces do all fit into place, but each individual piece of LinkUp’s data is just as fuzzy as every other data point highlighted so far.

For example, month over month gains in new and total job listings in our search engine have been pretty strong all year, with an average month-over-month increase of 9.4%.

2015 LinkUp 50:50 blend thru July

As background, LinkUp is entirely unique in the industry in that we only index jobs directly from corporate websites. Our index of 3.2 million job openings is updated daily and sourced exclusively from 50,000 company websites throughout the country. LinkUp does not aggregate duration-based, pay-to-post job listings from job sites in the way that Indeed, Wanted Analytics, or Burning Glass do, so our data does not contain duplicate listings or job pollution (scams, fraud, lead-gen, phishing, resume hoarding, staffing/recruiting/temp, identity theft, etc.). As a result, LinkUp’s labor market data is real-time and consists of the largest, highest-quality database of job listings in the market.  

LinkUp’s jobs data for July

But after strong back-to-back months in May and June, things have cooled off a bit in new and total job listings. New and total job listings rose just 3% in July – still good but a slower rate of growth that the previous 2 months and well below the average for the year. Equally as unclear is the fact that the exact same number of states showed a decrease in new job listings as those that showed an increase in new job listings. Total job listings rose in 33 states, but again, the total increase in total job openings rose just 3%.

Jobs By State July 2015

Jobs by category

July’s jobs by category paint almost an identical picture – tepid growth of 3% with an equal mix of gains and losses in new job openings in the 33 categories tracked by LinkUp.

Jobs By Category July 2015

Job Duration fell as hiring velocity rose sharply in July (but…)

LinkUp’s Jobs Duration report also sends a bit of a mixed signal. LinkUp’s ‘Job Duration’ report shows the length in days of jobs that have rolled off the site during the prior 6 months. Between April and October last year, the average job duration dropped from 51 days to 41 days as the ‘velocity’ of hiring by U.S. employers increased. In 2015, job duration rose back up again to 49 days in June as employers found in harder to fill openings in a tighter labor market, but in July, Job Duration fell sharply to 45 days.

Job Duration July 2015 (simple)

While this might simply reflect seasonal summer hiring, it could also point to a longer-term trend indicating that hiring velocity is accelerating again.

Putting all the pieces together

Obviously, the central question is how strong the economy is, how long it can sustain positive monthly job gains, and whether or not the Fed will raise rates in September, December, or next year.

LinkUp New & Total & blend thru Q2 2015

First, we’ll take our forecast for July’s non-farm payroll number. Based on the 11% and 17% increases in job openings on LinkUp in May and June respectively, we are forecasting a strong jobs report for Friday with a net gain of 310,000 jobs.

July 2015 NFP 2

It is our longer-term view that, in really broad brush strokes, the economy is very strong, consumers and businesses will continue to spend, wage inflation is going to surprise on the upside sooner than anyone expects, job growth will remain steady through at least the end of the year, and the Fed will raise rates in September.

For certain, the rate increase, the inflation jolt, the popping of the tech bubble ($10b valuation for WeWork – WTF), continued and even rising ineptitude within Congress, and rocky markets due to Europe and China, among others, will all create some additional turbulence, perhaps even inducing nausea at times. But with strong fundamentals that continue to chug along slowly yet methodically, the view toward the horizon continues to look very good.

So that’s our tune. The Rest Is Noise.

 

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P.S. – I cannot say enough about REDEF. I immediately became a huge fan. Soon thereafter, I became a fanatic. And with each day’s insanely well-curated mix of articles and Jason’s phenomenal rantnrave://, I am annoying more and more people with my incessant demand that they drop whatever it is they’re doing and sign up. It is, simply, the best content on the web.

P.S.S. – Jon Stewart’s last show Thursday night. Immense sadness.