On Friday, February 5, markets were set to rise no matter what the employment data showed. If they beat to the upside, that would validate the reflation/pent-up demand narrative. If they disappointed, well, that would simply mean more fiscal and monetary largesse (which financial markets love). Either way, heads markets rise; tails, ditto.
Labor Market Signals: Positive, Negative and Mixed
As it turns out, there was validation for every viewpoint in the latest Bureau of Labor Statistics Employment Report:
· Negative: The Establishment (Payroll) Survey grew just +49K disappointing the consensus view of +105K. Worse, December was revised down by -87K and November by -72K.
- Leisure/Hospitality: -61K
- Retail: -38K
- Transportation/Warehousing: -28K
- Manufacturing: -10K
- Banking/Finance: -3K
· Positive: State and Local Government: +67K (But this means that payrolls in the rest of the economy were -18K!)
· Mixed: The Unemployment Rate (U3) fell to 6.3% (good), a decline that was mainly due to a -406K fall in the labor force, i.e., people dropping out having given up (bad).
· Mixed: The workweek rose to 35 hours (+0.9%). Hours worked in Leisure/Hospitality rose +2.4% and +1.3% in Retail, even as there were significant pink slips in these sectors. This tells us that businesses chose to meet demand by working the existing staff OT instead of hiring, just in case the rise in demand proved to be temporary.
· Negative: The diffusion index in the Labor Survey fell to 48.1 in January from 61.9 in December. Fifty is the demarcation between expansion and contraction, so this means more firms were laying off than were hiring.
· Positive: Average hourly earnings rose +0.2%. This was due to the mix of employment (the rise in state and local jobs which pay above average) and to the expansion of the workweek.
· Negative: “Permanent” job losses rose to 3.5 million; the number of unemployed for more than six months reached 4 million; the number of labor force dropouts is more than 4.3 million with more than 50% of these in their prime working years (ages 25-54); the average duration of unemployment rose to 26 weeks, up from 21 weeks in September.
· Positive: For the third week in a row, the Department of Labor (DOL) reported that there was a fall in Initial Unemployment Claims (ICs) in the state programs and in the special Pandemic Unemployment Assistance programs (PUA). The chart and table show a fall from 1.422 million the week of January 16 to 1.165 million the week of January 30. [Note: As indicated last week, the California data were troublesome showing huge declines for two weeks in a row. Last week, about half of those decreases were reversed. What caught my eye was the fact that Illinois data showed a -58% decline (-55,089). Remember, there were major winter storms in the northern part of the country during this reporting week. Other states in the path of the storms also showed declines, (though not to the extent of Illinois) indicating that IC filings may have been impacted by weather. Will know more with the next DOL release on Thursday, February 11.]
It is quite clear that severe damage has been done to the labor market. The chart and table showing the number of people receiving some kind of unemployment assistance remains near 18 million. The first bar in the chart (left hand side) is the data for March 14, 2020 – call that the pre-virus “normal.” That number is 2.1 million. The downward slope from mid-October to mid-January, implies that it will be February 2022 before we reach the pre-pandemic level.
But wait! America’s businesses have figured out how to substitute technology for physical bodies. In 2020, productivity measures show a rise of 4%. This is a productivity growth rate we haven’t seen for nearly a decade. Thus, the February 2022 date mentioned above is likely nothing more than a number in my calculator! Because of the damage done by the pandemic to the labor market (automation, labor force drop-outs, permanent job losses…) a return to the robust labor market of 2019 may be years away!
The passage of the $1.9 trillion “stimulus” package by Congress will likely add to the GDP, but the addition will be nowhere near the $1.9 trillion increase in debt. Still a possibility in the legislation is a timed step ladder to a $15/hour minimum wage. This will only accelerate the move by businesses to automate. The businesses that pay minimum wages are those in the struggling Leisure/Hospitality and Retail sectors. Expect more “permanent” job losses there as a result. While markets are worried about inflationary impacts from such increases, inflation from this source isn’t a real threat.
The “stimulus” does provide significant support for state and local governments, and those governments began rehiring (mainly school districts) perhaps in anticipation of such. Then, of course, there is the $1,400 checks for many American household members. The last two times we had “helicopter” money, early in the pandemic and then this past December, funny events occurred in the equity markets (the rise in the stock price of bankrupt Hertz last May, and of course, the recent GameStop
rise and fall as many members of Gen Z and Gen Y, raised with videogames, appear to view the equity markets in that vein). We may well get another bout of such irrationality with the next drop of free money!
As an aside, “Helicopter Money” was a concept I laughed at when Ben Bernanke re-introduced this Milton Freidman notion in a November 2002 presentation to the Washington D.C. National Economists Club. At that time, he was a member of the Board of Governors of the Fed. But it is a reality in today’s topsy-turvy world. A continuation of such money drops has two implications: 1) each successive dose has a weaker and weaker impact on the economy because the populous saves more in anticipation of paying higher taxes (an economic concept known as Richardian Equivalence), and 2) massive debt increases weaken the dollar and risk its “reserve currency” status. This is a big deal because most international trade is done in dollars causing high demand for the currency. A loss of “reserve currency” status would weaken the dollar and be highly inflationary as the cost of imports and many foreign sourced raw materials would skyrocket. “Reserve currency” status, while not currently pressing, could become an issue if dollars really do grow on trees.
There has been a spike in interest rates in 2021. The 10-Year U.S. Treasury Note yielded 0.93% on January 4 and that yield was 0.56% at the end of last July. On Friday, February 5, the yield had spiked to 1.17%. Market participants are clearly worried about inflation. They are concerned about the enormous increases in debt, not only by governments, but also by the corporate sector.
In my past few blogs, I have argued that consumer inflation, in the classic sense of a rise in the Consumer Price Index (CPI), is nowhere in sight. The pent-up demand narrative makes no sense when the pent-up items (services like restaurants, airlines…) represent a small percentage of consumption and even a smaller percentage of GDP. In addition, we are currently seeing pent-down demand in “stay at home” items (appliances, home improvement…) which will only accelerate when the pandemic is over. The CPI is much more sensitive to rents, tuition, and medical costs which make up 45% of the index and are currently deflating.
Like recent market phenomena (Hertz, GameStop), a temporary untethering of markets from economic reality can occur, and this can persist for long periods of time. Interest rates can certainly rise from here, and they are likely to do so as long as inflation remains a worry. But when the inflation indexes don’t respond and reality sets in, interest rates will retreat. Remember, the Fed has already committed to keeping rates where they are for several years.
Things to Ponder
- The worst stocks, from a fundamental point of view, significantly outperformed the overall market in January.
- More “Helicopter Money” will hit most Americans’ checking accounts in the next several weeks. Money really does grow on trees in Washington D.C.
- SPACs (Special Purpose Acquisition Companies) raised $83 billion in 2020, six times more than in 2019. These companies have no specific purpose except a promise (“hope”) that they will do something with the money thrown at them that will produce a return for the investor. Only “old-fashioned” people want to know what their money will be used for!
Over the past year, Bitcoin’s price has risen 600%, and Tesla’s
by 800%. Gold is only up 13% and silver 49%. I am told by Gens Y and Z that gold and silver are out of date, and that Bitcoin is the new store of value. Personally, I’m a big skeptic.
The global economy won't recover if we don't get vaccines to developing countries, too – CNN
First, step up efforts to end the health crisis
Second, step up the fight against the economic crisis
Third, step up support to vulnerable countries
With many vaccinated, Israel reopens economy before election – NEWS 1130 – News 1130
JERUSALEM — Israel reopened most of its economy Sunday as part of its final phase of lifting coronavirus lockdown restrictions, some of them in place since September.
The easing of restrictions comes after months of government-imposed shutdowns and less than three weeks before the country’s fourth parliamentary elections in two years. Israel, a world leader in vaccinations per capita, has surged forward with immunizing nearly 40% of its population in just over two months.
Bars and restaurants, event halls, sporting events, hotels and all primary and secondary schools that had been closed to the public for months could reopen with some restrictions in place on the number of people in attendance, and with certain places open to the vaccinated only.
Israeli Prime Minister Benjamin Netanyahu’s government approved the easing of limitations Saturday night, including the reopening of the main international airport to a limited number of incoming passengers each day.
Netanyahu is campaigning for reelection as Israel’s coronavirus vaccine champion at the same time that he is on trial for corruption.
Israel has sped ahead with its immunization campaign. Over 52% of its population of 9.3 million has received one dose and almost 40% two doses of the Pfizer vaccine, one of the highest rates per capita in the world. After striking a deal to obtain large quantities of Pfizer/BioNTech vaccines in exchange for medical data, Israel has distributed over 8.6 million doses since launching its vaccination campaign in late December.
While vaccination rates continue to steadily rise and the number of serious cases of COVID-19, the illness caused by the virus, drops, Israel’s unemployment rate remains high. As of January, 18.4% of the workforce was out of work because of the pandemic, according to Israel’s Central Bureau of Statistics.
At the same time that it has deployed vaccines to its own citizens, Israel has provided few vaccines for Palestinians in the West Bank and Gaza Strip, a move that has underscored global disparities. It has faced criticism for not sharing significant quantities of its vaccine stockpiles with the Palestinians. On Friday, Israel postponed plans to vaccinate Palestinians who work inside the country and its West Bank settlements until further notice.
Israeli officials have said that its priority is vaccinating its own population first, while the Palestinian Authority has said it would fend for itself in obtaining vaccines from the WHO-led partnership with humanitarian organizations known as COVAX.
Israel has confirmed at least 800,000 cases of COVID-19 since the start of the pandemic and 5,861 deaths, according to the Health Ministry.
Ilan Ben Zion, The Associated Press
Powell's Dashboard Shows How Far US Economy Has to Go on Jobs – BNN
(Bloomberg) — Federal Reserve Chair Jerome Powell says he and his colleagues have learned a lot over the last decade about the meaning of full employment. Now, they’re looking at a new set of labor-market indicators as they chart a recovery from the steepest economic downturn on record.
Call it the Powell dashboard.
The Fed chair has recently highlighted several data points that underscore the central bank’s shift in focus beyond headline numbers and toward the most vulnerable sections of the workforce. It’s an important development for Fed-watchers to graspin guaging how long policy makers will keep interest rates near zero as they judge incoming data, including Friday’s jobs report.
The approach marks an evolution from that of Powell’s immediate predecessor, Treasury Secretary Janet Yellen, who maintained a “dashboard” of metrics to help determine remaining slack in the labor market created by the Great Recession. It focused Fed-watchers on an array of statistics like job openings, layoffs, underemployment and long-term joblessness that applied to the entire labor force.
By comparison, the statistics on Powell’s list home in on things like Black unemployment, wage growth for low-wage workers and labor force participation for those without college degrees, categories that historically have taken longer to recover from downturns than broader metrics.
“It’s a pretty notable change,” said Seth Carpenter, a former Fed official who is now chief U.S. economist at UBS. The new definition of full employment reflects a growing understanding among policy makers that they can’t conclude the economy has reached such a state until “you really are starting to see businesses compete for workers at every part of the income distribution,” he said.
Here are some of the numbers Powell is watching that underscore the challenges ahead:
Covid sent Black unemployment surging to 16.7% in April and May of last year. By January it had recovered to 9.2%. But it reversed some of that progress last month, rising to 9.9%, according to Labor Department figures published Friday.
The Fed has faced growing pressure to acknowledge the uneven expansion in recent years, and the experience of the pandemic has only added to it. Powell has repeatedly said he wants to see broad-based gains in employment, and not just in the aggregate or at the median. In August, the Fed announced changes to its monetary policy strategy to codify a more inclusive approach.
The long economic expansion that preceded the pandemic continually defied forecasts of accelerating inflation even as unemployment dwindled, indicating potential for further labor-market gains. By mid-2019, Black unemployment had fallen to 5.2% — a record low in nearly a half-century of data.
During the financial crisis of 2008, Fed officials cut their benchmark interest rate to nearly zero, and didn’t begin raising it until December 2015. By then, the overall unemployment rate had recovered from a high of 10% to just 5%. But they didn’t take into account the unemployment rate for Black Americans, which at the time stood at 9.4%.
As Fed chair, Yellen often cited wage growth as a metric for judging progress toward full employment, including a measure produced by the Atlanta Fed in her dashboard.
In a Feb. 10 speech, Powell cited pay for the bottom 25% of earners in particular. Just before the onset of the pandemic in the U.S., wage growth for this group of workers was 4.7% on a 12-month average basis, according to the Atlanta Fed. That marked its highest rate relative to overall wage growth since the late 1990s.
By January of this year, the latest month for which data are available, it had moderated to 4%. In the wake of both the 2001 and the 2007-09 downturns, earnings growth for the lowest wage quartile took almost three years to bottom out.
Powell has also highlighted labor force participation rates specifically for those without college educations. The pandemic has had an outsize effect on them. As of last month, their participation rate was just 54.7%, according to the Labor Department figures published Friday.
Compare that with February 2020, when it stood at 58.3%, up from a low of 56.9% in 2015.
The magnitude of job losses during the Great Recession made the recovery from it a slow process. Many individuals looking for work eventually became discouraged and gave up, leading them to stop being counted as unemployed.
Under Yellen, the Fed elevated the labor force participation rate in its analysis of the state of employment to account for the likelihood that many of the so-called labor-force dropouts would take jobs if work was available. But the slow pace of recovery fanned arguments among policy makers over whether everyone who had lost work — especially the least-educated — would be able to find new employment and should therefore be counted in the shortfall.
In 2015, the year Yellen’s Fed began raising rates, “many forecasters worried that globalization and technological change might have permanently reduced job opportunities for these individuals, and that, as a result, there might be limited scope for participation to recover,” Powell said in his Feb. 10 speech.
But the next five years proved them wrong as those without college degrees were increasingly drawn back into the workforce.
As the Fed chair put it during an event on March 4: “Today, we’re still a long way from our goals.”
©2021 Bloomberg L.P.
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