Weekly Economic Commentary

Transcription

1 LPL FINANCIAL RESEARCH Weekly Economic Commentary March 4, 2013 Marching Toward the Pre-Recession Peak John Canally, CFA Economist LPL Financial Highlights The U.S. economy needs to add another 2.7 million net new jobs to get back to the all-time high set in early 2008 during the early months of the recession. How quickly the economy can create those 2.7 million jobs will in large part determine if, when, and how the Federal Reserve (Fed) begins to scale back its quantitative easing (QE) program. Despite growth in private sector jobs, the pace of job creation overall has been frustratingly slow. Please see the LPL Financial Research Weekly Calendar on page 3 1 Both the Headline Unemployment Rate and the Underemployment Rate Have Come Down Over the Past Three Years, but Remain High by Historical Standards U-6 Underemployment Rate Seasonally Adjusted Civilian Employment: Derived from the Household Survey, Seasonally Adjusted, Millions Source: Bloomberg data, LPL Financial 03/04/ U-6 underemployment rate is the broadest definition of the unemployment rate, taking into account workers who have given up looking for work and those working part time for economic reasons On Friday, March 8, 2013, the U.S. Bureau of Labor Statistics (BLS) will release its Employment Situation Report for February The report, which always generates plenty of conversation among politicians, pundits, and market participants, is actually two reports in one. Please see the nearby text box for a breakdown of the two surveys within the monthly Employment Situation Report. Labor Market Stress Measures Are Dropping Across the Board We would be more skeptical of the drop in the unemployment rate and the gains in the payroll job count if other measures of labor market stress (layoff announcements, initial claims for unemployment insurance, job openings, hours worked, etc.) had not moved in the same direction. Layoff announcements collected by a private sector outplacement firm, Challenger, Grey & Christmas in the 12 months ending in January 2013 totaled 510,000, very close to a 12-year low of 476,000 hit in early In mid-2009, the 12-month total of announced layoffs was over 1.6 million. Initial claims for unemployment insurance, tallied at the state level, averaged just 355,000 per week in the four weeks ending February 23, 2012, the lowest reading in five years (2008). Claims peaked at nearly 650,000 per week in mid In late February 2013, just fewer than 7 million people were receiving some type of unemployment benefit, down from close to 15 million in early The number of job openings, as measured by the U.S. BLS Job Opening and Labor Turnover report, found that in December 2012, there were more than 3.6 million open jobs, up from just fewer than 2.2 million in mid Virtually every measure of consumer sentiment, all of which are collected by the private sector, is at, or close to, five-year highs. The improved sentiment is a function of a stronger equity market, less volatility in financial markets, improved labor markets, the vastly improved housing market, and, until recently lower prices for gasoline. Gallup employment data The private sector Gallup polling firm asks 18,000 Americans on a regular basis about their employment status, and the unemployment rate derived from that survey has moved Member FINRA/SIPC Page 1 of 5

2 Measuring Underemployment There are alternative measures of the unemployment rate that attempt to measure the level of underemployment in the economy. To more closely examine these, we need to define some terms: Workers who are marginally attached to the workforce are those who currently are neither working nor looking for work, but indicate that they want and are available for a job and have looked for work sometime in the past 12 months. Discouraged workers, a subset of the marginally attached, have given a jobmarket related reason for not currently looking for work. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a parttime schedule. down significantly since the beginning of 2010, tracking the official unemployment rate calculated by the U.S. Department of Labor. Gallup underemployment data However, the Gallup data also suggest that underemployment remains quite high at around 18%, consistent with the government s measure of underemployment (see box). The U-6 unemployment rate (which takes into account part-time workers and discouraged workers) in January 2013 stood at 14.4%, down from a peak of over 17% in 2009 [Figure 1]. Closer Look at the Monthly Employment Report A quick refresher to remind readers that the monthly jobs report is actually derived from two surveys, each of which surveys an unusually large number of businesses and households relative to other nationwide polling. The monthly job count is derived from a monthly survey of approximately 140,000 businesses and government agencies representing approximately 440,000 worksites throughout the United States. This is referred to as the establishment survey. The household survey, which provides us with the unemployment rate, uses a sample of 60,000 households. The data are collected by personal and telephone interviews. By comparison, national polling on presidential races poll only around 1,000 or so individuals. The household survey has been conducted in much the same way since Although it has been "modified" over the years, the basic framework of the data set is the same as it has been for 70+ years. The last major modification to the dataset (and to how the data is collected) came in The headline unemployment rate (7.9% in January 2013) is calculated by dividing the number of unemployed (12.3 million) by the number of people in the labor force (155.6 million). The civilian population over the age of 16 stood at million in January You are identified as being part of the labor force if you are over 16, have a job (employed), or do not have a job (unemployed) but are actively looking for work. You are not in the labor force if you are neither employed nor unemployed this category includes retired persons, students, those taking care of children or other family members, and others who are neither working nor seeking work. In January 2013, the labor force was million, which consists of million employed persons and 12.3 million people who were unemployed. Another 89.0 million people over the age of 16 were classified as not in the labor force in January LPL Financial Member FINRA/SIPC Page 2 of 5

3 LPL Financial Research Weekly Calendar U.S. Data Fed Global Notables Mar Yellen* Eurozone Finance Ministers Meeting Australia: Central Bank Meeting 5 Mar ISM- Service Sector (Feb) Lacker Eurozone Finance Ministers Meeting Eurozone Retail Sales (Jan) Eurozone: Service Sector PMI (Feb) 6 Mar ADP Employment Report (Feb) Factory Orders (Jan) Beige Book Plosser (Hawk) Fisher (Hawk) Canada: Central Bank Meeting Brazil: Central Bank Meeting 7 Mar Initial Claims (3/2) Challenger Job Cut Announcements (Feb) Trade, Exports and Imports (Jan) Consumer Credit (Jan) 8 Mar Employment Report (Feb) Wholesale Inventories (Jan) Fed releases bank stress test results Hawks: Fed officials who favor the low inflation side of the Fed s dual mandate of low inflation and full employment Doves: Fed officials who favor the full employment side of the Fed s dual mandate * Voting members of the Federal Open Market Committee (FOMC) European Central Bank Meeting Japan: Central Bank Meeting Bank of England Meeting Spain: Bond Auction France: Bond Auction Germany: Factory Orders (Jan) China: Imports and Exports (Feb) China: CPI (Feb) due out on Saturday, March 9 China: PPI (Feb) due out on Saturday, March 9 China: Industrial Production (Feb) due out on Saturday, March 9 China: Retail Sales (Feb) due out on Saturday, March 9 China: Fixed Asset Investment (Feb) due out on Saturday, March 9 Mexico: Central Bank Meeting Germany: Industrial Production (Jan) Spain: Industrial Production (Jan) The economy needs to add another 2.7 million net new jobs to get back to the all-time high of early The private sector economy in the United States lost 8.8 million jobs between the peak in employment in January 2008 and the trough in employment in February Since the end of the recession in June of 2009, the private sector of the economy has created 5 million jobs. Since the labor market trails the overall economy, the labor market itself didn t bottom out until February 2010, eight months after the end of the recession. Since that point, the private sector economy has created just over 6 million new jobs [Figure 2]. Still, the economy needs to add another 2.7 million net new jobs to get back to the all-time high set in early 2008 during the early months of the recession. How quickly the economy can create those 2.7 million jobs will in large part determine if, when, and how the Federal Reserve (Fed) begins to scale back its quantitative easing (QE) program, and eventually begin to lift rates from their exceptionally low level. LPL Financial Member FINRA/SIPC Page 3 of 5

4 2 The Private Sector Economy, Which Shed 8.8 Million Jobs in the Great Recession, Still Has to Add 2.7 Million Jobs to Get Back to Pre-Recession Peak All Employees: Total Private Industries, Seasonally Adjusted, Millions 2.7M Jobs Needed to Reach Peak of Jan Jan 08 Jan 10: -8.8M Jobs Jan 10 Early 13: +6.1M Jobs Source: Bureau of Labor Statistics, Haver Analytics 03/04/13 The Next 2.7 Million Jobs If the 2.7 million jobs are added over the rest of 2013, for an average monthly gain of just fewer than 250,000 per month, the Fed is likely to begin to scale back its QE program this year. Job gains at that pace would also likely put downward pressure on the unemployment rate, pushing toward the 6.5% threshold at which the Fed would consider raising rates. A pace of around 175,000 net new jobs per month would be most consistent with our view of the pace of around 2.0% economic growth in If the next 2.7 million jobs are created over the next over 15 months (by early 2014), net new job creation would be around 175,000 per month, the pace at which the economy has created jobs over the past 12 months. At this pace, the unemployment rate would likely decline only gradually, and likely not threaten the 6.5% threshold until mid This pace of job growth would be most consistent with our view of the pace of economic growth in 2013 around 2.0%. If it takes the economy longer than 15 months to create the next 2.7 million jobs, it likely would mean that the economic recovery has stalled perhaps due to the ongoing fiscal debate in the United States or a deepening recession in Europe. In this scenario, the Fed would likely continue to purchase $85 billion of Treasury and agency mortgagebacked bonds (MBS) per month beyond the end of 2013, and may even consider additional QE to help foster job growth. In the economic recoveries in the early 1980s, early 1990s, and early 2000s, it took the economy 25 months, 38 months, and 54 months, respectively, for the economy to get back to peak employment. If the economy continues to create jobs at the same pace it has over the past 12 months (around 175,000) per month, total private sector employment won t recoup all of the 8.8 million jobs lost during the Great Recession until April April 2014 is four years and two months from the trough in private LPL Financial Member FINRA/SIPC Page 4 of 5

5 sector employment (February 2010) and 63 months since the prior peak in employment hit in January The pace of job creation in this recovery has been "frustratingly slow," a phrase used by Fed Chairman Ben Bernanke in recent years. The unique nature (bursting of the housing and credit bubble of the mid-2000s) of the Great Recession and its aftermath, along with the stops and starts in U.S. fiscal policy, and the ongoing fiscal crisis in Europe have all contributed to the sluggish recovery in the U.S. economy. The sluggish economy, in turn, has led to the tepid pace of job creation since the recession ended in n IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Stock investing involves risk including loss of principal. Quantitative easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Mortgage Backed Securities are subject to credit, default, prepayment risk that acts much like call risk when you get your principal back sooner than the stated maturity, extension risk, the opposite of prepayment risk, market and interest rate risk. INDEX DESCRIPTIONS The Chicago Purchasing Managers Index is read on a monthly basis to gauge how manufacturing activity is performing. This index is a true snapshot of how manufacturing and corresponding businesses are performing for a given month. A reading of 50 or above is considered a positive reading. Anything below 50 is considered to indicate a decline in activity. Readings of the index have the ability to shift the day's trading session one way or another based on the results. Producer Price Index is an inflationary indicator published by the U.S. Bureau of Labor Statistics to evaluate wholesale price levels in the economy. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. This research material has been prepared by LPL Financial. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity. Not FDIC/NCUA Insured Not Bank/Credit Union Guaranteed May Lose Value Not Guaranteed by any Government Agency Not a Bank/Credit Union Deposit Member FINRA/SIPC Page 5 of 5 RES Tracking # (Exp. 03/14)