LPL FINANCIAL RESEARCH Weekly Economic Commentary February 19, 2013 JOLTS Show Labor Market Still Healing John Canally, CFA Economist LPL Financial Highlights We continue to expect modest improvement in the labor market in 2013. We expect the economy to create between 150,000 and 200,000 jobs per month. The JOLTS data continue to tell a familiar story: The labor market is healing, but it still has a long way to go to get back to normal. One key takeaway from the recent JOLTS data is that small and medium-sized businesses in the South are looking for manufacturing workers. Please see the LPL Financial Research Weekly Calendar on page 3 The nation s labor market has come a long way since the depths of the Great Recession and its aftermath, but it still has a long way to go to get back to normal. We continue to expect modest improvement in the labor market in 2013, with the economy creating between 150,000 and 200,000 jobs per month and the unemployment rate drifting gradually lower from the 7.9% reading in January 2013. How quickly the labor market heals in 2013 will help to determine if, how, and when the Federal Reserve (Fed) begins to scale back quantitative easing (QE) and eventually begins to raise interest rates. Our view as detailed in the Base Path outlined in our Outlook 2013 remains that the economy will grow at around 2.0% in 2013, a pace consistent with a small drop in the unemployment rate and also with the Fed continuing to purchase $85 billion in Treasury and agency mortgagebacked securities (MBS) as part of the Fed s third round of quantitative easing, or QE3. The minutes of the January 29 30, Federal Open Market Committee (FOMC) meeting, due out Wednesday, February 20, 2013, will provide market participants some insight into how FOMC members viewed the pace of the economy (and labor market) as 2013 began. 1 Solid Percentage Increase in Manufacturing Jobs During the Recovery December 2012 at Start of Recovery in June 2009 Increase in Hourly Earnings Total 3.6 Million 2.1 Million 1.5 Million $24/hr Construction 92,000 57,000 35,000 $26/hr Manufacturing 259,000 100,000 159,000 $24/hr Retail Trade 420,000 272,000 148,000 $16/hr Professional and Business Services Education and Health Care Leisure and Hospitality 540,000 367,000 173,000 $28/hr 710,000 519,000 191,000 $24/hr 461,000 260,000 201,000 $13/hr Federal Government 61,000 58,000 3,000 NA State and Local Government 299,000 256,000 43,000 NA Member FINRA/SIPC Page 1 of 5
Inner Workings of Labor Market The JOLTS data provide more insight into the inner workings of the labor market than the monthly employment report does. One data point FOMC members did not have when they met in late January 2013 was the monthly report on job openings and labor turnover for December 2012, also known as the JOLTS data. This report was released this past week on Tuesday, February 12, 2013. Each month, market participants and the financial media obsess over the monthly jobs report that details how many jobs were added in the economy, in what industries the jobs were added, how much workers were paid, and why workers were unemployed. That report is typically released on the first Friday of every month. On the other hand, the JOLTS data (released by the same government agency The Bureau of Labor Statistics that releases the monthly jobs report) is met with little, if any, fanfare from the financial markets or the financial media. The JOLTS report does not get a lot of attention, mainly because it is dated. The market already has detailed information on the labor market for January 2013 and has seen several weeks worth of initial claims for unemployment data for February 2013. However, the JOLTS data provide more insight into the inner workings of the labor market than the monthly employment report does. One key takeaway from the recent JOLTS data is that small and medium-sized businesses in the South are looking for manufacturing workers. JOLTS provides data on: The number of job openings by economy-wide, by firm size, and by region; The number of new hires in a given month; and Job separations. On the surface, the data reveal just how dynamic the U.S. labor market is, demonstrating how the economy creates (and destroys) tens of millions of jobs a year. It can also help us answer questions we receive quite often in the LPL Financial Research Department like: Where are all the jobs coming from? What do those jobs pay? What kind of companies are hiring, and where are the jobs located? At the end of December 2012 (the latest data available), there were 3.6 million job openings, up from 2.1 million open jobs at the start of the economic recovery in June 2009 [Figure 1]. However, the 3.6 million open jobs at the end of December 2012 was roughly a million fewer than at the end of the 2001 2007 recovery. Thus, the JOLTS data continue to tell a familiar story: The labor market is healing, but it still has a long way to go to get back to normal. Where Are the Jobs? Currently, the manufacturing sector has 259,000 job openings (versus just 100,000 at the end of the Great Recession). The industry group that has seen the biggest percentage change (159%) in the number of open jobs since the start of the recovery is the manufacturing sector. Leisure and hospitality (77% increase in open jobs since the end of the Great Recession), construction (61% increase), and retail trade (54% increase) have also seen large increases in job openings since the end of the Great Recession. Currently, the manufacturing sector LPL Financial Member FINRA/SIPC Page 2 of 5
LPL Financial Research Weekly Calendar U.S. Data Fed Global Notables 2013 18 Feb Mexico: GDP (Q4) 19 Feb Homebuilder Sentiment (Feb) Germany: ZEW Index (Feb) 20 Feb Housing Starts and Building Permits (Jan) PPI (Jan) FOMC Minutes Thailand: Central Bank Meeting 21 Feb CPI (Jan) Initial Claims (2/16) Markit PMI (Feb) Phila. Fed (Feb) Leading Indicators (Jan) Existing Home Sales (Jan) Bullard* Williams Fisher Spain: Bond Auction France: Bond Auction China: Property Prices (Jan) Eurozone: Markit PMI (Feb) 22 Feb Germany: IFO (Feb) 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) The manufacturing sector is experiencing a mini revival. has 259,000 job openings (versus just 100,000 at the end of the Great Recession). As we have noted in this and other publications over the past year or so, the manufacturing sector is experiencing a mini revival. The recent boom in domestic natural gas production provides U.S. manufactures with very cheap energy input costs. In addition, the United States continues to have the most productive, highly educated and mobile workforce, all at relatively low wage rates. The superior workforce allows better quality control, and producing domestically (instead of overseas); it also cuts down on transporting goods long distances back to the domestic market. Finally, political arm-twisting has also contributed to the rebound in U.S. manufacturing in recent years, as manufacturers take advantage of tax rebates and other incentives to open or expand factories in Toledo instead of Taiwan. It s not back to where it was in the 1970s and 1980s, but after declining for 70+ years since the end of WWII, manufacturing employment may be poised to climb higher over the medium term. How Much Do They Pay? Job openings have surged in the relatively low-paying ($13 per hour on average) leisure and hospitality area by 77% and by 54% in retail ($16 per hour) [Figure 1]. But large increases in job openings since the beginning of the recovery have not been limited to low-paying jobs. Job openings in both manufacturing and construction have soared, and these are among the highest paying jobs. Even in the health care and education areas sectors that didn t see many job cuts during the recession job openings have LPL Financial Member FINRA/SIPC Page 3 of 5
increased by 37%, for jobs that pay on average $24 per hour. Government job openings have increased only modestly, with a decent 17% gain in state and local openings, and a very small increase in the number of open jobs in the federal government. There is no commonly accepted set of data that track hourly pay rates for government jobs. What Kinds of Companies Are Hiring? 2 Vast Majority of Gains in Job Openings Have Come From Small Businesses (Under 499 Employees) Q4 2012 1 to 9 Employees 445,000 279,000 10 to 49 893,000 652,000 50 to 249 1,111,000 656,000 250 to 999 548,000 309,000 1000 to 4999 255,000 176,000 5000+ 61,000 48,000 Q2 2009 3 The South Enjoys the Most Job Openings and Most Added Since the Great Recession Open Jobs as of December 2012 as of June 2009 Increase in Northeast 654,000 578,000 76,000 South 1,322,000 834,000 488,000 Midwest 904,000 436,000 468,000 West 737,000 543,000 194,000 NORTHEAST: Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont. SOUTH: Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West Virginia. MIDWEST: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin. WEST: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming. Figure 2 looks at job openings by firm size. Since the early 1990s, small businesses have created two-thirds of the jobs in the United States. The Bureau of Labor Statistics collects this data, but it lags the other data mentioned in this commentary, and the most recent report is from the middle of 2012. However, some private sector firms collect data on hiring by firm size, most notably, in the ADP Research Institute employment report. These data show that small businesses (under 499 employees) have accounted for 75% of all job gains in the last two years through January 2013. Recent surveys do show an uptick in small business optimism, albeit from very low levels, helping to corroborate the hiring data. But returning to the data, we find that the entire increase in open jobs since the start of the recovery (1.5 million from Figure 1) can be accounted for by firms between one and 249 employees. While larger firms have seen increases in open jobs, the vast majority of the increase in job openings over the past threeand-a-half years have come from small businesses. A recent Gallup poll found that 53% of small businesses in January 2013 said that it was either very difficult or somewhat difficult to find qualified workers, and that 27% of small business were hurt because they could not find qualified workers. Both of these figures are up from a year ago, but still well below pre-great Recession levels, another sign that the labor market is better, but still not back to normal. What Regions Have Jobs? Figure 3 breaks down job openings by region. The region with the most openings (1.32 million) and the biggest increase in job openings since June 2009 is the South. On the other hand, the Northeast has seen the smallest increase in job openings in the past three-and-a-half years and also has the fewest open jobs right now. The Western region has fared a bit better than the Northeast, but still has seen the second-smallest increase in job openings and has the second-lowest number of open jobs. One explanation for the lagging performance in these two regions is that both were hurt by: 1) the collapse in the real estate bubble (fewer construction jobs); and 2) the Northeast was also hurt by the collapse in the financial services sector due to the bursting of the real estate bubble. More recently, the Northeast was adversely impacted by Superstorm Sandy. Looking around the country at open jobs by industry, firm size, and pay, it seems like a good time to be a manufacturing worker in the South looking for work in a small to mediumsized business. n LPL Financial Member FINRA/SIPC Page 4 of 5
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. Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. 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. The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation s open market operations (i.e., the Fed s buying and selling of United States Treasure securities). 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. Mortgage-backed securities are subject to credit, default risk, 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, and interest rate risk. International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors. The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation s open market operations (i.e., the Fed s buying and selling of United States Treasure securities). Job Openings and Labor Turnover Survey (JOLTS) is a survey done by the United States Bureau of Labor Statistics to help measure job vacancies. It collects data from employers including retailers, manufacturers and different offices each month. Respondents to the survey answer quantitative and qualitative questions about their businesses' employment, job openings, recruitment, hires and separations. The JOLTS data is published monthly and by region and industry. 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. 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 4085 0213 Tracking #1-142980 (Exp. 02/14)