Canadian employment grows based on jobs – U.S. based on math. Getting month to month statistics right may very well be a difficult task so I am not trying to call into question the credibility of the U.S. employment figures. However, it is important to understand that the drop in the U.S. unemployment rate was not due to more people employed.
The Bureau of Labor Statistics reported a drop in the overall number of 11,000 jobs in their highly watched ‘non-farm payroll’ figure. Let’s contrast this to that of Canada where the unemployment rate only dropped half as much (0.1% versus 0.2% in the U.S.). Statistics Canada reported an additional 79,100 workers on the payrolls. Keep in mind also the employment market in the U.S. is almost eight times larger than that of Canada.
So how is it possible to lose jobs and have the unemployment rate decrease? There are a number of reasons including the fact that there are actually two different BLS surveys. But the basic answer is that you just have to assume you have less people in your labor force. Given a U.S. labor force that is about 145 to 150 million workers, simple math says it would have taken 300,000 newly employed folks to truly bring down the unemployment rate by 0.2%. That puts us 311,000 short of justifying the headlines we saw last week.
An alternate, private employment survey (known as the ADP) reported 167,000 jobs lost in November. This job-loss figure was down from the previous months and supports an improving trend picture but does not support a job creation story.
If you want to look to an improving economic outlook, you have to look beyond U.S. unemployment to things like U.S. corporate profits, global trade, industrial production, and indicators like the Baltic Dry Index.
Corporate America is improving. A lot has been made about the recovery in global equity markets coming up strongly off lows back in November ’08 and again in March ’09. Yet a look at corporate profits in America says that this is warranted. Total corporate profits fell almost 30% in 18 months. They have since recovered 21% in the last nine months. I like to look at total corporate profits rather than S&P500 (SPY) profits because total profits as reported by the BEA captures private companies as well. Profits in the past quarter remain 15% off their 2007 peak.
It is easy to criticize the way in which corporate profits have improved because it has come at the expense of the government/taxpayers (through lower tax receipts and aid) as well as the labor force (layoffs, furloughs, and reduced pay). Yet the improvement has come.
Trade has bottomed. It is not only U.S. trade that has bottomed but the picture is similar around the world. The above picture of growing U.S. exports and even faster growing U.S. imports is not a good one for the U.S. current account deficit or for the U.S. dollar, yet it means activity is returning to the market.
I have multiple times pointed out the slow pace at which growth is returning in trade. Shipments are growing far slower than the pace of production increases in exporting nations like China (see here). The point is that while the recovery is happening it is not living up to the expectations of many.
Convergence of Baltic Dry Index components points to improving economic health. The Baltic Dry Index tracks the shipping rates for bulk dry goods around the world. As an index of actual economic activity, this measure is less subjective to the speculative frenzy of asset markets. It is still highly volatile. (See here for a description of the primary BDI and also of the impact from iron ore.) Two of the four lower level indices, Capesize and Panamax, are highly susceptible to stockpiling of iron ore while the indices of small ships (Supramax and Handysize) reflect a broader range of shipping activity. The fact that these latter two indices are hitting new highs for the year bodes well for the global economy even if the indices for the larger, more specialized ships have corrected some.
Federal Reserve should increase rates but likely won’t. Without true job creation, the U.S. Federal Reserve probably won’t be raising rates soon. This is unfortunate though. An increase to just 0.75% or 1.0% would signal to the markets that recovery is upon us albeit a weak one. Yet at 1.0% rates would still be extraordinarily low. Many Asian countries are unhappy about what looks to them like reckless monetary policy and benign neglect of the U.S. dollar.
With so many Asian currencies formally pegged to U.S. dollar or managed in line with its value, the result is an importing of U.S. monetary policy. Countries are reticent to let their currency float without concern for its strength as they fear it would result in weakening their export sector. These days it seems everyone wants to be a net exporter of goods and we all can’t do that at once.
In the Asia-Pacific region only Australia is content with a strong currency. Given that state of affairs Asia and the rest of the world are just going to have to wait for U.S. job creation, which has yet to come.
Disclosure: No positions
Looking Beyond U.S. Employment for Signs of Recovery
Dec
Two North American employment reports were released last Friday. The U.S. unemployment figures were widely reported and showed a decline of 0.2% to 10.0% for the month of November. The second, receiving less attention in the press, were those of Canada which showed a 0.1% drop to 8.5% but substantially more job growth. This week markets are ready to call an end to low interest rates and are speculating again on the timing of the rate hikes from the U.S. Federal Reserve.
Contrasting the report with that of Canada reveals some of the weakness in the U.S. version. There are some reasons for cautious optimism on global recovery but not because of the U.S. unemployment report. Unfortunately, rate hikes (which many Asian nations would like to see) are likely to be tied to true job creation.
