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MV Weekly Market Flash: Jobs OK, Productivity Not So Much

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In September 2010 the US economy lost 52,000 jobs, according to the Bureau of Labor Statistics report released on the first Friday of the following month. Why is that important? Because September 2010 was the last month in which we had negative job creation.   Ever since – and periodic breathless exhortations of imminent jobs-killing Armageddon to the contrary – the economy has registered net positive jobs creation each and every month. The period from October 2010 to April 2016 is, in fact, the longest uninterrupted period of jobs creation since the end of the Second World War.

One Month Giveth, One Month Taketh Away

It is important to keep this long-term context in mind when mulling over the particular details of a monthly BLS report. Always remember that what is reported in any given month is not a fixed number, but a statistical best guess within what can be a fairly wide margin of error. Investors fixate on each month’s number in relation to the consensus expectation ahead of the release, but it is much more useful to pay attention to multi-period trends.

With that caveat in mind, the headline numbers in today’s report were a bit disappointing, with payroll gains of 160,000 against expectations of 200,000, along with downward revisions to the March and February gains. The unemployment rate held steady at 5 percent. Other BLS takeaways including the long-term jobless number and involuntary part-time workers were little changed.

The bright spot was wages. Average hourly wage gains of eight cents from the previous month translate to year-on-year growth of 2.5 percent. That’s a brisker pace than any of the main price inflation indicators; both the headline Consumer Price Index and the Fed’s favorite Personal Consumption Expenditure indicator are below two percent while core CPI, excluding energy and food prices, is 2.2 percent at last read. This month’s wage gains suggest that overall price trends are heading north. Janet Yellen has been somewhat dismissive of recent data in her public comments, but the Fed will have to take the current cadence of inflation into account as they weigh policy options ahead of the June FOMC meeting. Given the market’s expectations for zero interest rate action in June, there could be potential surprises in store.

What Are All the Workers Doing?

While it’s nice to see more people going to work and getting inflation-beating pay raises, we still don’t have a good answer to the question of why their hours of toil are not adding more to economic growth. Once every quarter we have a Productivity Wednesday preceding Jobs Friday, and this week was the appointed Wednesday for Q1 results. They were unimpressive, continuing a longstanding spell of weak productivity relative to historical norms. For the first quarter of 2016 productivity declined by one percent (annualized), following a 1.7 percent decline for the fourth quarter of 2015. The average gain for the last decade remains below one percent, far weaker than the 2.3 percent average for the post-Second World War period.

Productivity matters a great deal to our economic well-being; its chronic absence was the dominant theme of our annual market outlook back in January. Simply put, an economy only grows if (a) the population of working citizens grows or (b) each worker produces more output for each hour worked than he or she did for the previous period. Absent either of these two things happening, the economy won’t grow. With the population growth rate in long-term decline, productivity growth is the only game in town. Economists have not yet been able to solve the puzzle of why all the technological advancements of the last 15-odd years have not materialized into tangible growth. Perhaps, opine some, we are simply in a lull between innovation and commercial realization.

Then again perhaps we are, as Robert Gordon argues in his fascinating recent book “The Rise and Fall of American Growth,” past the peak of secular economic growth and unlikely to see it again in our lifetimes. Gordon’s argument is that the two most important inventions of the last 150 years – electricity and the internal combustion engine – have already contributed the lion’s share of the average annual growth we enjoyed from the last two decades of the 19th century on. The current productivity trend gives some weight to Gordon’s arguments.

We do not agree with Gordon’s view that nothing will ever rise to the same level of importance as those two 19th century inventions; the nature of any paradigm shift that radical is that it cannot even be imagined before it happens. More prosaically, though, we would like to see more bounce in forthcoming Productivity Wednesdays. Month after month of job creation is nice, but it won’t last forever unless all those new positions do more to improve overall economic output.

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MV Weekly Market Flash: Beware the Ides of March

March 6, 2015

By Masood Vojdani & Katrina Lamb, CFA

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March 15 – the Ides – falls a week from this coming Sunday. But this year it’s actually two days after the ancient Roman feast of Lupercalia (and anniversary of the death of Julius Caesar) that has the soothsayers buzzing. That’s when the Fed convenes for its next policy session, armed with the latest jobs data released earlier this morning. The hills and dales of the Twitterverse are alive with the sound of Fedwatchers: will they or won’t they? How many synonyms for “patient” exist in the English language? Is the labor market really Schrödinger’s Cat in disguise: tight  (5.5% unemployment) and slack (near-zero wage growth) at the same time? How these questions play out in the days leading up to and then beyond the March 17-18 meeting will likely have a meaningful impact on the near term course of stocks and rates.

Strong Growth, No Growth

It is always interesting to follow the chatter after the monthly BLS jobs release: which data point will “win the day” and become the focal point of the conversation? Today’s release served up a very impressive headline number: the overall unemployment rate fell to 5.5% and nonfarm payrolls added 295,000 jobs. That’s twelve straight months of job creation above 200,000. The past four months represent the fastest pace of jobs growth since the late 1990s.

What looks nothing like the late ‘90s, though, is the persistently tepid pace of wage growth. One month ago we got a brief glimpse of a green shoot here, with average wages growing 12 cents month-to-month at the end of January. That green shoot appears to have been buried by the latest snowstorm though; wage growth was basically flat for February and in line with the year-on-year pace of 2% that has been the norm for a while.

So which is it, strong growth or no growth? Remember that there was a time, not too long ago, when Fed guidance on rates focused on crossing the unemployment threshold of 6.5%. Obviously that threshold has long since come and gone. What has stayed the Fed’s hand has been softness in prices generally and wages in particular. This month’s data fail to serve up a conclusive take on what the Fed will be inclined to do come mid-month. But one view is coming in loud and clear: yields on the 10-year have jumped 11 basis points since the jobs data release.

Curve Balls

What is happening on the yield curve today is, in fact, somewhat counterintuitive. The spike in the 10-year yield is of a larger magnitude than movements in the 2-year yield, which as a short term rate is more directly impacted by Fed rate policy. The general consensus among bond market watchers has called for a continued flattening of the curve, with short term rates rising in anticipation of the Fed, while ongoing foreign demand for intermediate- and long-dated issues keeps a lid on yields down-curve. We think it likelier than not that today’s curve trades are more noise than signal. With Eurozone QE firing up and foreign currencies plumbing new lows against the dollar, there should be plenty of continuing appetite for Uncle Sam’s debt obligations.

Equities are also trending negative today, so stocks and bonds alike seem to be listening to the soothsayers and fearing what comes after the Ides. But, as we have said here time and again, in the long run growth should trump rates. We’ll take Fed action – whether a simple removal of “patient” from the lexicon or more decisive guidance on timing – as another signpost on the road towards growth and a reason to stay fully invested in equities.

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