The first look at November job growth indicated that businesses continue to add to headcount, albeit at a somewhat slower pace than forecast. ADP Employment Change data for November indicate the private sector of the U.S. economy added 208,000 new jobs. This was down from a prior revised 233,000 (up from 230,000) and lower than the Street consensus forecast of 222,000. Goods-producing industries (Including manufacturers) and construction companies, increased staffing by 32,000 in November. Payrolls at service providers increased by 176,000. Large businesses (companies employing 500 or more workers) added 42,000 jobs. Medium-sized businesses, (50 to 499 employees) added 65,000 workers. Small businesses increased payrolls by 101,000, according to the ADP data.
Mark Zandi, chief economist at Moody’s Analytics Inc., said in a statement:
“It’s steady as she goes in the job market. At this pace the unemployment rate will drop by half a percentage point per annum. The tightening in the job market will soon prompt acceleration in wage growth.”
We agree that it is steady as she goes. We believe the job market is tightening. In fact, we believe the job market is tighter than many experts believe. However, if we are correct and the labor market is already tight, the wage growth we get is probably the wage growth we are currently experiencing. A larger portion of the population consists of wealth consumers and fewer are wealth generators. Economists continue to wait for pace of wage growth to accelerate. They are still waiting. We heard that wage growth would pick up when unemployment fell into the 6.00% area, but little changed. We then heard that wage growth would pick up when unemployment fell below 6.00%, but still little changed. We now hear comments that when unemployment falls below 5.5%, wage growth will accelerate. We are certain the all economists learned about the post hoc, ergo propter hoc fallacy. However, many have forgotten about the “fallacy” part. (5)
Skating Away: The post hoc, ego propter hoc fallacy is taught in level-one economics to caution students not to be taken in by events which seem correlated on the surface, but might be less so when all surrounding data and conditions are considered. One might go to five Columbus Blue Jackets games in which they played and defeated the Detroit Red Wings. Simply looking at the score results of those games, one might assume that the Blue Jackets are a better team than the Red Wings. However, when we dig deeper into the data, we discover that in each game the Red Wings were playing the second of back-to-back games and were thus fatigued and used their back-up goalie. Meanwhile, the Blue Jackets were well-rested and played their starting goalie. Come playoff time, when both teams receive a few days rest and play their starting goalies, game results could be quite different.
The same holds true in economics. We cannot simply state because the unemployment rate falls to a certain level that wage growth must increase. The same could be said of Fed policy rates. Just because 4.00% was a neutral Fed Funds Rate in the past, does not mean it will be so in the future. Technology, globalization and demographics all matter. With many of the jobs created during the past five years being of the low-skill variety, why should wages increase much, even with decent job creation? Jobs have been created and the labor force has shrunk. On the surface, this should create upward wage pressures. However, there is competition for these low-paying, often menial, jobs from workers who were formerly higher-wage earners. Then there is technology (which can completely replace some workers) and (in some occupations) foreign labor competition. Based on the size of the labor force, the labor market is fairly tight, but include technology, foreign labor and former high-wage workers competing for low wage jobs (because many middle-income jobs have been permanently eliminated) and there is no shortage of production capacity.
Bond Squad’s forecast is for job growth to continue in the low-to-mid-200,000 range while technology advances at a rapid pace. If wage growth accelerates much beyond 2.0% we will be surprised. However, inflation will struggle to reach 2.0% so consumers should be able to carry on and pay their cell phone and internet connectivity bills.
By Thomas Byrne – Director of Fixed Income – Investment Consultant
Thomas Byrne brings 26 years of financial services experience to Wealth Strategies & Management LLC. He spent the last 23 years as Director of Taxable Fixed Income for Citigroup, Inc. and predecessor firms in New York, NY. During the course of his long fixed income career, Mr. Byrne was responsible for trading preferred stock, corporate bonds, mortgage backed securities, government debt, international debt and convertible bonds. Mr. Byrne was also responsible for marketing, sales, strategy and market commentary within the taxable fixed income markets.
- November 2012 – Present, Wealth Strategies & Management LLC, Stroudsburg PA
- December 2011 – November 2012 – Bond Squad, Kunkletown, PA
- April 1988 – December 2011, Citigroup and predecessor firms, New York, NY
- June 1986 – March 1988 – E.F. Hutton, New York, NY
Director of Fixed Income
Wealth Strategies & Management LLC
E-mail: [email protected]