Farrell: Jobs and Gas Prices — Don't Get Carried Away
Don't get too excited about last Friday's employment report.
It was heartening to see almost 200,000 jobs created and the rate of unemployment tick down again, to 8.9% this past month. Some would say that another decline in the unemployment rate would confirm that last month's big move down of 0.4% was indeed the beginning of a trend. But I doubt it. The national labor force participation rate (the percentage of adults who are working or who are seeking work) is at 64.2%, down from 66% in December of 2007 when the recession began. Had the participation rate been 66%, the Wall Street Journalreported Saturday, the unemployment rate would have been 11.5%.
There are several million unemployed who have stopped looking for work. They might have gone back to school, are staying home with the kids, or sitting on the couch watching the tube. Historical trends would lead us to believe that, as jobs are created, these people will rejoin the work force with the hope of finding a job. I expect the number of jobs created each month to go up, but I expect the jobless rate to go up as well as the denominator to the equation expands with the surge of hopeful job seekers.
I do think job growth will expand, and nicely.
Initial jobless claims have dipped meaningfully below 400,000. There were 368,000 last week, the lowest since May, 2008. The four-week moving average of initial claims stands at 388,500, the lowest since July 2008. Also, the ISM manufacturing index and the ISM non-manufacturing index both have an employment sub-index contained in all their data. The manufacturing employment measure is now the highest it has been since 1973. Manufacturing is only about 15% of the economy, so the non-manufacturing index takes on more importance since non-manufacturing (service) covers about 85% of jobs. Its employment measure is now the highest it has been for several years. Expect this background data to lead to more jobs on a monthly basis in the big Labor Department monthly poll. 136,000 jobs a month on average have been created the last three months. While better than we have seen, it is barely enough to cover the 100-125,000 new entrants into the work force each year.
And we desperately need private payrolls to expand.
State and local government jobs are declining rapidly due to budget constraints. 13.7 million people are officially out of work, and several million more have stopped looking, as I mentioned above. Nearly half of those out of work have been so for six months or longer. A sign of muted inflation is that average hourly earnings advanced only one cent in February to $22.87, and the average work week was flat at 34.2 hours. Job creation could well lead Chairman Bernanke to stop the QE's at 2, but the lackluster move in wages will not allow him to raise interest rates. Figure rates stay very low for a long while and the dollar continues to weaken if the Euro folks follow through on their threats to increase rates across the Pond.
Rising oil and gas prices do not help at a time of sluggish job and wage growth. (Track Oil Prices Here)
But don't get too exercised yet about oil's rise.
There have been lots of quotes in the paper about how the last five recessions followed oil spikes.
The Financial Times's Gavyn Davies noted in a column recently that, "Each of the last five major downturns in global economic activity has been immediately preceded by a major spike in oil prices." Whether the rise was caused by "supply shocks as in the 1970's. . .or demand surges as in 2008. . .the outcome was always unhappy." Stephen King of HSBC was quoted saying "Regular as clockwork, increases in oil prices of more than 100% lead to declining GDP." And he is right. In 1973-74 the rise was 240% (sort of depending on when you start and stop measuring), 1978-79 was 150%, 1990 oil advanced 150% in three months, 1999-2000 was 75%, and 2007-08 was 100%. But, and this is a good but, the most recent rise is about 50% over a total of 8 months. Maybe oil goes higher, but I suspect we are near a peak except if Saudi Arabia erupts. A double-dip recession is a long way from a sure bet.
Economies are less oil-intensive as well. A sustained $10 rise in oil would probably impact the GDP of the US by about 0.2%, well below the 1970's impact. That same $10 would impact India and China a good bit more, say 0.8% or even slightly more. But they are also growing much faster. On the other hand, in 2008, during the last big rise in oil, the unemployment rate in the US was 5.7%, not 8.9%. Higher oil and gas prices now would hurt consumer spending more than 2008.
The conclusion is not to jump to conclusions. As to the stock market, the crazy volatility of recent days strikes me as a market that is topping itself and is struggling. I'm still guessing we have a bit of a pull-back.
Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.