US Employment data, key points and filler!

Unlike retail sales, industrial production, new orders or a number of other economic data, the employment report comes with a lot of extra filler.  You need to dig down into the ingredients to figure what is and what is not good.  On the surface we have seen a recent deceleration, but nothing which looks out of the ordinary post 2009.

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But what do we see when we dig? 

  • Productivity growth at post war lows!  Employment data is producing less and less and becoming in GDP, asset price support and income growth terms, increasingly diluted.
  • Health care and social assistance has been key to recent employment growth but the growth rate is falling off.  Looking after an aging society may not produce the growth needed to sustain the liabilities attached to the economic frame.  Indeed, many of these liabilities may not be adequately accounted for within asset valuations.
  • If we exclude health care and social assistance from employment date, employment levels only returned to growth on an annual basis in October 2014, making the current employment growth cycle a short one to date.
  • Add food service and drinking places employment (to health care and social assistance) and we have the sum total of jobs created since the recession started.  But even food services and drinking places employment growth has shown a recent declining trend.   Again, the income/productivity dynamics of this type of employment is unsupportive of the current asset/liability frame.
  • Retail trade employment growth was especially strong during the latter part of 2015 (dominated by motor vehicles and parts dealers), although we have seen weakening of late.  Watch out for MVP employment (which means an eye on consumer credit) and buildings and materials (which means an eye on construction).  There has been weakness on the retail side that is obscured by recent April data
  • The weakness in the goods producing industries, construction excepted, and trade and transport is noteworthy in the light of weakness in output, new orders and exports.  These are all key industries in terms of the economy’s ability to provide generate long term GDP, income and productivity growth.   Manufacturing and trade are important cogs in the economic machine.
  • The one relatively strong point in the data remains the professional and technical sub sector of professional services.  Relative to service sector (and hence all employment) it has continued to rise in importance, but the growth rate of this dynamic has slowed in the current cycle.  This may not be a positive for income flows if it represents a movement towards rationalisation of processes (reduced employment at the front end and a small increase at the operational core), reflective of cost reduction and other operational rationalisation.
  • Long term dynamics  – employment growth rates/part time versus full time/self employment versus employed – are all weakening or stuck in a post recession rut.  A lot of recent employment gains look like they are due to a rise in part time employment (which may be a positive if it signals increasing willingness to hire) so growth fundamentals are still very weak and possibly weakening. 

What makes employment growth and the make up of employment growth so important is that it impacts productivity and earnings growth, two key factors that require vigour if we are to accommodate high debt levels and high asset prices.  Other relevant relationships include capital investment (historically weak), income inequality and a slowdown in population growth as well as a shift in its demographics.   Finally, with weak global trade dynamics we have considerable pressure on areas of the economy that have traditionally been important to productivity and earnings growth.  

There is nothing wrong in a declining population and declining growth rates of employment as long as the relationship between asset values (debt/equity) and consumption/investment dynamics are in keeping.   I very much doubt whether it is and this is why employment growth today is a much more important indicator of financial health than it is fundamental economic health.  There are so many straws in the wind!

And the graphics:

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US Q1 GDP..big picture concerns conflate with shorter term weakness!

The big picture is the risk that growth may well have peaked in the current cycle:

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And personal consumption expenditure flows (population adjusted) have arced in a worrying sign of secular decline for some time:

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GDP growth less private employment growth has been negative since Q4 2010, one of the very few such periods in the post war period and the weakest to date and symptomatic of weak productivity and wage growth:

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Preliminary US GDP grew by a real $22bn in the first quarter.  Given that we are unlikely to see the weather related bounce back in growth that we saw last year, we are left wondering where growth is going to come from in the second and third quarters, especially if global trade fundamentals remain weak.

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US – Some interesting charts on income, GDP and new manufacturing orders from recent data

There are some interesting patterns and trends in US data: so I do ask myself, are we at the peak of the current cycle, are we as far as debt and low interest rates can take us?

US income growth has long been acknowledged to have weakened considerably yet recent data shows that the trend has indeed been weaker than first thought.  Note the following chart showing pre and post revisions to chained per capita personal disposable income:

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A Foray into the Fundamentals of Austerity in Anticipation of the Outcome.

A recent IMF report pointed out some supposed vast amounts of room available for the world’s economies to step up government borrowing to finance consumption, investment and production decisions.   Oddly the report appeared to ignore other forms of debt and material deterioration in key areas of the economic frame.  

When the crisis broke back in 2007 it was clear to me that monetary and fiscal policy would likely need to go for broke to support economic growth and employment at a time of collapsing asset values, debt defaults and a world wide retrenchment in expenditure of all kinds.   As it happened a great deal of that support went into asset prices and financial institutions.

But some years after the crisis, after a slow and drawn out recovery with interest rates locked to the floor, economies still appear to be borderline reliant on debt financed government expenditure.  Any attempt to reduce borrowing, to either raise taxes or cut expenditure to pay back debt would be considered by many to have an adversely negative impact on economic growth, especially at such low growth rates. 

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High savings can mask complex debt spirals: brief addendum to differences between debt and saving..

In a recent blog I touched on issues of definition with respect to savings, debt and money supply.   A recent blog by Michael Pettis also touched on excess savings in high growth, debt driven, over extended gross fixed capital investment led cycles…phew.   Today Jesse Colombo @thebubblebubble tweeted that “bubbles can form with 100% down payments.  Credit is not necessary to form a bubble”.

It is an interesting point.  You can get a localised bubble without credit/debt expansion and this is where consumption demand and/or asset focussed demand plonks itself overly on one particular sector of economic activity or asset class.   This would draw resources/demand away from other asset classes or other economic sectors.  But it would show up in relative demand for other asset classes and other areas of demand.  In other words some areas would deflate and others would expand.  The damage as the bubble burst would be due to misallocation of resources, if this impacted capital and human investment allocations, or merely a revaluation of asset classes.

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Some people are confusing bank deposit creation (loan growth) as saving..this misses the point

Some people seem to think bank loans and savings are one and the same thing..in other words if a bank lends someone $10,000, some believe that this instantly becomes savings in someone’s hands.  I do not believe it does.  They seem to think that excess savings is synonymous with too much debt…I find this incredible…

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