First rule of hole management: stop digging
Jim Moffett, the respected Chief International Strategist and Senior Manager of our foreign equity effort, is fond of saying: “If you find yourself in a hole, and wish not to be, the first rule of
hole management is to stop digging.”
The October report from the Bureau of Labor Statistics (BLS) reminded us of that rule. For the month at least, the economy stopped digging the unemployment hole.
The Report – Details
During October, the economy created 151,000 jobs. The private sector (non-government) side of the economy created 159,000 jobs, while government shed 8,000 positions. Since December 2009, employment in the private sector has increased by roughly 1.1 million jobs, representing an increase of 110,000 jobs per month. The unemployment rate stayedthe same at 9.6 percent. Importantly, the employment numbers for the months of August and September were revised upwards by 110,000 jobs.
The gains were reasonably broad-based with few areas of the economy showing significant weakness. Of special note, hiring in the health care and retail trade areas were particularly strong. Manufacturing, construction, wholesale trade, transportation, information and financial services were all reasonably flat.
This report was strong relative to expectations. The “street” expectation was calling for 60,000 new jobs. Along with revisions, 201,000 more jobs are currently in existence. This sounds like a huge number, but remember the civilian labor force currently numbers 154 million folks. The new jobs of 201,000 represent about 0.1 percent of labor force.
The First Rule
The labor force grows by 140,000 workers per month – on average – due primarily to population growth. So, bottom line, what does this report mean? It means for the first time in a number of months, the economy grew jobs that basically absorbed the new entrants to the labor force. In other words, for the time being it appears the unemployment “hole” in which we are standing has stopped getting deeper. We have stopped “digging.”
Are things getting better? We suspect they are – but we believe the unemployment rate is going to remain sticky. Real GDP needs to grow in the 3.0 percent-plus range to successfully grow enough jobs to substantially lower the unemployment rate. Conversely, nominal GDP (real GDP + inflation) has grown by 6.9 percent per year, on average, since the end of WWII. Currently, nominal GDP growth is in the 3.5 percent range.
On a sustainable basis, corporate revenue growth (which has been highly correlated with nominal GDP growth) is so weak that rapid growth in private-sector employment is not foreseen. Actions announced by the Federal Reserve this week indicate that inflation should start to rise (hopefully not rapidly) leading to a lowering of “real” interest rates. This activity may indeed bolster business expansion plans, leading to an improvement in the employment environment.
But let’s not make light of this report. It is a good report, given where we have come from. The employment picture, while certainly not bright, appears to be improving. Why is the improvement occurring? We have long thought (and written) that a significant portion of economic doldrums can be centered on uncertainty. We have been coming through a period of time when economic uncertainty has been extremely high.
Economic visibility has been low, which has been driven by many factors. Events during the last week (election and Federal Reserve action) are providing clearing actions, which may lead to a higher level of economic visibility.This increased visibility may indeed aid the employment picture, and business prospects going forward.
Within the capital markets, it appears to us the “risk” trade is back on. We have been advising a positive posture regarding risk asset exposure, at least for the time being. We maintain that view.