U.S. Jobs Growth and Equities
February 2, 2013
The Dow Jones Industrials (DJIA) closed at 14,010 on Friday, February 1, 2013, which was only the seventh time ever with a close above 14,000. All six other instances were grouped tightly in early October 2007, including the record of 14,165 on October 9 that year. Friday’s extended rally was triggered by the Labor Department jobs report that not only put January’s gain of 157K a bit above analyst expectations but also revised November and December up sharply. The message conveyed was that jobs growth has quickened recently and that the unemployment rate may therefore decline more sharply from here than markets had been assuming.
The data revisions were part of an annual review of seasonals affecting the published data from the past ten years. Looking at the revised data series as a whole, not just the past few months, one indeed sees a quicker pace, but the inflection point wasn’t just a couple of months ago but rather about two years ago. The average monthly increase over the past six months through January of 177K was greater than the 159K per month average during the prior half-year through July 2012 but by the same token somewhat less than the pace of 206K per month in the six months to January 2012 or 185K per month in the earlier six months to July 2011. The next quantum breakthrough will occur when jobs expand at least 200K per month, not just once or twice but sustained over many months.
For the past two years, employment has in fact been expanding at almost its long-term norm. Jobs advanced by 1.841% per year during the 1980s and a virtually identical 1.837% per year in the 1990s. The pace, in comparison, during the last two years was 1.658% per year. The problem is that in between the more recent span and the final 20 years of the twentieth century, jobs stagnated, dipping actually by 0.005% on average per year. All the while, population growth chugged along, and the labor force kept rising in spite of a lot of drop-outs, which caused the employment to population ratio to fall to historically low levels. The jobless rate soared initially, and progress in reducing such back to acceptability has been frustratingly slow. Employment needs to rise faster than its long-term trend of 1.84% per annum before excessive inflation becomes a serious threat. That process still hasn’t begun, and insufficient inflation is the greater danger until it does.
Real economic growth mirrors what has happened to jobs with an important wrinkle. U.S. GDP climbed 3.0% per year in the 1980s and 3.3% per annum in the 1990s. While jobs growth stagnated for eleven subsequent years, real GDP growth was halved to 1.7% per year. But with jobs later expanding almost on a par with the long-term trend in 2011-12, real growth failed to quicken in tandem and instead rose 1.8% per annum, implying a slowdown of labor productivity that precisely neutralized the improvement of labor force utilization. In order for U.S. GDP growth to shift back from its new normal of “below but close to 2.0%” to its old normal of “above but close to 3%,” the jobs deficit needs to narrow considerably. That deficit is measured by the gap between the actual level of employment and what the level of jobs would be if such had continued since end-1999 to rise at the long-term trend of about 1.8% a year. That hypothetical level should now be about 30 million higher than the current level of 134.5 million workers.
U.S. stock prices also move in fits and starts. From the Great Depression closing low on July 8, 1932 to the post-1970s inflation low almost fifty years later on August 12, 1982, the DJIA climbed 6.0% per year from 41.2 to 776.9. Compared to that 6% long-term trend of appreciation measured from two secular low-points a half century apart, the DOW raced ahead of itself in climbing 16.9% per year on average over the ensuing seventeen years to a peak of 11,723 on January 14, 2000.
Despite periods of strong share price appreciation such as seen since March 2009, stocks have been whittling back the excessive advance that occurred in 1982-2000. At the aforementioned historic peak of 14,165 in October 2007, the DJIA had risen just 2.4% from 11,723 some 7-3/4 years earlier, and a comparison of 11,723 in January 2000 to 14,010 some thirteen years later at present represents an annualized advance of 1.4%. Has this normalization been completed? Probably not. The DOW on balance has advanced at a 10.0% a year pace over 31 years from its August 1982 low, and that’s still quite a bit above the 6% long-term trend from 1932 to 1982.
All this is not to say that share prices cannot continue to plow upward to new historic highs. As noted, the market moves in fits and starts, and the erratic nature of this movement is shaped by unnatural distortions. Fed policy and resulting very low long-term interest rates are the catalyst for the market’s current strong performance. The 10-year Treasury yield averaged 6.65% in the 1990s, 4.33% in 2000-2010, and 2.25% in 2011-12. Even after a sharp increase in the first month of 2013, the yield remains below its 2011-12 mean. If and as yields climb toward 2.25% and significantly higher, the bull market in equities may become vulnerable.
Copyright 2013, Larry Greenberg. All rights reserved. No secondary distribution without express permission.