JOLTS Show Labor Market Still Healing

February 25, 2013

The nation’s labor market has come a long way since the depths of the Great Recession and its aftermath, but it still has a long way to go to get back to “normal.” We continue to expect modest improvement in the labor market in 2013, with the economy creating between 150,000 and 200,000 jobs per month and the unemployment rate drifting gradually lower from the 7.9% reading in January 2013. How quickly the labor market heals in 2013 will help to determine if, how, and when the Federal Reserve (Fed) begins to scale back quantitative easing (QE) and eventually begins to raise interest rates. We believe that the economy will grow at around 2.0% in 2013, a pace consistent with a small drop in the unemployment rate and also with the Fed continuing to purchase $85 billion in Treasury and agency mortgage-backed securities (MBS) as part of the Fed’s third round of quantitative easing, or QE3. The minutes of the January 29 – 30, Federal Open Market Committee (FOMC) meeting, out in mid-February, will provide some insight into how FOMC members viewed the pace of the economy (and labor market) as 2013 began.

Inner Workings of Labor Market
One data point FOMC members did not have when they met in late January 2013 was the monthly report on job openings and labor turnover for December 2012, also known as the JOLTS data. This report was released this past week on Tuesday, February 12, 2013. Each month, market participants and the financial media obsess over the monthly jobs report that details how many jobs were added in the economy, in what industries the jobs were added, how much workers were paid, and why workers were unemployed. That report is typically released on the first Friday of every month. On the other hand, the JOLTS data (released by the same government agency — The Bureau of Labor Statistics — that releases the monthly jobs report) is met with little, if any, fanfare from the financial markets or the financial media.

The JOLTS report does not get a lot of attention, mainly because it is dated. The market already has detailed information on the labor market for January 2013 and has seen several weeks’ worth of initial claims for unemployment data for February 2013. However, the JOLTS data provide more insight into the inner workings of the labor market than the monthly employment report does. One key takeaway from the recent JOLTS data is that small and medium-sized businesses in the South are looking for manufacturing workers.

JOLTS provides data on:

  • The number of job openings by economy-wide, by firm size, and by region
  • The number of new hires in a given month
  • Job separations

On the surface, the data reveal just how dynamic the U.S. labor market is, demonstrating how the economy creates (and destroys) tens of millions of jobs a year. It can also help answer questions like: Where are all the jobs coming from? What do those jobs pay? What kind of companies are hiring, and where are the jobs located?
At the end of December 2012 (the latest data available), there were 3.6 million job openings, up from 2.1 million open jobs at the start of the economic recovery in June 2009. However, the 3.6 million open jobs at the end of December 2012 was roughly a million fewer than at the end of the 2001 – 2007 recovery. Thus, the JOLTS data continue to tell a familiar story: The labor market is healing, but it still has a long way to go to get back to normal.

Where Are the Jobs?
The industry group that has seen the biggest percentage change (159%) in the number of open jobs since the start of the recovery is the manufacturing sector. Leisure and hospitality (77% increase in open jobs since the end of the Great Recession), construction (61% increase), and retail trade (54% increase) have also seen large increases in job openings since the end of the Great Recession. Currently, the manufacturing sector has 259,000 job openings (versus just 100,000 at the end of the Great Recession); the manufacturing sector is experiencing a mini revival. The recent boom in domestic natural gas production provides U.S. manufactures with very cheap energy input costs. In addition, the United States continues to have the most productive, highly educated and mobile workforce, all at relatively low wage rates. The superior workforce allows better quality control, and producing domestically (instead of overseas); it also cuts down on transporting goods long distances back to the domestic market. Finally, political “arm-twisting” has also contributed to the rebound in U.S. manufacturing in recent years, as manufacturers take advantage of tax rebates and other incentives to open or expand factories in Toledo instead of Taiwan. It’s not back to where it was in the 1970s and 1980s, but after declining for 70+ years since the end of WWII, manufacturing employment may be poised to climb higher over the medium term.

What Kinds of Companies Are Hiring?
Since the early 1990s, small businesses have created two-thirds of the jobs in the United States. The Bureau of Labor Statistics collects this data, but it lags the other data mentioned in this commentary, and the most recent report is from the middle of 2012. However, some private sector firms collect data on hiring by firm size, most notably, in the ADP Research Institute employment report. These data show that small businesses (under 499 employees) have accounted for 75% of all job gains in the last two years — through January 2013. Recent surveys do show an uptick in small business optimism, albeit from very low levels, helping to corroborate the hiring data. But returning to the data, we find that the entire increase in open jobs since the start of the recovery (1.5 million from Figure 1) can be accounted for by firms between one and 249 employees. While larger firms have seen increases in open jobs, the vast majority of the increase in job openings over the past three and-a-half years have come from small businesses. A recent Gallup poll found that 53% of small businesses in January 2013 said that it was either very difficult or somewhat difficult to find qualified workers, and that 27% of small business were hurt because they could not find qualified workers. Both of these figures are up from a year ago, but still well below pre-Great Recession levels, another sign that the labor market is better, but still not back to “normal.”

What Regions Have Jobs?
The JOLTS data breaks down job openings by region. The region with the most openings (1.32 million) and the biggest increase in job openings since June 2009 is the South. On the other hand, the Northeast has seen the smallest increase in job openings in the past three-and-a-half years and also has the fewest open jobs right now. The Western region has fared a bit better than the Northeast, but still has seen the second-smallest increase in job openings and has the second-lowest number of open jobs. One explanation for the lagging performance in these two regions is that both were hurt by: 1) the collapse in the real estate bubble (fewer construction jobs); and 2) the Northeast was also hurt by the collapse in the financial services sector due to the bursting of the real estate bubble. More recently, the Northeast was adversely impacted by Superstorm Sandy.Looking around the country at open jobs by industry, firm size, and pay, it seems like a good time to be a manufacturing worker in the South looking for work in a small to medium-sized business.


Sequestration

February 19, 2013

It’s a big word for the $1.2 trillion in automatic spending cuts over 10 years that Congress set up in the summer of 2012 when it couldn’t agree on how to achieve deficit reduction in return for raising the debt ceiling. So lawmakers set up automatic cuts and automatic tax increases to take effect if they couldn’t agree before the end of 2012. In other words, it’s the spending-cuts half of the fiscal cliff that remains after the tax-increases half was solved on January 1, 2013.

Federal workers will take cuts in pay, essential services to poor people will be reduced or eliminated, safety and law enforcement will be reduced, and small business loans will be cut.

The reduction in federal spending across the economy, and the reduction in spending power from the furloughing of Defense Department and other federal workers, will have a devastating effect on the economic recovery. A survey of money managers says they expect the Dow to drop by 5% if sequestration happens on March 1. But will it?

With little more than two weeks to go, the two parties agree it’s critical to avoid the automatic cuts, but they are far apart on how to accomplish that. Republicans insist that no more tax increases be part of any deal; Democrats want a 30% minimum tax rate on incomes over $1 million and the closing of corporate tax loopholes to be part of any cuts in spending. Stay tuned to see whether Washington can work out a compromise.


Surprise GDP Result Provokes Little Reaction from Wall Street

February 7, 2013

The Commerce Department’s preliminary estimate of GDP for the 4th quarter showed a -0.1% growth rate. The decline was unexpected, as most economists predicted a gain of around 1%. There were two primary drivers of the negative growth, neither is particularly troublesome: a large reduction in government defense spending and a reduction of inventory growth.

Government spending fell at a 6.6% annual rate in the 4th quarter, led by a 22.2% reduction in defense spending. Many see this as a result of accelerated 3rd quarter defense spending in advance of possible budget cuts. In all, reduced government spending subtracted 1.3% from GDP. Other deficit reduction measures may reduce government spending in the future, but this sharp of a decline is not expected anytime soon.

Inventories grew at a $20 billion annual rate, but this is down from a $60 billion rate from the previous quarter. This slowdown also subtracted 1.3% from GDP. Household consumption, residential construction, and corporate spending were all positive contributors, leading some economists to believe that the slowing inventory growth was led by a smaller crop harvest and supply chain disruptions from Superstorm Sandy. There is no reason to believe that companies will continue to slow inventory stockpiling in the current quarter.

In the end, the headline number was a bit surprising but it is being shrugged off by Wall Street as temporary and incongruous with recent economic results such as jobs and housing data.