FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
December 12, 2017
The latest Robinhood Investors Conference is in the books, and some hedge funds made an appearance at the conference. In a panel on hedge funds moderated by Maverick Capital's Lee Ainslie, Ricky Sandler of Eminence Capital, Gaurav Kapadia of XN and Glen Kacher of Light Street discussed their own hedge funds and various aspects of Read More
- Better Than Expected November Unemployment Report
- Employment Gains Improving Across Economic Spectrum
- Today’s US Business Climate is Near the Best Ever
- So Why Then Are Average Wages Rising So Slowly?
- Fed Policy Meeting Today & Tomorrow – Rate Hike Expected
Better Than Expected November Unemployment Report
Last Friday, the Labor Department reported a better than expected 228,000 net new jobs were created in November. The pre-report consensus suggested only around 200,000 new jobs last month. This is yet another indication that the US economy is accelerating as I have suggested often over the last several months.
The headline unemployment rate held steady at 4.1%, a 17-year low last month. In the past 12 months, the number of people employed is up 1.87 million. That's why the unemployment rate continues to drop.
Even some usual critics in the mainstream media now admit the economy's underlying shift: "The American job market is the strongest it's been in a decade, and arguably the strongest since 2000," wrote The New York Times on Friday. The Times is right.
Companies in nearly every sector are reveling in the best opportunities they have seen in years. Improving global growth is giving a lift to manufacturers, which have added jobs for four straight months. Rising incomes and strong consumer confidence helped retailers, whose payrolls grew at the fastest pace since January despite the shadow of rising online sales.
Even the fall hurricanes, which led to a short-lived slowdown in hiring in September, as you can see in the chart above, are now helping employment as Texas and Florida rebuild. The construction sector added 24,000 jobs in November.
Employment Gains Improving Across Economic Spectrum
The most interesting part of the latest jobs report, which goes almost unnoticed by the media, is that it's not just a few groups seeing more jobs and opportunity. It's now broad-based with minorities, women, men and even those with low incomes showing the best gains. For instance, every education group -- ranging from those with no high school diploma to those with a bachelor's degree or higher -- saw significant declines in unemployment in November 2017 from November 2016.
And the biggest drops were for those with the least education, not the most. Meanwhile, groups that have lagged in recent years also show major improvements. For instance, the jobless rate for African Americans dropped from 8% to 7.3%, while for Hispanics it fell from 5.7% to 4.7%. For Asians, it stayed at an ultra-low 3%.
Among adult men 20 years and over, unemployment has plunged from 4.3% last year to just 3.7% at November 30. Likewise, adult female unemployment declined from 4.2% to 3.7%.
Only one group is doing notably worse: Teenagers. Those aged 16 to 19 have seen their jobless rate rise from 15.2% to 15.9% in the past year. It's no fluke: Hefty minimum wage hikes around the country have slashed youth employment.
Even manufacturing, long a laggard in our economy, has rebounded significantly. Manufacturing added 189,000 jobs in the last year, the Bureau of Labor Statistics notes. At the same time, federal government employment is down by 3,000, CNSNews.com reports.
For the first time since records have been kept, employers have added jobs every month for more than seven years -- 86 months, to be precise. It’s interesting how few in the mainstream media ever care to report this astounding fact. What else is new?
Today’s US Business Climate is Near the Best Ever
So as far as the overall business climate today, Mike Bolen, chief executive of McCarthy Building Companies, a commercial construction company with offices across the country, recently said:
“Maybe it’s not quite the best ever, but it’s pretty close to the best ever. Typically, we’ll have one region that’s really hot and one region that’s really slow, and right now, all five regions are just cooking. Everything’s busy.” And business could get even busier soon.
The Republican tax plan aims to encourage business investment by cutting corporate taxes, which could increase demand for the big projects -- hospitals, airports, office buildings, etc. -- that make up a big part of McCarthy’s business. In fact, Mr. Bolen said, many clients are already making plans on the assumption that the tax reform legislation will pass.
Mr. Bolen added: “A lot of people are making decisions this year assuming that it’s [tax reform] going to happen. If it doesn’t happen, I think you’ll see some people pull back.”
The challenge for McCarthy, as for other builders, is finding the workers for their projects. A couple of years ago, Mr. Bolen said, job seekers would line up outside the gates of construction sites, hoping for a chance to work. Today, McCarthy is having so much trouble finding qualified workers that it is building a 10-acre training center outside of Houston and hiring staff members to teach construction skills.
Bolen added, “It’s a really big deal now, probably a bigger deal than I’ve ever seen it, and I don’t see it getting better. We are spending a lot of money and effort trying to train up the unskilled portion of our workforce.”
Bolen’s comments underscore another big problem in the US economy that I have commented on in recent months. The number of unfilled job openings in the US remains at a near record high. As of the end of September (latest data available), unfilled jobs remained near a record high of 6.1 million.
The problem is that many would-be employers simply can’t find enough applicants that possess the job skills required to fill their openings. There are numerous reasons for this shortage, but perhaps largest among them is the fact that our current educational system does not provide the training needed to produce enough qualified candidates for these much-needed jobs.
So Why Then Are Average Wages Rising So Slowly?
The question vexing many economists is why -- if labor is as scarce as Mr. Bolen and other executives claim -- workers are not seeing bigger increases in their paychecks. McCarthy has raised pay, especially for people with specialized skills. But overall, wage growth remains restrained. For example, average hourly earnings were up only 2.5% in November from a year earlier, only a bit faster than the rate of inflation, according to Friday’s jobs report.
Wage growth of only 2.5% is well below the average seen in post-recession recoveries since the Great Depression. Brett Ryan, an economist at Deutsche Bank in New York, noted recently: “Wage growth is just not taking off the way we’ve seen in the past. It’s still just creeping higher.”
Yet that picture could be about to change. Other measures of earnings, for example, show faster growth. And according to an analysis by forecasting firm Pantheon Macroeconomics, wages are rising faster in regions where the unemployment rate is lowest. This suggests that pay growth could accelerate if the unemployment rate continues to fall next year.
As noted just above, average earnings rose five cents an hour, or 2.5%, from last year. But economists Brian Wesbury and Robert Stein of First Trust add that number to the change in total hours worked to get what they call "total earnings." Those are up "a sturdy 4.8% from a year ago," they said, and "wages are rising faster in the lower income ranges than in the higher ones" for the first time in decades.
I’ll end this discussion with the following note. President Trump's many political foes in the media and inside the Beltway have continually painted him as a clueless friend of the elite and an enemy of working people.
Yet as the November jobs report clearly shows, that's just plain wrong. This economic recovery is benefitting Americans across almost all wage sectors. And with the GOP tax cuts on the way, job growth isn't likely to end soon – which is more good news for all Americans.
Fed Policy Meeting Today & Tomorrow – Rate Hike Expected
The Fed Open Market Committee (FOMC), which sets interest rate policy, is meeting today and tomorrow. It is widely expected that the FOMC will hike its Fed Funds rate by another quarter-point when it releases its policy statement. In fact, the only surprise will be if it doesn’t.
My only comment is this. The stock market has risen steadily for the past seven-plus years just as the Fed has held short-term interest rates near zero. Now the Fed appears to be on course to raise rates yet another time this year and says it plans to raise rates several more times in the next couple of years at least.
With the economy improving so much better than most anyone expected just a year ago, one has to wonder if the Fed won’t accelerate its moves to “normalize” short-term rates even faster than its current plans next year.
One also has to wonder if the stock markets can continue their historic rise in such an environment. Likewise, a thinking person might be concerned that stocks could take a significant hit as the Fed turns the tables. I don’t think most investors have factored this into their outlooks.
In any event, it looks like we’re about to find out. I won’t be surprised if it doesn’t end pretty. It might be time to adjust your investment strategy accordingly. If you agree, we have some unique ways to reduce equity exposure while still earning consistent attractive returns at my company. Call us at 800-348-3601 to learn more, while there’s still time.
Webinar: Wellesley Asset Management – December 19
We will host a live webinar with Michael Miller of Wellesley Asset Management next Tuesday, December 19 at 3:00PM Eastern. Wellesley specializes in convertible bonds which can be an excellent addition to your portfolio. Wellesley has an impressive performance record dating back over 21 years.
Unfortunately, many investors don’t understand how convertible bonds work and how they can help diversify their portfolios. Our webinar on December 19 will be an excellent opportunity to learn how convertible bonds work, and Michael will answer any questions you may have. Be sure to register for what will be one of our most informative webinars of the year.
All the best,
Gary D. Halbert
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