"Kee" Points with Jim Kee, Ph.D.

Don’t forget that our San Antonio Market Update is this week at the San Antonio Country Club (Ballroom) on Thursday, January 16 from 5:30 to 7pm. We look forward to seeing all who can make it!


Employment Facts: Econometricians have pointed out that the most relevant data for anticipating monthly job growth is the average of the past three months. That would have led you to expect a number around 192,000 for Friday’s jobs report, which in fact was pretty much what “consensus” expected. The actual number was 74,000, far lower than expected. But remember, any given month’s number is “only about a third as important as it seems,” (a quote from Edward Leamer at UCLA’s Anderson Forecasting Group), which is why market reaction was muted. Nevertheless, a number that low, in my opinion, increases the importance of the following few months’ jobs data over what it would be otherwise. So rather than under-react or over-react, the proper reaction is one of moving the monthly jobs report up in importance on the watch list.


Longer-term trends: Federal Reserve data indicate that total nonfarm employment in the U.S. peaked around 138 million in January, 2008. It fell to around 129 million in February 2010 (the bottom) and has since bounced back to 136.7 million (Federal Reserve Bank of St. Louis). So four and a half years after the Great Recession ended (which was June 2009) we still haven’t generated enough jobs to replace those lost during the recession. But remember from prior Kee Points that this lengthening of the time period required to replace jobs lost in recessions is actually consistent with the trend over the past 25 years: the average length of time for the economy to make up for jobs lost during recessions since WWII has been about five quarters. But the 1990 recovery took 10 quarters (two and a half years) and the 2001 recovery took 16 quarters (four years), a record at the time. We are currently at 18 quarters, and at a pace of around 190,000 jobs per month (Friday’s report notwithstanding), it will take several more quarters for non-farm employment to regain its 2008 peak.


The unemployment rate did fall from 7% to 6.7%, largely because the labor force participation rate declined (people left the labor force). That too continues a longer-term trend. The participation rate peaked around 2000 with the tech boom (probably an overshoot) and has been declining ever since. It is still above the levels of the 1970s and early 1980s. Some of the decline in the participation rate reflects a longer-term trend. Some of it also reflects discouragement, and some of it of course reflects the increased length of unemployment benefits. Unemployment is highest among the least educated, at 9.8% for those with less than a high school diploma. And it is lowest among college graduates at 3.3%. Those numbers are for the population of workers 25 years or older, which is the way the Bureau of Labor Statistics reports it.


New topic: Global risk measures have come down dramatically, and this includes credit-related measures for Europe. It is tempting to see this as the world having a short memory, as it was only a few years ago that Europe was slated (in the headlines anyway) to break up, default, go off the Euro, etc. But the truth is that global risk measures have come down because global risk has come down. As the Wall Street Journal pointed out a year ago, if for example investors were concerned about holding Spanish debt they could move their euros to Germany by abandoning Spanish bonds. This would drive Spanish bond prices down and increase Spain’s borrowing costs, which in-turn would increase the chances of a Spanish default. Such a “run” in the U.S. (or U.K., which didn’t adopt the Euro) would have the Fed “printing money” and buying bonds, i.e. being a lender of last resort, which would keep lending rates (costs) down. But Spain can’t do that because it relinquished that authority to the European Central Bank. So when European Central Bank President Mario Draghi said, back in 2012, that the ECB would do “whatever it takes” to protect the Euro, meaning acting as a lender of last resort, it was a game changer. Risk measures came down because, suddenly, risk (chances of a major EU country being driven to default) came down. That is, the chances of a major European country being driven into default by higher borrowing costs (interest rates) came down (the ECB would buy the debt or be the lender, if need be). Now, you shouldn’t be too complacent about Europe either. Europe was experiencing pretty anemic growth before the recession, and will experience anemic growth going forward. There are plenty of near-term concerns in Europe, like spring elections and bank stress test. But going from negative to positive growth is meaningful, as is the reduction of existential threats!