Disappointments and Opportunities in an Idiosyncratic Environment

September Employment Disappoints

The September employment numbers almost made the Fed look smart in its decision to delay a rise in the target fed funds rate at the last meeting. There was certainly little good news in the report for the month. Jobs increased only 142,000 on a seasonally-adjusted basis with downward revisions for the two previous months. The revisions, in particular, were not what we expected, although we did point out some concern about the initial numbers for August in our last blog on employment (see the geek table below for more detail).

I am still looking for someone inside or outside the BLS who can explain the seasonal adjustments since, I have yet to meet a seasonally-adjusted person.


The overall employment rate held at 5.1% aided by a fall in the participation rate. Most of the increase in employment came in the services sector (+131,000) and government (+24,000) with goods producing (-13,000)—of which mining and logging (-12,000) was a big part—the major contributor to the downside. Before anyone gets too excited about the government number, the increase was all in state and local (+26,000) with federal employment actually falling (-2,000). The highest unemployment rates continue to be in the 16- to 19-year-olds (16.3%), 20- to 24-year-olds (9.1%), and the mining/oil and gas sector (11.2%, up from 6.1% a year ago). That sector, with significantly higher wages than the average, has seen 100,000 jobs disappear over the last 12 months. This has certainly been a drag on the overall wage picture.

The Search for Good News

The good news in the report, to the extent there was any, was the unemployment rate for all those 25 or older fell to 4.1%. Experience and education count. The index of weekly payrolls—which takes into account hourly earnings, average hours worked, and the increase in employment—is up 4.5% from a year ago. This goes a long way toward explaining the consumption expenditure increases we are seeing and maybe the confidence numbers as well. While average weekly earnings are up modestly in the private sector, the increase in employment does lead to more income in the system, pushing consumption numbers up more than the average weekly wage. As we have said before, we are seeing a difference in income growth and job growth between the production and non-supervisory workers—which account for about 80% of the workforce—and their more skilled and supervisory brethren. Employment and wages are up more for the latter group pushing total income up 8.6% year-over-year versus only 3.5% for the production and non-supervisory class. There is an increased wage inequality between the two groups, but the faster job growth is also an indication of the changing skill requirements in the overall labor force. It is also consistent with the numbers that, so far, keep showing up in the JOLTS report of an increasing number of job openings unfilled as we move through the year—the skills required are just not there. We will see if the latest JOLTS report for August, which will be released October 16th, supports that view. The word is that the JOLTS report has become more important to the Fed’s view of the labor front. It should be, as it deals with more of the total dynamism of the US labor market. Let’s remember that around five million people are actually hired every month with a slightly lower number actually leaving their jobs from quits, usually to take a new job (2.7 million in July); terminations (1.6 million); and other reasons—usually retirements (0.43 million). The employment numbers—the 142,000 we focused on for September—relates to the incremental change in what is a very fluid labor market.

Will the Markets Continue to Disappoint?

If one is looking for the “markets” to provide solace, much less returns, odds are reasonably high investors will be disappointed, or at least experience schizophrenia. Think of the revisions up in GDP for the first and second quarter and the likely revisions down for the third quarter as the trade balances reflect increased buying by Americans (a good sign) and decreased buying by our trading partners (not so good). The overall equity and credit markets will ultimately track earnings and cash flow growth, which are likely to continue to disappoint from slower unit growth, limited pricing power, a strong dollar, and some wage pressure.

Some Green Shoots but Accidents are Likely

However, as pointed out in our most recent video, analysts are beginning to reappear with specific stock and credit recommendations. The key word is “specific.” Against the backdrop of some systematic trends in currencies, commodities, stocks, and bonds, we are seeing differentiation in operating performance among individual companies in the US and elsewhere in both the public and the private markets. For example, one doesn’t want to own the high yield index because of the almost 20% weight of energy and commodity securities there, where accidents are likely to occur. However, some of the $3 trillion in wealth transfer from the energy and commodity sectors is finding its way into other companies—maybe more so than the consumer—as a reduction in input costs. I want equity and fixed income managers who can identify those companies and avoid the accidents. Recently, we discussed the fixed income markets specifically in this webinar. Fixed income and the credit markets are a bigger concern than the equity markets right now.

Seeking Active Management and Watching Macro Factors

We, of course, deal with less correlated active managers and systematic trend followers who operate on both sides of the markets. But there are active long only managers as well who have had a frustrating experience for almost the last decade. But their past performance is unlikely to be indicative of future results as we experience a slow return to “normal.”

We also see opportunities in the less liquid parts of the markets where an “illiquidity premium” appears to exist. We are paying attention to those factors that could indicate something more significant is at work here. China and global growth in general against a tense geopolitical backdrop bear watching. We are not in the hard landing camp for China. While we have previously commented that China’s industrial sector is in a major, major slowdown, affecting all hard commodities and energy, the services sector is doing quite well. This is likely to keep China’s overall growth above the hard landing level. Last December, we had suggested 5% real growth for China this year. It may not even be that low. However, the impact on the industrial sectors of its trading partners and other industrial and extraction entities is likely to continue to be severe and certainly appears worse from the outside, since those are the primary sources of trade with the country. Weak energy and hard commodity demand and prices can produce other accidents or actions in countries, like Russia, that are dependent on these markets. For the US, the labor markets will be the key to the growth path and, of course, Fed action.

2 thoughts on “Disappointments and Opportunities in an Idiosyncratic Environment

  1. Pingback: North Dakota, Oil Prices, Pace of Pumping and Accidents | OUTSIDE THE BOXES: ALTEGRIS BLOG

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