A new normal for job growth? Not exactly

The overall contradiction I am seeing now is that businesses are looking and feeling more optimistic at a time that U.S. consumers and international customers are sitting on their hands. I do share businesses' confidence because consumers have the wherewithal to spend a lot more money than they are--the savings rate is unusually high. Hopefully, something pulls the consumers out of their funk really soon. Maybe a few great Black Friday doorbusters will do the trick.

Headline employment disappoints some, year-over-year data suggests more of the same
Nonfarm employment growth for October came in at 214,000 jobs added, below the consensus of 243,000 but roughly in line with my estimate of 215,000 jobs and the 12-month average of 222,000. This follows sharp growth of 256,000 jobs added in September, which was revised higher by 8,000 jobs. August data was substantially revised again this month, and the August disaster has now all but disappeared. August job growth of a disappointing 140,000 jobs as originally reported has now been revised to job growth of a very respectable 200,000.

Overall, I was pleased by the number for October, despite the headline shortfall. I started the year with a forecast for job growth of 200,000 per month, and the U.S. is currently running about 5% above that figure. Frankly, the October jobs report had some headwinds, too, which could have made the number even more disappointing. Exports, consumption, and housing data have all been soft. With the stalwarts of employment growth slowing, we were lucky the employment numbers didn't look worse.

It's difficult, though not impossible, for employment to grow faster than general economic activity. Observers always seem to get this relationship backward. Employment doesn't generally drive economic activity. It’s the other way around: Economic activity drives employment, with a lag. Unfortunately, that means some of the poor export data and consumption data has yet to hit the employment report fully.

As usual, it makes a lot more sense to compare employment data with the same period a year ago averaged over a three-month period. This strips out those truly pesky seasonal adjustment factors that no one can seem to get right. The averaged data eliminates monthly anomalies like strikes and shifting holiday schedules. Here the data is little changed from the growth rate of just under 2% (including both private sector and government jobs) that has been the status quo for the past three or four years.

More interestingly, a lot of folks are characterizing the current low-level job growth as unprecedented, a kind of new normal (which is another way of saying a new awful). But job growth, looked at year on year, hasn't been all the much higher, at least for long, stretching all the way back to the 1980s. And some of those earlier periods had the benefit of substantial population growth to help push things along. The average job growth since 1980 has been 1.3% and is currently running at 1.9%.

Now, I will admit that one might have expected a sharper improvement after the 2007-09 recession. However, there were at least a few categories that needed a one-time reset and were not purely a cyclical phenomenon. If it were all a cyclical issue we might have expected a bigger bounce, like the short-lived 4% growth rate that the U.S. saw in the mid-1980s for a brief couple of years.

The auto industry is one example of an industry that was probably well overdue for a reset. That industry, admittedly, had too many brands, too many dealerships, and cumbersome labor agreements. If all those conditions had continued, the U.S. would not have had a viable auto industry. The industry bankruptcies finally allowed many of those longstanding structural barriers to be broken. It worked, and the U.S. auto industry is now back to prerecession levels of sales and production. It's now even exporting cars to other countries because of a favourable cost structure. Unfortunately for workers, auto industry employment is now less than 80% of what it was at the last peak. Still, without those one-time adjustments in 2009, it's unlikely any of the Big Three auto makers would have survived, with the possible exception of Ford F.

Government job losses still loom large
Shockingly, government is another sector that is really holding back recent and intermediate-term employment growth. I am going to stay out of the politics of whether that is good or bad. Still, it's hard not to notice.

The government has lost almost 1.1 million jobs since May 2010 (though the loss of census jobs might account for as much as a third of that collapse). We have lost more government jobs in the past four years than the entire auto industry employs currently. It also represents about a 5% decline in the number of government workers over four years at a time when the population is up at least some. Those are jobs with good hours and at least average pay. And it is happening at all levels of government, although the local data is showing some signs of life.

It seems odd that government job growth has been truly awful and yet no one seems to be asking if this is good or bad or even really talking about the government job situation at all. I can't help but wonder if the government jobs we have shed recently amount to a lot more than the manufacturing jobs that we have lost to China. I can put forth a lot of theories about why government jobs are in such a funk but frankly it deserves more attention than I have room for in today's column. However, automation (no more toll collectors), taxpayer fatigue, smaller war efforts, outsourcing (think trash collection), and the need to fund larger pension contributions are all factors in the bleak government employment data.

Hourly wage rates OK but not great
Besides the raw employment numbers, it's also important to look at the average hourly wage and the number of hours worked. Combining these gives us a rough cut at consumer wage growth, the fuel for future spending. On a month-to-month basis, the number the media focuses on, wage growth looked anemic at $0.03 or about 1.4% on an annualized basis. Looking year over year and averaged, the number is slightly better and very consistent at just about 2%. That data is shown in the third column below. The impact of wage growth is every bit as important as employment growth in determining the effects on the economy and spending.

Hours worked tends to bounce around a little, but at this stage of a recovery, they are usually beginning to decline. That's not happening this time. At 34.6 per week, hours worked in October was one of the highest months of the recovery. I wouldn't expect a lot more improvement in this category in the months ahead.

Combining components, total wage growth above average
Rolling together employment, wage rates, and hours worked to get an approximation of total wage payments, we saw a modest outperformance compared with the average of the past 12 months, 4.5% growth versus 4.2%. It's not a phenomenal number, but it does imply a slight improvement and more of the slow and steady growth that we have seen for the past four years.

Adjusting for inflation, wage growth trends look even better
Inflation has been slowing a bit lately, and it seems that more good news lies just ahead, with falling gasoline prices that will let consumers' wage dollars stretch even further.

Although the current figure is nicely above the 12-month average at 2.6%, it's still not quite as high as it was last fall. That tempers at least a little of my enthusiasm for the holiday shopping season. Still, the savings rate has been unusually high for most of 2014, not just the past few months, potentially leading to some respectable holiday sales growth rates.

Don't be fooled by trying to game the nonseasonally adjusted employment numbers
One quick word of caution: A lot of pundits have been all excited about nonseasonally adjusted, month-to-month jobs data, which looked fantastic. But you can't really do this. Whether looking at year-over-year nonseasonally adjusted or seasonally adjusted data, you get the same result: about 2% growth. For comparison, consumption growth over the same period was about 2.3%, a very typical spread. Consumption generally runs a bit above employment growth because of increased productivity. So whatever the wacky nonseasonally adjusted numbers are saying at the moment, any employment number much different from 2% growth wouldn't make any sense.

Trade data disappoints, downward GDP revision likely
Everyone thought the trade deficit news for September wasn't going to be good (based on the dollar and a weak world economy), but the data from this week was still quite disappointing. Analysts had expected the trade deficit to widen from $40.0 billion to $41.5 billion. Instead, the deficit widened all the way to $43 billion. And the report could have been far worse if there hadn't been a few huge shipments of soybeans that took more than a billion dollars off of the deficit. However, the new iPhone shipments probably offset at least some of the soybean bonanza.

Although averaging and inflation-adjusting the data paints a much less bleak pattern, it is still going to mean a downward revision in the third-quarter GDP estimate. Combining the new trade deficit report with a poor construction report probably means that GDP for the third quarter will be revised down from a great 3.5% report to a more believable 3.0% rate. However, with inventory data and retail sales revisions yet to come, that GDP downgrade isn't a sure thing just yet.

Turning back to the recent data, the month-to-month headline numbers didn't look good, with exports down 1.5% and imports basically unchanged. Low export growth is not good news for U.S. exporters. Poor import numbers are bad news for our already weak trading partners and certainly don't speak well of the general health of the U.S. economy. Import numbers generally get smaller only in a recession.

As is usually the case, when averaged and inflation-adjusted the year-over-year data on exports and imports is not as grim. The trends in export and import growth still look slightly positive. When things erode quickly and the underlying story on exports is not good, I am a little less prone to write off the month-to-month data as some type of fluke. Nevertheless, with exports representing just 13% of U.S. GDP, a troubled global economy isn't as big a deal for the United States as it is for the rest of the world in general, and Germany in particular.

New orders lift ISM numbers back before the holiday season (by Roland Czerniawski)
After a modest pullback in September, which we did not view as a reason for concern here, the Institute for Supply Management reported that the October manufacturing PMI increased to 59 from a previously reported reading of 56.6 a month ago. This constitutes a relatively strong bounceback from an already high level, and 16 out of 18 manufacturing industries reported growth this month. The only industry showing a contraction in October was petroleum and coal products. While growth was reported in the majority of the index categories, the 2.4-percentage-point increase in October's PMI was mainly driven by the surge in new orders that registered a reading of 65.8, up from 60.0 in September.

The high reading, along with some of the purchasing managers' comments about current business conditions, shows that the manufacturing boom we have been experiencing might well extend into the fourth quarter. Managers are reporting that holiday orders are already exceeding their seasonal forecasts in the food, beverage, and tobacco products industry. Auto-related industries are noticing that demand remains strong because of body redesigns among major car manufacturers, which appear to be driving demand for new machinery and materials. We are also suspecting that the high new orders reading should help industrial production extend its uptrend in October and November.

On a less positive note, ISM reported that exports were the only contracting category this month, dropping to 51.5 from 53.5 a month ago. In light of softening worldwide economies and a strong dollar, we are not surprised that the orders for export are declining. This reading could have come at a much lower level, but only two industries reported a decrease in this category and nine industries reported an expansion. For the remaining seven industries, exports remained flat. We are convinced that exports won't be as big of a contributor to the third-quarter GDP as the BEA initially reported, and now we are beginning to see early signs that downward trending exports could extend the losing streak into the months ahead, potentially making a dent in fourth-quarter GDP estimations.

Domestically, we are seeing stronger-than-expected demand as major manufacturers and retailers are preparing for the busy fourth quarter. Considering the rising savings rate, collapsed gasoline prices, and strong consumer sentiment, manufacturers are right to assume that consumers now have what they need in order to finally spend more money. Let's just hope that consumers agree.

Auto sales show decent gains in October (by Roland Czerniawski)
October’s auto sales came in at 16.3 million units (seasonally adjusted annual rate), unchanged from last month, according to the Bureau of Economic Analysis. Year over year, auto sales grew 6.7%, or 7.7% on a year-over-year three-month-moving-average basis. The averages might be a little skewed, however, by unusually strong August numbers (17.4 million), which we thought were too high and unsustainable over the longer term. The current pace of 16.3 million units is probably closer to a more sustainable pace and is more representative of the current state of auto industry. We are relieved to see that the number of units sold remained flat and did not drop much further as the third-quarter average seemed to indicate a relatively high 16.7-million pace. More important, the latest number is certainly much more supportive of our annual forecast of 16.25 million-16.50 million units for 2014.

Overall the report seemed to indicate that the consumer mood isn't getting any worse, but that the consumer isn't feeling ebullient by any stretch of the imagination.

Slim pickings next week: Just retail sales and job openings report
With acceptable but below-expectation employment numbers and a surge in the Challenger Gray Job Cut Report, economists will anxiously await the job openings report due on Thursday. Openings and even the number of people quitting (a very good labor market indicator) have been trending sharply higher in recent reports. Improving data here could take some of the sting out of the not-great employment report.

Retail sales looked grim in September, falling 0.3%, led by declines in auto sales. Auto sales were a little better in October, so analysts are a little more optimistic, expecting 0.1% growth for October. That is still subpar, and I would really like see growth of at least 0.3% month in and month out. I am at a loss to explain why consumers are still refusing to spend, even with employment and total wage data looking better and inflation way down. The weekly shopping centre data doesn't suggest much improvement in October, either. The economy could use a real upside surprise from this report. I wonder if consumers are holding back in hopes of snagging some really great bargains during Black Friday, or other holiday shopping events.