Crime in the Jobs Report

Submitted by John Mauldin – Mauldin Economics

“When more and more people are thrown out of work, unemployment results.”

– Calvin Coolidge, US president, 1923-29, in his role as Mr. Obvious

“Unemployment is of vital importance, particularly to the unemployed.”

– Edward Heath, UK prime minister, 1970-74

Every now and then you get some good news. Economists had projected a good solid 185,000 new jobs, with the range of expectations running from a low of 150,000 to a high of 240,000. What we got was a boffo 271,000 jobs. Plus some green shoots of potential actual wage-push inflation, the kind of inflation pressure that most workers like, which means that, for a change, wages might start going up faster than inflation.

The unemployment rate dropped a whopping 0.01%, but that was enough to push the rounded number down to a headline 5% unemployment (actual was 5.04%).

In today’s letter, we are going to look briefly at the latest employment numbers. Then we’ll explore some of the deeper, less understood facets of the employment data. For some of you this may be a lot of detail, but for those of us who think about employment (and you should, as it is THE ultimate driver for your business and investments), understanding how the numbers work and what they mean is important.

But first, we are going to open registration for my annual Strategic Investment Conference very soon. I’ll be hosting it in Dallas this year, May 24–27. It will be over at noon on Friday the 27^th so you can easily get back home for the weekend. The airport is only about 25 minutes from the conference venue, and Dallas is central, with nonstop connections all over the US, Europe, Asia, and South America. You are going to want to register early, as there will be several events with limited seating that will fill up on a first-come, first-serve basis – your early registration will move you to the front of the line. You can sign up to get advance notice by clicking here.

And now let’s take a look at the unemployment picture in America.

The Employment Numbers Say a Rate Hike Is Pretty Much Done

Let’s rewind the tape from an email sent out by Philippa Dunne of the Liscio Report  so we can see where the new jobs came from:

Employers added 271,000 jobs in October, all but 3,000 in the private sector. Construction added 31,000 (well above its average of 19,000 over the last year, though two-thirds of the gain came from nonres specialty trade, those who finish buildings); wholesale trade, an above-average 10,000; retail, 44,000, also well above average; finance, 5,000, less than half its recent average; professional and business services, 78,000, well above-average; education and health, 57,000, somewhat above average; and leisure and hospitality, 41,000, also somewhat above average. Government added 3,000, all from state government; local was unchanged, and federal, off 2,000.

Manufacturing was unchanged.

This employment report was all about gains in services industries, plus a little in construction. Which squares with the data we have seen in recent months from the regional Fed banks. Manufacturing is getting soft, and services are doing well. Let’s look at a few charts that will help tell the story. The first is an amalgamation of the regional Fed manufacturing indexes. The second is the national manufacturing index, and the last one is the national non-manufacturing (read services) index.

Source

Your Own Personal Inflation Rate

Submitted by John Mauldin – Mauldin Economics

“Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.”

– Ronald Reagan

“To me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target.”

– Janet Yellen

The US economy grew at a 1.5% inflation-adjusted rate in the third quarter, or so said the Bureau of Economic Analysis in its first GDP estimate last week. The number is subject to revision and will probably change. Based on recent experience, revisions could easily push it below 1% or above 2%. Since this is “real” GDP, it also depends on inflation numbers. BEA doesn’t use the familiar Consumer Price Index for this purpose – CPI comes from an entirely different agency, the Bureau of Labor Statistics.

You can get quite different real GDP growth numbers if you use the inflation figures calculated by the Dallas Federal Reserve Bank. The Dallas Fed developed something called trimmed PCE, the use of which would make real 3Q GDP growth 1.1%. Or, if we all decided that the calculation of “median CPI” performed by the Cleveland Fed was what we should use, then GDP growth was about 0.3%. (Which is of course why we don’t use it!)

And gods forbid we use the method employed in Europe for calculating inflation. Evidently, housing is not a very big deal in Europe, so it is a much smaller component of the inflation calculation; and if you can believe it, the Europeans actually use an archaic methodology for calculating housing inflation that involves the real prices of home sales, as opposed to a totally artificial guesstimate called Owner’s Equivalent Rent, used by more sophisticated countries like the United States. If we had done things the European way, inflation would have been sky-high during the last decade, and the Federal Reserve would have been forced to raise rates rather than holding them under 1% for far too long. And who knows where the inflation rate would have gone if we hadn’t pricked our little housing bubble.

This week’s letter is all about how we create the sausage that is called inflation. The Fed has a target of 2% inflation. Aren’t we almost there at +1.9% CPI? Not really, as the Fed uses something called the PCE, and it is barely at +1.3%. Which is different again from other measures of inflation. Confused? Hopefully, we can make sense of inflation today and have some fun along the way with crazy government statistics.

If, like me, you are ancient enough to remember the 1970s, you will recall that inflation was Economic Enemy #1. Presidents Gerald Ford and Jimmy Carter spent most of their terms trying to Whip Inflation Now. Their inability to tame it is one reason neither had a second term.