LP L FINANCIAL R E S E AR C H
Weekly Economic Commentary
November 7, 2011
Can The Labor Market JOLT the Economy?
John Canally, CFA
Economist
LPL Financial
Highlights
„„
This week is heavy on Federal Reserve
speakers and light on U.S. economic
data, as markets mull Europe and a full
slate of Chinese economic reports.
„„
The JOLTS data, along with the October
employment report reveal that the labor
market continues to heal, but at an
excruciatingly slow pace.
Economic Calendar
Monday, November 7
Consumer Credit
Sep
Thursday, November 10
Initial Claims
wk 11/5
Tuesday, November 8
Small Business Sentiment
Oct
Trade Balance
Sep
JOLTS Job Openings
Sep
Wednesday, November 9
MBA Mortgage
Applications Index
wk 11/4
Wholesale Inventories
Sep
Import Price Index
Oct
Treasury Statement
Oct
Friday, November 11
U of M Consumer
Sentiment
Nov
The upcoming week (November 7 – 11) is heavy on speakers from the Federal
Reserve (Fed) and relatively light on U.S. economic reports, providing markets
ample time to reflect on the October employment report and to focus on
the deliberation of the congressional super-committee and the latest news
in Europe. The next round of Chinese economic data for October is due out
this week, as the market continues to debate the hard landing/soft landing
issue in China. We will continue to watch the “center of gravity” at the
Fed — Chairman Bernanke, Vice-Chair Yellen and New York Fed President
Dudley — for any shift in tone.
Aside from the regular weekly reports on retail sales and initial claims for
unemployment insurance, none of this week’s batch of economic data in
the United States is likely to be market moving. There are a number of Fed
speakers this week, as market participants mull over last week’s Federal
Open Market Committee (FOMC) meeting as well as the press conference
held by Fed Chairman Bernanke. This week’s speakers range from very
hawkish (Fed officials known to favor the low inflation side of the Fed’s dual
mandate from Congress) to very dovish (Fed officials known to favor the full
employment side of the dual mandate). The hawks slated to speak this week
are Philadelphia Fed President Charles Plosser and Minneapolis Fed President
Narayana Kocherlakota. The doves on the docket this week are San Francisco
Fed President John Williams, Chicago Fed President Charles Evans and
Boston Fed President Eric Rosengren.
It is likely that the hawks will say that the Fed is putting too much monetary
stimulus in the system, and equally as likely that the doves will say the
Fed needs to do even more to support the economy. While the media will
likely focus on the extremes, we will continue to watch the Fed’s “center of
gravity” — Bernanke, Yellen and Dudley — for any shift in tone at the Fed. Two
of the three (Bernanke and Yellen) are set to make public appearances this
week. We continue to expect the Fed to pursue historically accommodative
monetary policy in the period ahead. Even if the economy tracks to the
market’s expectations (roughly 2.0% real gross domestic product growth
in 2012 and 2.5% in 2013), the Fed is likely to ease even more in 2012 (via
additional purchases of Treasury securities or mortgage-backed securities
in the open market), as the Fed’s forecast for economic growth and the
unemployment rate remains more optimistic than the market’s. The next
FOMC meeting is in mid-December.
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In our view, fears of a hard landing in
China (and related issues like China’s
banking system and property market) are
waiting in the wings to replace Europe
and the U.S. fiscal situation as the
financial market’s concern du jour.
1The Percent Of Job Quitters is Climbing, A Healthy
Sign for the Labor Market
0.675
Private Sector Job Quitters As a
Percent of Total Separations
0.525
0.450
01 02 03 04 05
Source: Haver Analytics 11/7/11
Unlike most developed markets (and most emerging markets), where the
economic data calendar is set well in advance, the Chinese economic data
calendar is relatively flexible. Reports on Chinese industrial production, retail
sales, exports and imports, and perhaps money supply and new loans are
likely to be released this week, as market participants continue to debate
whether or not Chinese authorities can guide China’s economy, the world’s
second largest, to a soft landing. Although fears continue to swirl in the
marketplace about a so-called “hard landing” — a sharp and unwanted
slowdown in economic growth in China to around 5 or 6% from the current
growth rate around 9% — our view remains that China can achieve softlanding growth of 7 to 8%, and that Chinese authorities are close to taking
steps to stimulate the Chinese economy. In our view, fears of a hard landing
in China (and related issues like China’s banking system and property market)
are waiting in the wings to replace Europe and the U.S. fiscal situation as the
financial market’s concern du jour.
The JOLTS Data and the Labor Market
0.600
0.375
This week’s economic calendar is filled mainly with second-tier reports on
the economy and with little in the way of corporate earnings news on tap
this week, markets are likely to continue to focus on Europe, the supercommittee’s deliberations on the federal budget and on the full docket of
Chinese economic reports for October.
06
07
08
09
10
11
One report due out this week that we like to watch, but one the market
seems to ignore, is the job openings and labor turnover (JOLTS) report. The
JOLTS report does not get a lot of attention, mainly because it is dated (the
report due this week is for September), and the market already has plenty
of information on the labor market in October. However, the JOLTS data
provides more insight into the inner workings of the labor market than the
monthly employment report does.
JOLTS provides data on:
„„
The number of job openings (there were just over three million open jobs
at the end of August)
„„
The number of new hires in a given month (four million positions were
filled in August)
„„
Job separations (just under four million people left jobs in August)
The data is conveniently broken down by industry group and by region as
well. On the surface, the data reveals just how dynamic the U.S. labor market
is, demonstrating how the economy creates (and destroys) tens of millions
of jobs a year. Digging a little deeper, one of our favorite components of the
JOLTS data can be found within the data on job separations.
People are separated from their jobs either voluntarily (they retire or quit to
take another job) or involuntarily (they are laid off or fired from their jobs).
As noted above, just under four million positions were eliminated in August.
About half of these (two million) came as a result of people leaving their
current positions voluntarily. While not quite back to “normal” — during the
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W E E KLY E CONOMIC CO MME N TAR Y
The steady climb higher in recent months
of the number of job separations that are
voluntary suggests that the labor market
is healing, albeit slowly, as individuals are
becoming more and more confident in
the labor market. After all, you would not
likely leave a job in today’s environment
unless another job was waiting for you.
2Job Creation In This Recovery Is In Line With the
Recoveries From the 1990 – 91 and 2001 Recessions
6%
2010
2003
1991
4%
3%
2%
1%
0
6
12
18
24
Source: LPL Financial, Bloomberg Data 11/4/11
As noted in last week’s employment report for October, the labor market
is healing, but still has a long way to go. The data further undercuts the
notion that the economy is in, or about to enter, a recession, although it does
suggest only sluggish growth (2.0 to 2.5% GDP growth). The economy
created 80,000 jobs in the month (expectations were for an increase of
125,000), but the job count in the prior two months was revised up by a
combined 102,000, taking some of the sting out of the below-consensus
October reading. The private sector created 104,000 jobs in October, as state
and local governments shed another 22,000 jobs.
Over the past three months, the private sector has added an average of
122,000 jobs per month; good, but not great. The private sector economy
shed 8.8 million jobs between December 2007 and February 2010, but has
added just 2.8 million of those jobs back since then, creating jobs in each
of the past 20 months in the process. The increase in the number of private
sector jobs over the past 20 months is in line with the pace of job creation
seen during recoveries from the last two recessions (1990 – 91 and 2001), as
seen in Chart 2. The payroll job count data is culled from a survey of 440,000
business establishments across the country.
5%
0%
mid-2000s economic expansion in the United States, roughly 55% of job
separations were the result of workers voluntarily quitting their jobs — the
percentage of job quitters in August was far above the recession lows. In
early 2009, during the worst of the Great Recession, only 37% of separations
were voluntary, suggesting that layoffs and downsizing accounted for nearly
two-thirds of job separations. The steady climb higher in recent months of the
number of job separations that are voluntary suggests that the labor market is
healing, albeit slowly, as individuals are becoming more and more confident
in the labor market. After all, you would not likely leave a job in today’s
environment unless another job was waiting for you.
30
36
The unemployment rate, calculated from a survey of 60,000 households
across the country — a huge sample size for a national survey given that
most polling on national elections survey only a few thousand people
at most — dipped 0.1% to 9.0% in October. The unemployment rate is
calculated by dividing the number of unemployed persons (about 14 million)
by the total number of people at work or looking for work (about 154 million).
The details of this household survey were solid, as the survey's count of
employment increased by 277,000, the third consecutive sizeable gain
(275,000+). The number of persons in the labor force (at work or looking for
work) increased for the third consecutive month as well.
On balance, the labor market remains stuck in neutral. The economy is
growing just enough to produce some job growth, but not quickly enough to
substantially lower the unemployment rate or the number of people filing for
new unemployment benefits each week. In short, the economic and policy
uncertainty that is restraining the rest of the economy is still clearly being felt
in the labor market, and only a resolution of that uncertainty will lead to an
improved labor market in the months and quarters ahead.
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IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific
advice or recommendations for any individual. To determine which investment(s) may be appropriate for you,
consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of
future results. All indices are unmanaged and cannot be invested into directly.
Job Openings and Labor Turnover Survey (JOLTS) is a survey done by the United States Bureau of Labor
Statistics to help measure job vacancies. It collects data from employers including retailers, manufacturers and
different offices each month. Respondents to the survey answer quantitative and qualitative questions about
their businesses' employment, job openings, recruitment, hires and separations. The JOLTS data is published
monthly and by region and industry.
This research material has been prepared by LPL Financial.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not
an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Member FINRA/SIPC
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LP L FINANCIAL R E S E AR C H
Weekly Market Commentary
November 7, 2011
Kicking the Cannes
The S&P 500 Index had a bumpy ride last week as it tumbled 5% in the
first two days on the eve of the Group of 20 summit in Cannes, France, as
the Greek Prime Minister proposed a referendum on the European debt
deal. This political move risked scuttling the hard-fought deal that had been
unveiled the prior week that contributed to the powerful stock market rally.
Stocks recovered most of the lost ground later in the week as the Prime
Minister withdrew his call for a referendum and moved toward establishing
a new government for Greece that is very likely to approve the controversial
debt rescue package.
Jeffrey Kleintop, CFA
Chief Market Strategist
LPL Financial
Highlights
Stock market volatility was driven by last
week’s political brinkmanship derailing
plans to secure funding support from China
and other countries for the European debt
rescue plan, kicking the implementation of
the plan down the road well past the G20
meeting in Cannes.
However, the political brinkmanship derailed plans by the leaders of Germany
and France to showcase the new plan in order to secure funding support
from China and other countries.The French President said it may take until
February 2012 for a funding deal to be reached, kicking the implementation
of the plan down the road well past the meeting in Cannes.
With every move in the stock market seeming
to coincide with a headline coming out of
Europe, it would be easy to conclude that this
is the only issue that matters to investors.
While hurdles to implementation of the debt plan are materializing, Italy’s
10-year borrowing costs are slowly nearing the 7% threshold that forced
Greece, Ireland and Portugal to seek bailouts last year. The yield on Italy’s 10year bond rose to 6.35%, the highest since the creation of the euro currency
in January 1999. We expect the delay will force changes in the Italian
government and result in the passage of the difficult, but necessary reforms
to return to a sustainable fiscal path.
By stepping back from the day-to-day and
week-to-week trading, it appears the issues
in Europe over the past couple of years have
merely created volatility around the true focus
of investors on the fundamental economic
backdrop that continues to slowly improve.
1Stock Market Tracking Economic, Rather Than
European, Developments
1700
S&P 500 (Left Axis)
Initial Jobless Claims in Thousands (Right Axis, Inverted)
225
1500
325
1300
425
1100
525
900
625
700
725
500
2007
2008
2009
2010
2011
825
Source: LPL Financial, Bloomberg data 11/04/11
The S&P 500 is an unmanaged index, which cannot be invested into
directly. Past performance is no guarantee of future results.
With every move in the stock market seeming to coincide with a headline
coming out of Europe, it would be easy to conclude that this is the only
issue that matters to investors. By stepping back from the day-to-day
and week-to-week trading, we can see a different, longer-term pattern of
performance emerging — one that reflects a different focus entirely.
If we look back at the past five years, we can see that stocks have very
closely tracked real-time economic data, as measured by the weekly tally of
initial claims for unemployment benefits as seen in Chart 1. It appears the
issues in Europe over the past couple of years have merely created volatility
around the true focus of investors on the fundamental economic backdrop
that continues to slowly improve.
What else does this chart tell us? That the October rally was justified
based on the underlying economic fundamentals and that stocks may have
additional modest gains in the months ahead — barring distractions that
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W E E KLY MARKE T CO MME N TAR Y
cause stocks to again deviate from the underlying driver. In fact, based on
this relationship, if initial jobless claims fall to a more normal level of 350,000
by year-end 2012, the S&P 500 would be around 1400, well above Friday’s
closing level of 1253.
Job growth does not make for a healthy
economy; a healthy economy makes
jobs grow.
This would seem to suggest that what the market really cares about are
jobs. But we believe that would put too fine a point on it. Initial jobless
claims do measure the conditions in the job market, but they are also a
real-time, weekly reflection of economic conditions. While the President and
GOP presidential candidates focus on promoting their job plans, we think
it is important to keep in mind that job growth does not make for a healthy
economy; a healthy economy makes jobs grow (see this week’s Weekly
Economic Commentary for a look at the October employment report). The
health of the economy reflected in initial jobless claims is critical to gauging
the outlook for the magnitude and sustainability of profit growth critical to
long-term stock market performance.
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific
advice or recommendations for any individual. To determine which investment(s) may be appropriate for you,
consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of
future results. All indices are unmanaged and cannot be invested into directly.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no
guarantee that strategies promoted will be successful.
The Group of Twenty (G-20) Finance Ministers and Central Bank Governors is the premier forum for our
international economic development that promotes open and constructive discussion between industrial
and emerging-market countries on key issues related to global economic stability. By contributing to the
strengthening of the international financial architecture and providing opportunities for dialogue on national
policies, international co-operation, and international financial institutions, the G-20 helps to support growth
and development across the globe.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure
performance of the broad domestic economy through changes in the aggregate market value of 500 stocks
representing all major industries.
International and emerging markets investing involves special risks such as currency fluctuation and political
instability and may not be suitable for all investors.
This research material has been prepared by LPL Financial.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not
an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Member FINRA/SIPC
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