There’s something very wrong with the US jobs market, as the slide above confirms. Commentators professed to be surprised by the disappointing May report last Friday, but its hard to know why:
- The overall participation rate has been in decline since July 1997, when it reached 68%: today it is only 62.7%
- Male participation is at an all-time low of 69.1%; female participation is back at 56.8%, the 1988 level
- The total civilian population was 253m, so 172m would be working today if the participation rate was still 68%
- Instead, only 159m were working – 13m fewer people, over 5% of the civilian population
Equally worrying is that there is no sign of any improvement. If we look at data for the month of May, it shows that overall and female participation has been in steady decline since 2008, when they were 66% and 59% respectively. Every single year since then has seen a decline. Male participation has seen almost exactly the same trend, with the exception of last year – when it rose by 0.3% to 69.5%. This year, however, it fell to a new low.
The striking thing about the post-2008 downturn is that it parallels the launch of the US Federal Reserve’s major stimulus programmes. The Fed has just two targets – employment and inflation. It has boosted its balance sheet by over $4tn dollars since 2008 to try and meet these targets, and cut interest rates to near-zero. But the policies have clearly failed, given the participation rate decline and that CPI inflation is virtually half the target level at 1.1%.
One might think that policymakers would feel some embarrassment about such a very expensive failure. But it seems not:
- Instead, they prefer to avoid focusing on these key trends. Their focus is on indicators which disguise the key trends, such as the jobless rate. This is a far less reliable indicator, as it only measures people actively looking for work, not those who have given up. So it is always likely to give a more favourable view of the position. Similarly, they prefer to talk about so-called “core inflation”, rather than the CPI itself
- This self-delusion has a purpose, of course. If they focused on the key data, they would soon have to explain why they were ignoring the demographic issues that are causing the participation rate to fall, and inflation to turn to deflation. They would also be forced to have difficult discussions with the voters about the sheer unsustainability of current policies – which have failed to adapt to a world where the average 65-year old American now has 20 years’ life expectancy ahead of them
The simple fact is that an extra 13m people would be working today, if the participation rate had remained at 1997′s level. There would then have been no need for the Fed to have created today’s vast debt levels. And the whole world would be in a better state as a result.
The UK economy appears to be recovering well from the financial crisis. But appearances can be deceptive.
Certainly employment has risen for both men and women since 2009, and the jobless rate has fallen. But new data yesterday from the Office for National Statistics highlights how, despite these achievements, total incomes have been falling in real terms since 2009, as the chart shows:
- Male employment has risen by 900k (blue shading) and female employment by 700k (red)
- Male and female employment have also hit all-time highs of 16.8m and 14.1m respectively
- But total male and female earnings have continued to decline in real terms as £2015 (black line)
- They peaked in 2009 at £1.1tn ($1.67tn), but have since fallen 9% to £1tn today
The reason, of course, is the factor that governments prefer to ignore, namely demographics. The UK is an ageing society, and earnings peak by the age of 50 as the second chart highlights (again based on ONS data):
- There were 5.8m people working in the 30-39 age group, with median earnings of £490/week ($750/week)
- 6.4m were working in the 40 – 49 cohort, with median earnings of £493/week
- But increasing life expectancy meant there were 5.4m working in the 50-59 cohort at £458/week, and 1.9m working in the 60+ cohort at £339/week
- Whilst falling fertility rates meant there were only 4.4m working in the 22-20 cohort for £383/week, and just 1.2m in the 18-21 cohort for £201/week
Of course, governments prefer to focus on achievements when they talk about employment. And with major spending cuts due to be announced next week, no doubt ONS felt it was better not to highlight the issue in their summary report. As far as I can tell from a Google search, none of the major media has mentioned this key fact in their reports.
However, it is clearly critical for both companies and investors. Consumption is around 2/3rds of the UK economy, and it is the 5th largest economy in the world. The data clearly highlights the fact that, like other major economies, the UK faces a future where there will be a declining number of people in the peak earning and spending Wealth Creator 25 – 50 age group, and a rising number of people in the lower-income and spending 50+ age group.
Companies can’t expect to sell products and services to people who can’t afford them. There is therefore an increasingly urgent need for them to develop new business models focused on providing low-cost essentials to the growth area of the over-50s.
Demographics is destiny, after all,
The US population reached 320m this year, an 11.35m increase versus 2010, according to the US Census Bureau:
“The U.S. is expected to experience a birth every 8 seconds and one death every 12 seconds, whilst net international migration is expected to add one person to the U.S. population every 33 seconds. All these factors mean a net gain of one person every 16 seconds to the U.S. population”.
Over the same period, the number of working age people has also grown, from 237.8m in 2010 to 250.3m last month. Yet sadly, the percentage of people in employment has fallen, according to Bureau of Labor Studies data, as the chart shows:
- 64.6% of the working age population were working in January 2010, versus 62.6% last month (black line)
- 70.9% of men were working then, versus 69% last month (blue)
- 58.7% of women were working then, versus 56.6% last month (red)
These rates are also slightly lower since November, when I last analysed the jobs market. So it is puzzling, to say the least, that most reporting of the US job market currently suggests it is steadily improving . Jobs are certainly being created, but not in sufficient numbers to maintain spending power and thus revive economic growth.
A simple calculation highlights the issue:
- Another 5.1m people would be working today, if the economy still had the same percentage of employed people as in January 2010 – 2.3m men, and 2.8m women
- This would provide major support for the economy, with median male earnings at $895/week in Q1 2015, and median female earnings at $730/week
Clearly the US, like other Western nations, needs to find a solution to this problem. But unfortunately it is currently using the wrong tools. Common sense, as well as the experience of the past 6 years, tells us that it is impossible for the Federal Reserve to create jobs in today’s economy via the use of monetary policy:
- One major problem today, for example, is that only 47% of those without a high school diploma have jobs
- This is far below the 75% employment rate of those with bachelor’s degrees
- Data for Black and Hispanic employment shows similar gulfs versus White employment rates
How can printing money change these fundamental causes of unemployment?
Hopefully next year’s Presidential election will include debate on this critical issue. Otherwise, on current trends, the US will have suffered a further 2% decline in participation rates by 2020, when the 45th President comes to the end of his/her term in 2020.
As I have feared, major volatility is developing in financial and chemical markets, as the Great Unwinding of policymaker stimulus continues. The chart above shows the dramatic increase in the benchmark portfolio since the Unwinding began in mid-August:
- There was very little volatility from January until August, with prices generally remaining within +/- 10%
- Volatility then exploded, with prices for Brent oil (blue line), naphtha (black) and benzene (green) falling 50% within a matter of weeks
- Prices for PTA (red) in China fell 40%, whilst US export prices for HDPE (orange) fell 20%
- The value of the Japanese yen (brown) also fell nearly 20%
- And even though the US S&P 500 Index (purple) appears stable, it moved >1% on nearly one-third of trading days in Q1 this year – twice the volatility seen in 2014
The issue, of course, is that markets are no longer anchored by previous certainties.
They still believe central banks will never let stock markets fall – and New York Fed Chairman Bill Dudley duly rushed to support the S&P 500 last week after the weak jobs report. But in the wider world outside stock markets, companies and investors are not so certain. Oil markets provide a good example of the contrary views on offer:
- Shell’s $70bn bid for BG is based on the belief oil prices will return to $90/bbl by 2017
- The latest forecast from the US Energy Information Agency is for $59/bbl in 2015 and $70 in 2016
- Goldman Sachs cut their forecast in January from $80/bbl to $42/bbl for 2015, and are now at $40/bbl
- Citibank and myself both believe over-supply and weak demand will cause prices to fall below $30/bbl
BASF typify the uncertainly surrounding this key issue. CEO Kurt Bock forecasts prices at $60/bbl – $70/bbl, but cautions that:
“Oil and raw material prices are volatile, as are currencies; the emerging markets are growing more slowly; and the global economy is being damped by geopolitical conflict.”
Companies and investors clearly cannot avoid taking a view on the issue. And the difference between the forecasts is vast in terms of future profitability.
One way to resolve this impasse might be to test strategies against the 3 Scenarios I proposed in my 2015-17 Outlook last November, Budgeting for the Cycle of Deflation. This could help avoid the risk of an unpleasant surprise in the future.
WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Benzene Europe, down 46%. “Slight upward movement over the course of the week, with some cracker turnarounds and recent exports on benzene and pygas helping to balance out regional supply”
Brent crude oil, down 45%
Naphtha Europe, down 41%. “Activity remains low after the Easter holidays with demand for gasoline blending seen to be weak
PTA China, down 34%. “Overall polyester demand in Asia was described as largely flat, with majority of buyers sitting on ample inventories.”
HDPE US export, down 23%. “Prices held steady because of ongoing logistical problems in Houston.”
¥:$, down 17%
S&P 500 stock market index, up 8%
The bursting of the US energy bubble is looking more and more like a replay of the sub-prime bubble in 2008.
As investor Warren Buffett has noted, “its only when the tide goes out, that you learn who has been swimming naked .” And nearly a year ago, former central banker William White warned the problems in the global economy were:
“Worse than 2007, because then it was a problem of the developed economies”
One area of major concern, for example, is the link between the energy bubble and US job creation. The Wall Street Journal research on the right, for example, supports the Manhattan analysis I discussed last week:
- The top chart shows there has been 70% growth in oil industry support jobs (red line) since 2009, 40% growth in pipeline construction jobs (orange), and 35% growth in oil/gas extraction jobs (green)
- Without this, there would likely have been no overall growth in the US job market (grey)
- The bottom chart confirms that real wage growth (adjusted for inflation) has also been highly focused on oil/gas
- All 3 oil/gas related sectors have seen a combination of high wages and wage growth; pipeline wages have risen over 20%
- But average wages in the total economy have hardly risen over the period, and are half those in extraction
So what happens now that the bubble is bursting?
As with the sub-prime bubble, we cannot yet know for certain how deep the problems run. But we do know the participation rate (the number of men and women working, as a proportion of the adult population), is already at its lowest level since 1978.
And we also know that jobs in the oil/gas industry are now starting to disappear quite quickly as the bubble bursts.
This will take time to appear in the official data, but by Q2 we will probably start to be able to make some sensible conclusions. We may also find job growth in other industries was more connected to oil/gas than first realised:
- The data suggests that the recent revival in housing starts has been largely focused in the South and West
- These, of course are also the regions where most oil/gas developments have been taking place
- 10,000 people per month have been moving to Houston, Texas – all needing somewhere to live
December’s near 1% fall in US retail sales is another worrying sign that all is not well in the wider economy – which is 70% dependent on consumer spending.
Of course, we also know that the wishful thinkers, as in 2008, will keep telling us that “everything is for the best, in this best of all possible worlds”.
And we all know how wrong they were, then.
Financial markets today only care about one thing – whether central banks will continue to provide more low-cost financing to support higher asset prices. Thus markets liked last Friday’s weak US jobs report. They hoped that the US Federal Reserve would slow its tapering process as a result.
This inverted logic explains why bad news for the real economy is seen as good news for financial markets.
But for those of us who live and work in the real economy, bad news remains bad news. Thus it becomes important to understand why US employment has failed to recover since the Crisis began in 2008
US EMPLOYMENT CANNOT BE REDUCED VIA MONETARY POLICY
One answer lies in the number of full-time jobs, which remain 3.2 million below their 2007 peak of 123.2m. And a key reason for this shortfall is shown in the official Bureau of Labor Studies charts above:
- 12% of Black Americans (purple line), and 8% of Hispanics remain unemployed (green)
- This compares with just 5% of Whites (blue) and Asians (orange)
- 10% of those with less than a high school diploma are unemployed (blue), compared to
- 6% of those with some degree (orange, green) and 3% of those with bachelor’s degrees (purple)
Blacks are 14% of the US population, and Hispanics are 17%. So this racial divide in the jobs market makes it most unlikely that employment can quickly recover. Similarly, low educational attainment cannot be changed overnight.
This, of course, is why it makes no sense for the Fed to think it can boost employment via the use of monetary policy.
Printing more money, or keeping interest rates low, will not change unemployment rates for Blacks and Hispanics. Nor will they magically provide a college or bachelor’s degree for those who left high school without a diploma.
Sadly, today’s politicians prefer to avoid hard conversations with the electorate about these structural issues. That would mean real debate, not sound-bites and Twitter-feeds. Instead, they are happy to shift the headlines to central banks.
But, of course, this hands-off approach does nothing for real investors, wanting to think beyond the next quarter. Nor does it help real companies to invest in growing markets for the future.