The Latest Employment Reports May Glister, But That Doesn’t Make Them Gold
Monday Morning Interest Rate Update for December 10, 2012
There’s nothing like a good headline number to kick-start the running of the bulls.
It’s just too bad about those devilish details. Not to be a party pooper, because I’ll take a good headline number any day (especially these days!), but let’s not count on escaping from economic purgatory and start worrying about higher interest rates just yet.
The U.S. Non-Farm Payrolls Report
Hurricane Sandy dramatically lowered U.S. employment expectations for November and the consensus opinion on Wall Street was that the U.S. economy would only add about 85,000 new jobs in November.
By that measure, the 146,000 new U.S. jobs that were actually gained would seem like a bonanza. But in the latest jobs report, the U.S. Department of Labour basically said that the storm had almost no impact on their data, so we have to factor out Wall Street’s “Sandied-down” estimates and look at that 146,000 number in the context of a normal month. To that end:
- The U.S. economy needs to generate about 150,000 new jobs just to keep up with its population growth each month, and the experts I read think that it will need to average about 200,000 new jobs per month for several years to reach the U.S. Fed’s long-range unemployment target of 6.5%. The Fed’s pledge to keep its Policy Rate at 0% is tied to the U.S. employment data and the, 146,000 new jobs don’t threaten any existing timelines. (Canadian monetary policy is tightly interlinked with U.S. monetary policy whether Bank of Canada Governor Carney wants to admit it or not, so FYI, that’s why I watch the U.S. employment data so closely.)
- The U.S. employment data for the prior two months were also revised downwards by 49,000. That means that the U.S. economy has averaged just 139,000 new jobs each month for the past six months. In other words, recent U.S. employment growth hasn’t even been keeping up with U.S. population growth, let alone contributing real net job gains.
- Many of the new U.S. jobs were in lower-paying sectors, with 53,000 new hires in retail and 23,000 new hires in leisure/hospitality and administrative roles. Meanwhile, manufacturing jobs, which form the bedrock for employment in any healthy economy, once again fell by 22,000. The U.S. economy’s trend of swapping higher-paying goods-producing jobs for lower-paying service jobs remains an ongoing concern.
- Only about half of the eight million U.S. jobs that have been lost since the start of the Great Recession have been recovered, despite rampant and unsustainable levels of government stimulus. Fiscal cliff or not, the U.S. government must continue to withdraw at least some of its stimulus programs and will have no choice but to reduce the level of non-essential services it provides. That means that the U.S. public sector will shrink, leaving the U.S. private sector on the hook for a) making up the shortfall and b) adding new job growth that is over and above what is lost in the public sector.
- While the U.S. unemployment rate dropped to 7.7% in November, that’s only because a record number of unemployed Americans have, at least for now, given up looking for work. These people aren’t sitting on their couches eating bon bons and watching Oprah – most of them are back in school trying to upgrade their skills. Today’s soaring levels of U.S. student debt are proof of this. But when school is out, will there be jobs for these newly trained and now heavily indebted Americans? That’s a critical and, as yet, unknown variable that should temper any enthusiasm over short-term changes in the U.S. employment landscape.
The Canadian Employment Report
Just when our little-economy-that-could appeared to be pulling over into the slow lane, along came our November employment data, showing that we created 59,000 new jobs last month. While this was a far cry from the 10,000 new jobs that most analysts were expecting or the 12,000 new jobs we have averaged over the last six months, any rampant enthusiasm should be tempered by the following details:
- Job creation is tightly linked to GDP growth over the longer term and our GDP growth rate fell from a “bad-enough” 1.70% in the first half of this year to a “hello-is-anybody-there?” rate of 0.60% in the third quarter. Bluntly put, our November jobs report looks more like a blip than a trend because it doesn’t correlate with our GDP data.
- We saw the biggest employment increases in lower-paying sectors of our economy like retail (+25,000) and hospitality (+28,000), and we saw the biggest decreases in construction jobs and manufacturing, both of which tend to be higher paying. Just as in the U.S., we see a disturbing pattern of trading higher-paying jobs for lower-paying ones.
- Despite the increase in jobs, we haven’t seen any real corresponding change in overall hours worked, which have actually declined so far in the fourth quarter. If established employees are working less at the same time as the new hires are being brought online, there is no net benefit to our economy.
Hey … what happened to the trumpets?
Five-year Government of Canada bond yields were flat for the week, closing at 1.29% on Friday. Five-year fixed-rate mortgages are widely available at rates below 3% and high-ratio borrowers (who are making down payments of less than less than 20%) can now find rates as low as 2.84% if they know where to look.
Variable-rate mortgage discounts can still be found at rates as low as prime minus 0.40% (2.60%). While fixed rates can be had for only a small premium, if rates stay low for an extended period (as I feel they well might), the variable version could still prove cheaper over time. Of course, there is a lot of volatility in the market and the spread between fixed and variable rates is thin, so borrowers who choose a variable-rate mortgage should keep a close eye on mortgage rates or partner with a mortgage planner who will do this for them.
The bottom line: Despite their surprising headline numbers, the latest U.S. and Canadian employment reports left a lot to be desired. As such, I’ll hold my applause until the book looks as good as its cover.