Job Report No Groundbreaker

It was another week of market volatility, with investments benefiting from slower growth (bonds, utilities) doing well early in the week and growthier-looking fare doing really well later in the week, especially on Friday.

Economic numbers early in the week didn't look so hot, with pending homes sales moving slightly down instead of up, weaker-than-expected manufacturing-related reports, and auto sales slightly missing the mark. All was forgiven on Friday when stocks soared because the employment report showed a nice rebound in employment growth--but not so powerful as to necessarily force the Fed's hand to raise rates.

I think markets may be reading a little too much into the favorable report, which benefited from better seasonal factors and the return of some 20,000 striking workers. Hours worked moved up, potentially providing a boost to the economy greater than the number of jobs added. On the negative side, hourly wages did inch down. However, I wouldn't read a lot into this number, which can go for months with no gains, then leap upward. The year-over-year growth rates, which strip out the herky-jerky pattern in hourly wage growth, are still in the 2% or so range, neither stellar nor terrible. As discussed below, declining wages for heretofore better-paying jobs were slightly more troubling.

As suggested by a falling unemployment rate (5.9%), recovery-low initial unemployment claims, and wage growth in select categories, I continue to believe the economy will face spot labor shortages in 2015. That could mean that pay rates in some industries will need to go up. That could pressure corporate earnings in the year ahead along with rising interest rates and an increase in the trade-weighted dollar that has now appreciated by close to 12%. 2015 could be the first year when it might be better to be an employee than an employer.

GDP growth could do quite well even if corporate earnings falter, but it is terribly hard to make broad statements. Domestic-oriented companies with low labor needs, decent consumer exposure, and cash on the balance sheet could do well, even wonderfully. Those with high labor content that have taken advantage of employees in a soft labor market and have huge export sales and commodities exposures could be shellacked. I think we are still too early in this recovery to face a broad-based decline without some impetus from some type of foreign or natural disaster.

Employment Report Not a New Groundbreaker; Results Are Good, Not Great
The single-month growth rate of 248,000 jobs added in a single month looked stunningly good, topping the 12-month average of 220,000 jobs. Just as important, the previous two months were also revised upward by a combined 69,000.

As I suspected, the crummy 140,000 jobs added in August as originally reported was revised to a more acceptable 180,000 jobs. In fact, if you add back about 20,000 strike-related jobs to August, that brings the number to a very acceptable 200,000. However, we have to do the same adjustment to the September data, which brings that number down to a less unusual-looking 228,000 jobs added. To free us from those month-to-month variants, and to help mitigate difficult-to-make seasonal adjustments, I like to look at year-over-year data averaged over three months.

​Private sector employment growth has been stuck in an exceptionally narrow range of 2.0%-2.2% year-over-year growth since 2011. Interestingly, since 1950, this metric has averaged 1.8%, so maybe things aren't quite as bad as we all believe. However, coming off such a deep recession, forecasters were not wrong for hoping for more growth. The slow recovery suggests that maybe the stretch of employment growth will last longer than the more boom-and-bust periods of the '50s and '60s. But that is little solace to today's unemployed, especially young workers just entering the labor force.

The sector data didn't shed much light on the employment situation. Goods-producing sectors generally did well, but not as well as they did over the summer. Services generally did better than they had been. However, most of the above trend growth was in professional and business services. While temporary workers were part of that story, business professionals added more than half of the gain in this important category. For those fearful that low-paying retail jobs inflated the job total, today's report allayed some of those concerns. Retail added a relatively anemic 35,000 jobs that included the 20,000 returning strikers.

As I always stress, hours worked and average hourly wages are also key metrics in this report. The news on the hours front was good, with average hours up to 34.6, a new recovery high and up from 34.5. In terms of total wages in the hands of all employees, adding 0.1 hours to each worker's day provides about the same benefit to the economy as adding 400,000 jobs. Again, I wouldn't hang my hat on just one month's worth of data, since this could be just a rounding phenomenon. The news on the hourly wage was not as good as either the headline number or the hours worked data. Wages were down by a penny month to month to $24.53. That penny decline equates to a loss of about 60,000 jobs.

The wage data probably deserves more time and attention than it gets from most economists and what I am able to give it today. The data seem to imply that overall no one in the economy got a raise last month. That is not the case. The average wage can fall because of a shift of workers between higher-wage growth (or absolute sector employment level, for that matter) and lower-wage growth sectors. It can also mean wages in one particular sector are getting pummeled while workers elsewhere are doing just fine. And then there is the issue of the retirement of high-wage baby boomers being replaced by younger, lower-wage workers.

In addition, two-tier wage systems are hurting workers and the average wage calculation. That may be what is behind the disappointing data out of the manufacturing sector. While overall annual wage growth is running at about 2%, the manufacturing sector is trailing far behind at just 1.3% growth. Health care fared even worse, growing just 0.7%, although that is probably because more tasks are being handed off to lower-paid workers (doctors to nurse practitioners). Meanwhile, information workers have seen wages go up 5%, mining workers 3.5%, and even 3.2% for leisure and entertainment workers.

It doesn't help that the numbers, for some reason, are very lumpy. While everyone seems to remember the months with no growth, sometimes we see huge monthly gains that are often followed by a couple of months of no movement. Still, the year-over-year data doesn't win a lot of prizes, either. Year-over-year averaged hourly wages are up 2.04%, which sounds good until one considers that inflation was likely 1.8% or more over the same period.

Rolling together the growth in total employment, hours worked, and hourly wages to get an estimate of total wage growth, things appear to be looking up a little for the consumer. My calculated version of wage growth has improved from a low of 3.8% in February to 4.5% currently, which compares favorably with the 4.2% growth shown on average over the past 12 months.

Alas, what the wage data gives, inflation takes away. Inflation is still running a lot higher than it was year ago, with the inflation-adjusted wage growth of 2.7% dead even with the 12-month average, but below the growth of September a year ago. Still, my variant of wage growth is running ahead of consumption growth, which leaves room for consumption growth in the months ahead. That could mean more production, more jobs, and more income to be spent. Let's hope the cycle works out that way.

Speaking of consumption and incomes, the news, though now badly out of date, looked better overall in August. Deflation-adjusted consumption grew 0.5% while incomes grew 0.3%. That income number is likely to be revised up to at least 0.4% based on today's employment report revision for August and should look even better than that in September. I usually prefer looking at the year-over-year data, but some of the monthly data is telling. Consumption reached its best level in five months and registered its second-highest reading of the past 12 months.

For most of 2014, income growth has been excellent while consumption growth has been volatile and much slower. Between December and August real wages are up 3.1%, real disposable income (which includes other types of income, including dividends and rents as well as subtracting taxes) is up 2.8%, and consumption a meager 1.4%. My premise and reason for optimism is that incomes don't grow faster than consumption for long in the United States. As inflation backs down again and the job market continues to improve, I am expecting the consumer to come through with additional spending in the back part of 2014.

If consumption growth remains at the same level in September as in August, it appears that third-quarter consumption growth could come in at 2.3%, which is impressively close to the 2.5% rate of the red-hot second quarter. That in turn should help push overall third-quarter GDP growth to close to 3.5%. While down from the 4.6% growth rate of the second quarter, it keeps the economy on track to hit GDP growth of 2.0%-2.5% for all of 2014, which I have been forecasting for over a year.

Auto Sector Sales Settle Back a Little, Still in Great Shape
Auto sales moved up 6.5% in September compared with September a year ago, to 16.4 million units on a seasonally adjusted basis, according to the BEA. That was off from an unbelievably good August that showed 17.4 million units sold. Year-to-date sales are up 5.6%. If sales for the rest of the year grow at that same 5.6% rate, total units would come in at 16.4 million units, up from 15.5 million units in 2013 and a recessionary low of 10.4 million units in 2009.

Forecasters are now beginning to look ahead to 2015.  Ford (F) went out on a limb this week and forecast industry sales of 16.9 million to as many as 17.4 million light vehicles for 2017. At the high end, this would keep industry growth rates near 2014 levels. That would be good news to me and other economists who thought auto sales growth would continue to slow. Of course more leasing, extended terms, and easier credit (and modest incentive growth) have been part of the reason that auto sales have been such a bright spot in the recovery, especially recently. As long as these conditions don't get out of hand, they should continue to provide support for the industry.

Meanwhile, homebuilders, who haven't done nearly so well, have seen sticker-shock-type price increases, only modestly relaxed credit qualification conditions, and terms that remain onerous. No wonder the auto industry is back to peak levels while housing languishes at less than half of the last peak.

In any case, auto sales are a great, if not the best, indicator of real consumer confidence. This week's numbers continue to flash a go signal, albeit not quite as strong as August's outlier performance. Sales have been above 16 million units for six consecutive months. That's hardly a sign that the consumer has given up the ghost as some have suggested, including those silly monthly consumer confidence polls.

Don't Read Much Into the Slowing ISM Numbers on Manufacturing
Manufacturing has had a very good 2014--better than I had been forecasting--driven largely by a strong auto industry and all the industries that serve it. Because so many firms in so many industries serve the auto industry, the index inadvertently gives a little more weight to the auto sector than I would like. Recent readings have suggested close to boom times, which is probably only true for the auto industry. Things have been good but not as good as the headline number for August suggested. The market did not take kindly to the fact that the ISM version of the U.S. manufacturing index fell from 59 in August to 56.6 in September. Mind you, that is still a great reading, and you need a number of well under 50 to signal a coming recession. I wouldn't read much into a one-month slump, especially given that auto sales backed off a bit in September.

In addition, the U.S. readings remain the best of the major manufacturing blocks. The World PMI data, ex-U.S., continued to look lackluster and showed almost no changes between August and September. Most markets outside the United States are barely in growth mode, with ratings just modestly above 50.

Trade on Target to Aid Third-Quarter GDP Growth; Then Watch Out
The trade deficit shrank surprisingly in July, creating some fears that the deficit might rebound in August. It did not. The deficit shrank from $40.3 billion in July to $40.1 billion in August. The inflation-adjusted deficits for July and August are running considerably lower than the slightly inflated numbers of the second quarter. Net trade took 0.4% off of GDP growth in the second quarter and is likely to add 0.2% in the third quarter, providing potential for a meaningful swing. The trade account would likely be an even bigger help, except that the new iPhones are likely to cause a mini-import binge in September. Unfortunately, trade may hurt the U.S. economy in the fourth quarter because of a stronger dollar.

Neither export nor import growth is showing any clear trend, with relatively modest ups and downs and no signs of a sustained trend. One might expect with the U.S. relatively strong and other countries getting weaker that exports would be trending down and imports would be moving up in a relatively strong pattern. However, with the dollar so much higher and the relative performance of the U.S. economy, I would be a little surprised if exports don't weaken and imports pick up at least a little in the months ahead. Hence I remain pessimistic concerning the net exports account in the fourth quarter and beyond.

Only Federal Budget Data and Job Openings Report Next Week
After a slew of data this week, next week there is next to nothing due. Although the job openings report has had a market impact lately, this month's report will prove less meaningful, unless it makes a huge swing. With Challenger Gray layoffs, initial unemployment claims, and this week's BLS report all pointing in the same direction, we don't really need the corroboration or tie-breaker effect that this report usually provides. Nevertheless, the very rapid increase in job openings has not been matched by new hires. This suggests that a lot of positions remain unfilled, either because employers have not been willing to pay up or because potential employees don't have the necessary skills. Let's see if the gap closed a little bit for August.

The federal budget deficit has been trending down for several years, and next week's report will provide the final read on fiscal year 2014, which ended on Sept. 30. CBO is projecting a deficit of $506 billion (2.9% of GDP), which is a shade higher than its original estimate of $480 billion. A quick view of the daily data for September suggests its original estimate of $480 million may end up being closer to the mark as tax collections surged in September, a big month for government revenue.

Projections currently have the deficit flat over the next four years. That is without any congressional tampering or new war efforts. In the same CBO report, forecasts for economic growth look too high, but inflation and interest rates could prove to be too high, too, potentially canceling each other out.

Unfortunately, the other thing in favor of smaller deficits is income inequality. As more taxable revenue accrues to the wealthy that are subject to higher tax rates, income inequality means more tax collections and smaller deficits. Though the CBO way overestimated economic growth rates this year, tax collections will ultimately be missing forecasts by a tiny amount or not at all.