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Insights / Blogs

On The Lookout

James Swanson, Chief Investment Strategist, helps readers make sense of the markets by sharing what he learns along the way.

February 6, 2015

Jobs, Jobs, Jobs

US payrolls have been expanding consistently.
The mix of jobs and wages has been improving.
Even the “worry zones” are seeing employment growth.

Of course investors ought to avoid complacency, but facts — not rumor and speculation — are their best guard against investment mistakes. Despite the worries we see around the world, one of the most critical considerations for investors is the health of the business cycle. And the most important feature of any business cycle is the employment situation.

As investors, we like to think longer term than traders think. We also try to base our work on the most fundamental, foundational premises — or what academics call first principles. One of these is that the number of people working — and whether that number is going up or down — matters. The number of workers helps shape the growth of an economy by figuring into final demand, which can either buoy or sink company sales and profits. As profits and sales go, so go the markets.

What have US jobs been doing?
In the United States, for the last week of January 2015, the number of people filing insurance claims because they were out of work was 278,000. While that may sound like a lot of workers collecting unemployment benefits when they would rather be working, it is actually the lowest such number in 10 years.

What I find significant is that this series has been falling so consistently. Let’s trace the number of workers filing initial claims back to the end of the last recession, now nearly six years ago. In July 2009, the number of applicants for unemployment insurance was 554,000 — more than half a million people. In December 2011, that number had fallen to 381,000, and by the fifth anniversary of the recession’s end, initial claims were down to 303,000.

Other employment-related measures of the health of the US business cycle have also been moving in the right directions. The number of layoffs has been falling, while the number of new job openings has been steadily rising. These numbers also matter to the US Federal Reserve, with new job openings in particular believed to sway interest rate policy.

Most important of all, the nonfarm payroll report tells a similar story. The number of workers is hitting new highs, and the mix of job types is improving. Just reported for January 2015, the monthly total for new jobs is 257,000 and the unemployment rate stands at 5.7%.

Added to the outsized gains in December and November, the past three months have seen the fastest US employment growth in 17 years!

In July 2009, the nonfarm payroll number was −327,000 — a net loss of US jobs — and the unemployment rate was 9.5%. The biggest job losses in 2008 – 2009 were in the construction sector, as the overbuilding in single-family residential housing came to a sudden halt.

Once the recession was over, the job gains that did occur were mostly in the lower-paid service and food industries. As time went on, manufacturing jobs increased, helped by growth in the US energy sector and better exports from US multinationals.

Now we are looking at job growth coming from a better and more balanced mix, including jobs in manufacturing, services, government and even — finally! — construction.

What about jobs outside the US?
Though the “worry zones” remain in China, Japan and Europe, we are seeing some job gains in Japan, and the biggest economy in Europe — Germany — is showing improvements in exports and consumer spending. Even three of the more troubled and indebted economies of Europe — Spain, Portugal and Italy — are finally posting better employment and spending numbers. It’s just possible that lower oil prices and borrowing costs are starting to help non-US economies as well.

The woes of the world and this global business cycle are well documented. One of the debates is that the rise in prosperity is mostly helping the top 10% or even 1% of earners. This may be true, yet it is undeniable that economic growth helps all sectors. Despite the problems, the main mover of future growth is spending power from workers, and worldwide the number of workers is rising.

What I cannot ignore is that in the United States, this cycle remains very strong, with many characteristics of a longer-than-normal cycle. The relentless rise in the number of people employed is now accompanied by gains in the number of hours worked. The mix of jobs and pay is also increasingly favorable, evidence of better balance in the labor market. All this points to a business cycle that can be summed up in one word — expansion. And expansions help investors.

No forecasts can be guaranteed.

The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.