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INTEREST RATE WATCH
Prepared by
R.J. O'Brien & Associates, Inc.
Myth Versus Reality
The credit market was taken completely by surprise this morning with the release of the Labor Department's Employment report. Non-farm payroll jumped by 404,000 jobs, more than double the gain of 200,000 that analysts had expected. The Household Survey confirmed the strength as reported in payrolls. Employment rose by a whopping 671,000 jobs; the number of unemployed fell by 218,000 to 6, 249,000; and the jobless rate fell to 4.6%, the lowest level since March 1970, when it was 4.4%.
Some bond bulls are pooh-poohing these numbers, citing the use of new seasonal factors utilized by the government. However, according to BLS chief, Katherine Abraham, “the surge in non-farm payrolls did not stem from the new seasonal factors.”
Furthermore, if these bulls had bothered to look at the real, non-seasonally adjusted numbers, they would see that the seasonal factors have understated actual employment growth. The actual number of unemployed is 5,914,000, which is 13.2% less than last November, and the real unemployment rate is actually 4.3%
There isn't anything in this report which the Fed will find comforting. Consider the rate of job growth in the last year. Employment has grown by 2.46% (payroll survey) and 2.22% (household survey); yet, at the same time the population has only grown by 1.25%. As a result, we are cutting deeply into the available supply of labor. Approximately 20% of the total unemployed are teenagers–a fact that does not augur well for further productivity gains–and the unemployment rate for those aged 20 and older is only 4.0%. This shortage of qualified workers is forcing employers to pay up for good help. In November, average hourly earnings rose 7 cents to $12.47, and average weekly earnings rose by 1.4% to $433.96. Over the past year, average hourly earnings have risen by 4.1% and average weekly earnings by 5.0%.
This shortage of workers is manifesting itself in two other areas. The most obvious is in hours worked. Employers who can't find workers are requiring the ones they have to work harder and longer. In November, the average workweek jumped from 34.5 to 34.8 hours; while the government's total hours index jumped to 142.8 from 141.2. This is not a situation that can continue indefinitely. Unions are stronger, and workers are starting to rebel at the longer hours.
The other revelation of labor market tightness comes from the “duration of employment” numbers. It seems to us that the first sign of labor market softness should make itself known in the duration numbers–that those unemployed will find it harder to get a job. In fact, just the opposite is happening. In November, the number of people who were unemployed for over 15 weeks (the longest category) fell by 155,000. The average duration in weeks of those unemployed fell from 16.6 weeks to 15.3 weeks, while the median duration declined from 7.5 weeks to 7.3 weeks.
Another indicator of labor market tightness has been state unemployment benefits. Much like individual income tax receipts, this is a very “hard” number. Nowadays, anyone unemployed gets benefits while they are looking for another job. The latest numbers reveal that the total number of people receiving benefits has continued to trend lower, with the four-week moving average making a new low this past Thursday. The total number receiving benefits is now 9.91% below year-ago levels.
Finally, we urge customers to focus their close attention to manufacturing employment levels. If there is an area which will be impacted by the strong dollar and currency problems in Asia, it should be manufacturing. What happens here is extremely important, for manufacturing employment has always had a strong correlation with the level of short-term interest rates. The manufacturing sector has not participated in the Clinton job machine, with total employment below that existing in 1989. American manufacturers have downsized, but they are now being forced to respond to strong demand by hiring more workers. They cannot ask their employees to physically work longer hours (the average workweek is 42.1 hours and overtime averages 4.9 hours), so they are dipping into the depleted pool of American workers. The end result should be higher wage inflation.
The credit markets don't seem to be worried–bonds lost less than a half a point in reaction to today's report. Traders seem to agree that declining commodity prices, continued productivity gains and increasing competition from Asian and other imports will, contain U.S. inflationary pressures. According to the latest Federal Reserve survey of regional economic conditions, “the Asian financial turmoil and currency weakness have reduced demand for exports of manufactured and agricultural goods.” We have seen for ourselves reduced demand for grain; Korean companies, for instance, have canceled contracts, asked for delays in shipments or asked for additional financing.
However, as far as manufacturing is concerned, we're a little skeptical. This week the National Association of Purchasing Managers reported that its New Export Orders Index strengthened in November to 54.2% from 51.6%. The survey showed that 18% of respondents reported better exports and 72% said they were the same, while 10% said that exports worsened. In contrast, the respective numbers in October were 16%, 72% and 12%. The manufacturers themselves can't be too worried, or they wouldn't be increasing employment.
We have been steadfast this year in proclaiming that the U.S. economy would remain very strong. The Fed is obviously betting that it will slow in '98. They thought the same this year. We'll see.
December 5, 1997R.J. O'Brien & Associates, Inc.
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