Something, Anything!

Something, anything!  Said the markets yesterday as they traded sideways and ultimately closed down slightly.  Stocks were in search of positive news on trade talks and in its absence found themselves with nowhere to go.

WHAT YOU NEED TO KNOW:

1)  The services sector is doing just fine.  Yesterday’s ISM non-manufacturing index, which measures services sector activity in the US, came in with a greater than expected reading of 59.7, up from last month’s 56.7.  The index declined in the prior two periods and the strong positive move is encouraging news for the economy as services make up almost 80% of the US GDP.

2)  The US Dollar remains strong as other world currencies weaken.  President Trump wants a weaker dollar according to a tweet from last weekend.  A weaker dollar makes US goods cheaper for foreign purchases and could help to decrease the trade deficit.  But alas, the dollar remains strong as the US economy and financial markets continue to attract investors.  Additionally, the recent pop in bond yields, albeit small, probably helped a bit.

Stocks had nowhere to go yesterday as traders await some news about the US China trade negotiations.  Markets have become somewhat dependent on the steady and carefully choreographed news flowing from Administrative officials.  Hopes for a trade deal have had a big hand in extending the equity markets’ most recent recovery after being resuscitated by the Federal Reserve at the end of the year.  The behavior of the markets over the past two sessions after getting news that a trade deal was imminent suggests that success is already baked into the market.  If that is the case, the Fed would be back in the driver seat.  The Fed is tasked with two major goals: keeping inflation in check and maintaining low unemployment.  The Fed’s so-called duel mandate is more difficult than it would seem as low-unemployment usually brings inflation, so it is a bit of a balancing act for monetary policy makers. As unemployment goes down labor supply shrinks making workers more scarce.  That means companies will have to get more competitive in order to hire.  More competitive means that they will have to offer higher wages and when companies have to spend more to produce goods they will eventually have to raise prices to maintain margins which means… inflation.  Higher wages and more employed workers also means more retail spending.  More spending equates to increased demand for goods, which also equates to… inflation.  So the Fed has a difficult job in balancing between low unemployment and controlling inflation.  The unemployment rate has been receding since reaching a high of 10% in October of 2009 and it reached a low 3.7% in September of 2018, the lowest since 1969. The recent Fed policy shift calls for patience in rate hikes.  Patience is afforded to the Fed by in-control inflation, so any signs that inflation may be increasing would surely trigger a resumption of hikes.  On Friday, the Bureau of Labor Statistics will release its monthly Employment Situation report which provides details of non-farm jobs added (or lost) in the prior month along with the official unemployment rate, amongst a number of other related statistics.  Because the unemployment rate is such an important number and because it is geek-out Wednesday, I thought it appropriate to delve a bit more into what is behind the number.

GEEK-OUT WEDNESDAY

The monthly unemployment rate is generated by the Bureau of Labor Statistics (BLS) which is a division of the Department of Labor.  The number is based on a monthly survey of 60,000 US households which are randomly selected.  Respondents are asked a series of questions which are then tallied up to come up with the numbers.  Though 60,000 seems like a small number given the US population, it is actually larger than most surveys and represents a good statistical sample.  Additionally households may contain multiple eligible workers so the sample size is, in fact, greater than the 60k.  Once the BLS collects the data it is used to calculate several different unemployment rates.  The official unemployment rate, which is the most commonly quoted and used, is referred to as U-3.  The U-3 labor statistic is calculated as follows:

U3 = ( Uw / LF ) * 100

Where:

U3 = U-3 unemployment statistic

Uw = The number of unemployed people who are available and willing to work and who have actively sought out work in the past 4 weeks.

LF = Total labor force, which includes all people 16 and above who are available for work and are not active in the military or in penal institutions.

For example:

If out of the 100,000 people in the 60,000 polled households, 30,000 people claimed that they were unemployed but are not actively seeking work, they are not included in the labor force.  That leaves 70,000 people who are active in the labor force.  Of those active in the labor force, perhaps 4,000 are out of work but are actively seeking employment.  The calculation would look as follows:

U3 = ( 4,000 / 70,000 ) * 100

U3 = .057 * 100

U3 = 5.7%

So, in this example the official civilian unemployment rate is 5.7%.  The BLS then seasonly adjusts the rate so that it is easily compared to the prior months.  Seasonal adjustment is a process which takes into account known seasonal spikes and drops such as increased hiring before the holidays.  Now that you know how the rate is calculated you can probably already see why there is controversy around the number.  If the number of unemployed workers only takes into account workers who are actively pursuing work it ignores workers who may be willing and available for work who may have given up looking because either no jobs are available or their skills are lacking in an evolving economy. Examples of these may be someone who has just given up trying after a long period of failure or a sewing machine operator seeking a position that has largely been moved offshore.  The smaller number of unemployed workers (Uw) in the equation above makes the number appear better than the actual reality.  There may be 20,000 people who are willing to work but have given up because their skills have become obsolete.  The BLS calculates a number of other statistics that may more accurately describe the unemployment rate.  One example is the the U-5 unemployment statistic which is calculated as follows:

U5 = ( ( Uw + MAw) / ( LF + MAw) ) * 100

Where:

U5 = U-5 unemployment statistic

Uw and LF are same as U-3 above

MAw = Marginally attached workers.  These are people who are available and would like a job and have actively sought work within the past 12 months.  This includes discouraged workers who have skill mismatches and those who have reduced their efforts due to exhaustion.

So you can see that U-5 is probably a better assessment of the real employment situation.  To see just how different these two statistics actually are we can look at last month’s figures.  The January, 2019 U-3 came in at 4.0% and the U-5 came in at 4.9%.  U-6, which takes into account folks who have taken part-time employment but would prefer full-time employment, was 8.1%!  On Friday, the BLS will release its numbers for February and economists are expecting the unemployment rate to come in at 3.9%.  You now know that number is the U-3 statistic.

WHAT TO LOOK FOR TODAY:

This morning we will get the ADP Employment Change number, which details new hires, and economists are expecting 190k new jobs versus last month’s 213k.  The ADP number is considered to be an early indicator for Friday’s BLS number.  We will also get Trade Balance which is expected to come in at -$57.9 billion versus last month’s -$49.3 billion.  This afternoon we will get the Fed’s Beige Book which details economic conditions across all Federal Reserve regions.  The report will give us a closer look at labor conditions.  Today will feature several Fed speakers which can serve as market movers.  Before the bell we will hear from Dollar Tree, amongst others.

daily chartbook 2019-03-06