August Labor Report

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Today is the big labor report, which can certainly inject some daily volatility into the market. It may also give us a inclining of how the Fed will position monetary policy. Wonder how it will be spun?


August Labor Report

We saw the private payroll ADP report, which came in cooler than expected, but still above 200,000 jobs created. Staying above that hump of 200,000 is certainly important for optics heading into the mid-term elections. So how did the “official” government Labor Report layout the job landscape?

Job Creation.

Economist estimates had been lowered slightly, in light of the ADP report, with the average consensus expected at 225,000. The Labor Department reported that we only saw 142,000 jobs created in the month of August, far below expectations. The news is a little disheartening as it comes in below that 200,000 level for the first time this year. Additionally, June was revised from 298,000 down to 267,000, and July was revised from 209,000 to 212,000 – net loss of 28,000.

I too was surprised at how low this came in, thinking that we would be in the low 200,000 level for optic reasons heading into the mid-term. I have a sneaking suspicion that the next Labor Report will improve (Oct 3rd) before the mid-terms, and we may see an upward revision for August as well.

Government added 8,000 jobs, which we usually see this time of year as school teachers and education staff ramp-up as the education season starts. The service and professional sectors both added jobs, along with construction; however manufacturing added not a single job for the month.

While hourly earnings increased 6 cents, average work week held at 34.5 hours, which is unchanged for the year. A trend that we have seen since the “Great Recession” began and the introduction of “Obamacare” (which mandated coverage of health insurance for “full-time” employees), was a rise in part-time work with a decline in full-time work. This is also reflected in the average work week hours. There was a drop in part-time last month, with an increase in full-time – which did buck the long-term trend, but not enough so to put a dent in average work week hours. However, I think that was an anomaly and as we revert back to a part-time nation.


Unemployment

The highly touted and “official” unemployment rate, the U3, fell from 6.2% to 6.1% “seasonal adjusted” last month. This is probably far more important for the mid-term elections and I am still a firm believer that we will see a 5.9% print before the mid-term election. The NOT “seasonal adjusted” is 6.3%. Total was 9.57 million unemployed, of which over 30% have been unemployed for over 27 weeks.


Courtesy of shadowstats.com

How did we get that drop in the U3, well you can thank the falling participation rate, declining to 62.8%, the lowest level since 1978. I am frequently asked what is this participation rate I keep harping on and why is it so important for the unemployment rate? It’s simple, when the Labor Department surveys people as to whether they are unemployed, they don’t actually count ALL the people that say they are unemployed for one reason or another. The Labor Department does NOT count 37.2% of those people who are unemployed, because “HOW” they answered the question. It is mathematically possible to lower unemployment to ZERO by lowering the participation rate. If no one is participating, then no one is counted.

Let’s do some simple math to show you how this works at its very basic level.

The total U3 rate counted 9.57 million as unemployed, based on a participation rate of 62.8%. If we add back in the 37.2% they did npt count, the total unemployed is actually 15.23 million. This is closer to the (total unemployed) that the U6 considers. Note the U6 is running at 12%. Many consider the Labor Departments U6 rate of 12% a far more accurate reflection of the REAL unemployment in this nation. Unfortunately the Federal Government chose the U3 as the “official” rate to tout to the media and the people, fully ignoring the U6 rate.


Keynesian Reaction

It was interesting to watch Steve Liesman (Keynesian CNBC economics reporter) and other liked minded individuals who all said in unison, “I don’t believe this number!” Amazingly some of them said stuff like; “If you believe this number, you believe pigs fly!”, “There are errors in this number!”; “We can’t trust this number!” Really, so if it is bad news you can cry foul and ignore it, but when people criticize overly optimistic numbers and make the same claims they are wrong? Interesting, they don’t believe it when it is bad, but then start cheer leading when it is good. Way to be objective boys and girls. This economic Keynesian sideshow is reminiscent of the -2.9 GDP vs. the +4 GDP.

I don’t doubt it will be revised higher, it will for sure and the September Labor Report (released in October), will come in better right before the mid-term.


Market Reaction Reads the Fed.

So why did the pre-market futures, which were down over 70 points before the Labor Report, RALLY on the bad news? Well that answer is simple, a bad Labor Report means the Fed will keep rates low and remain accommodative for a long time. The bad Labor Report will certainly help justify Yellen and keep the two Hawkish members at bay that have been critical of the Fed running an uber-accommodative policy.

We remain in an equity market where bad economic news is good news, as it means the printing presses will continue to run and interest rates will remain at zero.

I firmly remain in the camp that we will not be seeing any rate increases for the foreseeable future and accommodation; be it QE3 extension, QE4, Operation Twist, or something new with a fresh coat of paint, is here to stay for some time.


Support & Resistance

INDU 17,000+
Well bad news is good news. We did get a bounce off the pre-market lows but remain negative going into the opening. I suspect that we will stay above 17,000.

NDX 4000+
Apple is about to release something new and shiny, which has the fan boys camping out for days. Could it be another iPhone or the iWatch – the world waits and we could see a jolt of volatility in this index from Apple.

SPX 2000
This is a straddle strike, do we rocket higher and turn this into support or do we sell off as this becomes resistance. I think the market hasn’t determined what to do next. The Labor Report certainly injected more certainly about Fed easy money, but we are running on very high leverage ratios. The VIX moved higher into this morning’s report, but I suspect it could come off some as the day progresses.

RUT 1170
I continue to circle back to the Russell index. We could get a pull back to 1160 range on the data, but I don’t see a big sell off. 1170 seems to be the support area as we should try to see a continued rallied into the midterms. If the Russell remains weak and breaks below 1160, that would bring a correction to the narrower based indices, but I think the Fed will do anything they can to avoid that from happening heading into the mid-terms.


Stacked Deck!

I hound on the mid-term elections as being a pivotal factor and driving force for the market moving higher. I don’t find it odd or even skeptical to consider the Fed accommodation and action to keep the market aloft as we head into an election. All based on political ideology and motivation of the Fed, any more than the same biases we see in the Supreme Court.

We have all become critical about Presidents stacking the Supreme Court to their ideology as it directly impacts their party’s ability to pass legislation, taxes, and social programs. One only has to look how the courts dealt with Obamacare, GM bankruptcy, and a host of issues and how they voted on those issues. It certainly doesn’t always go the President or his party’s way, because he only has managed to gain half of the court with his ideology. Yet every president tries.

However, when I suggest the same ideological gaming happens in the Federal Reserve, I have been called an idiot by some. Wait, the President gets to appoint, the Chairman and governors, much like he appoints the Supreme court nominees. What’s the difference?

Presidents and politicians are not married solely to political ideology, they also embrace economic ideologies that fuel their political agenda. For each form of government you need an economic model to sustain it. For collectivism and social programs, you need the Keynesian economic engine. One only has to look at FDR and the “New Deal”, which adopted a Keynesian model that became the economic engine.

The President has been able to stack the entire Fed governors, including the Chair, Janet Yellen. Do you think he would stack them with Austrian or Chicago school economists or Hawks? Of course not, he stacked them with Keynesians and Doves, which march step-in-step with his social expansionism. Someone needs to pay for it, currently that someone is the Fed.

Imagine if the President was able to stack the entire Supreme Court with his appointments. There would be outrage across the land and he would certainly be able to ram-rod programs through, without the concern of the Supreme Court siding against him. Yet the has done this with the Federal Reserve and all are mum, perhaps because even some Republicans are Keynesians when it suits them. Additionally, the population remains fairly ignorant and only Keynesian is taught in school. They don’t know any difference and certainly under-educated in math, finance, economics, and accounting. It is far easier for the population to get excited over Gay Marriage, than say zero interest rate policies.

Obama’s coup of the Fed has been a success, a new ultra-dove Chair and a bench of appointed Keynesian Dovish governors – with not one Hawk, Austrian, Classic, or Chicago economist among them. Certainly they pay attention to the economic data, much like the Supreme Court is guided by the Constitution, however they all have a bias and in this case the Fed is now, for the first time in a very long time, managed by an all Keynesian Dovish Group. Thankfully there are a few non-appointed Fed President’s that have voice their criticism. Yet, they don’t set policy and their votes matter little. It doesn’t work like the Supreme Court, as the Fed Chairman can over-rule anything for the most part.

It is for this reason why I believe Fed monetary policy will be aligned with and biased towards the political party that appointed them and also has the similar ideology. My reasoning is no different than stacking the Supreme Court.


Lord Keynes Courtesy of wikipedia

One Response to “August Labor Report”

  1. McRocket says:

    Thanks for this.

    BTW, a few extra tidbits if data from the household survey:

    - only 16,000 more people were employed in August.

    - looking at the full and part time section; there were actually 200,000 less people employed in August then in July (?).
    - since April, only 201,000 more full time positions have been created.

    http://www.bls.gov/news.release/empsit.t09.htm