MORNING BID – What’s all the Yellen about?

Jul 15, 2014 12:51 UTC

Rants from TV commentators aside, the market’s going to be keenly focused on Janet Yellen’s congressional testimony today, with a specific eye toward whether the Fed chair moderates her concerns about joblessness, under-employment and the overall dynamism of the labor force that has been left somewhat wanting in this recovery. The June jobs report, where payrolls grew by 288,000, was welcome news even as the economy continues to suffer due to low labor-force participation and weak wage growth.

Inflation figures are starting to show some sense of firming in various areas, for sure, but still not at a point that argues for a sharp move in Fed rates just yet. Overall, a look at Eurodollar futures still suggests the market sees a gradual, very slow uptick in overall rates – the current difference between the June 2015 futures and June 2016 futures are less than a full percentage point – not as low as it was in May of this year, but still lower than peaks seen in March and April 2014 and in the third quarter of 2013, before a run of weak economic figures and comments from Fed officials themselves scared people again into thinking that the markets would never end up seeing another rate hike, like, ever again.

Now the expectations for Fed moves have coalesced around late in the first half of 2015 for at least the first token rate rises, and it might even be a bit sooner depending on what happens with employment and inflation figures. On this front, Liz Ann Sonders of Charles Schwab points out that some of the leading and coincident indicators for the labor market look promising – noting that the jobless rate overall and the payroll figures are lagging indicators.

She points out that private-sector employment is up 9 percent since the end of the recession, outpacing the economy’s overall 5.9 percent growth rate – and that’s clearly due to a lot of local and state government austerity that was forced upon municipalities and other localities due to diving tax revenues and weak growth. Government employment didn’t finally trough until mid-2013, and has since started to come up a bit more, but it’s still down 3 percent from the end of the recession; the gains in private employment don’t completely obviate whatever need there is for government jobs and services – particularly if federal and state employment tends to be middle-class labor.

Job quits and layoffs figures are improving.

Job quits and layoffs figures are improving.

Other factors pointing to strength – the improvement in the JOLTS data, the job openings labor turnover survey, which shows job openings rising to levels consistent with the 2007 area – still not at the same level as it was in 2001 during the end of the tech boom, but much better than what’s been happening of late.

The “quit rate” also measured by JOLTS points to more people voluntarily leaving jobs – again, the 2.1 percent rate for private payrolls falls short of the 2.5 to 2.6 percent level during the end of the last boom and far from the 2.8-2.9 percent level back in 2001 – but it’s important enough that Yellen may modify some of her language. Given she’s learned pretty quickly to try to bore people to death after the “six months” remark that set people off, those looking for lots of news may be disappointed. But if there is to be any, it could be here.

Thirsty for work [Updated]

Jordan Fraade
Jul 11, 2014 21:09 UTC

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Last week’s jobs report may have capped off the best six-month period since the recovery began, but the long-term unemployment situation is as terrible as ever. Nearly3.1 million Americans have been out of work for six months or longer — a third of all unemployed Americans. This isn’t just a bad business cycle, says Nick Bunker. It has become structural problem in the labor market* (see update below). The Beveridge Curve, which tracks the relationship between the unemployment rate and job vacancies, has shifted outward, meaning there are lots of job vacancies, but more unemployed people than you would have expected had the pre-recession trend continued. There are plenty of jobs out there, Bunker says. Employers just aren’t hiring people to do them.

Catherine Rampell points to new data from NBER and Chicago Fed researchers showing that the average job opening is going unfilled for an average of 25.1 days, the longest vacancy rate since May 2001. She’s got a number of ideas on why this is happening, but she’s convinced that the one thing that’s not causing it is job seekers lacking the skills that employers want. If this were about the skills gap, she says, employers competing for a small pool of skilled applicants would be forced to raise wages — something we haven’t seen recently.

A 2012 paper from the Boston Fed backs this up, saying the high rate of unemployment is pervasive across the entire economy, and therefore not the result of a skills mismatch. Ben Casselman sums up a more recent NBER paper: “The high level of long-term unemployment during and after the Great Recession was driven by the lack of jobs and the difficulty of finding work after a long period of joblessness, not by characteristics [meaning skills] of the unemployed themselves.” Danny Vinik looks at a number of factors, from labor-market dropouts to wage growth, and says that what’s happening isn’t just a crisis, it’s a national tragedy.

There’s lots of debate about what to do next. One thing we definitely should not do, according to Robert Waldmann, is what happened last December: get rid of extended unemployment benefits. Waldmann writes that the conservative argument that the expiration of those benefits motivated people to find work in 2014 is not backed up by month-to-month employment data. Dean Baker says that we should bring the long-term unemployed back into the workforce by changing Americans’ labor habits as a way to spread the work around, such as “encouraging firms to reduce work hours as an alternative to laying people off.” James Pethokoukis suggests tackling the problem on a number of fronts, including tax credits for hiring, privatized job-training programs, and vouchers to help people move to places where they can find work.

There’s some hope, yet. Suzy Khimm notes that on Wednesday, Congress overwhelmingly passed a bill that streamlines federal job-training programs and gives private employers more say in how they work. — Jordan Fraade

On to today’s links:

Self-Promotional
A Cynking ship - Shane Ferro
Data’s drawbacks: The best way to commute is not always the fastest - Shane Ferro

Expensive Habits
The most expensive cities for expats aren’t anywhere near London or Moscow - Quartz

It’s Academic
A “peer review ring” has been busted - Washington Post

Data Points
The millennial daughter of the head of the Mortgage Bankers Association will continue renting, thanks - Lorraine Woellert

Servicey
For a hefty fee, the Awl’s staff will teach you how to dress - Shirterate

Rent-Seeking
Not everyone is upset about London’s banking shenanigans - Jason Karaian

So Hot Right Now
Unlisted real estate sales are a thing now - Carla Fried

Copy Wrong
Aereo would like to be considered a cable company - Aereo Blog
But its argument is probably going to fail –  Brian Fung

* In fact, that’s not what Nick Bunker said at all. It was the opposite: “If you look at their Beveridge Curve for economic recoveries going back over 60 years, you see the current shift is actually quite typical.” We regret that we erred in our original reading.

MORNING BID – Minute by minutes

Jul 9, 2014 13:44 UTC

The bond market remains pretty much tethered to the 2.50 percent to 2.60 percent range that’s prevailed for the 10-year note for quite some time now, with the primary catalyst being today’s release of the Federal Reserve’s minutes from its most recent meeting. The relevant data that investors are probably paying most attention to – the jobs report last week, the JOLTS jobs survey, shows some more things that is meant to keep the Fed engaged rather than moving toward an imminent increase in rates. The quit rate – the rate at which people leave jobs for others – is still historically a bit on the low side, not at a level that would make the Fed more comfortable that the kind of labor-market dynamism needed for the Fed to shift to raising interest rates. Fact is, the central bank just isn’t there yet.

And with that in mind, that means those investors clamoring for higher rates are probably going to continue to see their expectations unmet for a longer period of time, and with sovereign buyers from Europe and Japan wandering outside those halls, there’s an ongoing bid in the market that continues to thwart short-sellers who are just waiting for that right moment to bet against the bond market. That’s been a lonely trade of late – or rather, a popular trade, just a big loser as trades go.

Players in the markets may also be looking to see whether the Fed discusses the other exit strategies it has — reverse repos and the like — making that another thing to watch for in the late release. Dealers have been divided on whether the Fed will raise rates merely to 25 basis points or direct to 50 — our most recent polls are split on this, but a move to 50 would probably assuage a few of those who think the Fed is getting behind the curve.

Earnings play a factor in this equation as well however. The decline in earnings estimates has actually been subdued in the second quarter, compared with the first quarter, according to Goldman Sachs, which suggests a pickup in activity after the weak first quarter. Earnings don’t really get going for another few days, but the signs of growth will be what investors worried about valuations are looking for. The current valuation situation, as Chuck Mikolajzcak wrote in a story yesterday, points to some measures that are worrisome – the Case Shiller PE figure, for instance – while a couple of others like operating P/E, suggest only slightly expensive levels. With more strategists starting to worry of a correction, earnings would go a long way toward supporting equities.

from Data Dive:

Here’s why it’s so hard to land a job

Jun 25, 2014 13:31 UTC

Six years into the recovery, the American jobs situation is still in a rut. The relationship between how many people are looking for a job (the unemployment rate) and how many jobs are available (the jobs opening rate) has historically been predictable. Plotting it out in chart form gives you what is known as the Beveridge Curve, named after the British economist William Beveridge. The idea is that as the number of workers who are looking for a job rises — which to employers means the pool of talent for them to hire from gets bigger — the available jobs get filled and the opening rate goes down.

This is what it has looked like since 2001:

The Beveridge Curve

The first thing to notice is that something happened in 2008: the Beveridge Curve shifted to the right and stayed that way. That means employers aren’t hiring as many unemployed people as they should be, according to a pre-2008 view of the world. It is also one of the reasons the economy feels like it is still bad, even though the recession officially ended five years ago.

The question is why is the curve so far off from what would be expected in a normal recovery? And how can things be brought back on track?

The answer often cited is that the economy has a skills mismatch. Fewer people are finding jobs than they have in the past because they aren’t qualified for the jobs that are available. This is less about the Great Recession and more about changing technology and needs. Imagine a 45-year-old man who has worked in an auto factory his whole life up until it was shut down in 2009. He can’t be quickly or easily retrained to be a nurse or a computer programmer, which are the only jobs he sees available that pay as much as his old manufacturing job, so he remains unemployed.

But there’s a problem with this theory: if the problem really is a mismatch of jobseekers to jobs, why did it happen so suddenly? The decline in manufacturing and the need for computer programmers existed long before 2009. Plus, as Dean Baker notes, if a skills mismatch really were the big problem, wages should be rising for those who do have the skills (and the jobs). But they’re not.

Economist Brad DeLong floated another reason for the shift a few days ago. The shift in the curve might be because of a collapse of social networks. He doesn’t mean Facebook friends, but the loose network acquaintances people have in their daily lives (maybe even people you've met but aren't friends with on Facebook).

Think of your aunt’s best friend who you see at a July 4 party once a year, who paid you $50 to organize all her files one summer when you were 15. She might say, “Hey, my office is looking for an administrative assistant, and I heard from your aunt that you need a job. Send me your resume.” DeLong is worried that young people might not have enough of those connections, and, more worryingly, that older workers that got laid off during the Recession haven't kept up with their old connections. Submitting a resume through a computerized system is just not as effective as knowing someone in real life..

Then the next question becomes: what caused the atrophy of our social networks?

from Data Dive:

After six years, the US economy got its jobs back

Jun 6, 2014 15:57 UTC

"The scariest jobs chart ever", which Bill McBride at Calculated Risk has been updating month by month for years, is finally ready to be retired.

That’s right — with the 217,000 jobs added in May, the US economy is finally, finally back to the pre-recession employment level.

Screen Shot 2014-06-06 at 11.30.08 AM.png

And yet, while US employment is technically at an all-time high, we’re still behind. While the US now has more jobs than before the recession, the population has grown a lot in the last six years, and the labor force participation rate is the lowest it has been since 1978.

Breathe a sigh of relief at this milestone, but know we still have a long way to go.

MORNING BID – Be not afraid of more bond-market rallies

Jun 6, 2014 13:38 UTC

After the world’s most boring jobs report in history (seriously, misses consensus by 1,000, unemployment and wage growth in-line with expectations, and revisions over the last two months amount to a total decline of 6,000 jobs, which is a pittance), the bond market is catching a bit of a bid again. That shouldn’t be a surprise given the way this market is still taking its cues from the European bond market, which is soaring on what would otherwise be a quiet Friday. (Those of you who read Richard Leong’s story yesterday noting the likely rally in bonds post-jobs would have been all over this – just sayin’.)

It’s not going to be long before Spain’s 10-year yield falls through the U.S. 10-year yield – the spread has narrowed to about 6-7 basis points and at one point was around 3 basis points before the jobs figures. Even though the in-line figures could argue for higher rates, the report doesn’t change the consensus on the economy all that much and allows fixed income to concentrate on supply and relative valuation issues – and those point to yields remaining under pressure. Mark Grant of Southwest Securities lays it out well on a lot of issues in a comment this morning, but very specifically, he points out that “money from Asia and the Middle East is going to come pouring into the American market because of the yields here versus all of Europe. When the French 5 year yield is 304% less than the American one something is going to give and the ECB will not permit that answer to be a higher French yield.”

Lower European yields are pressuring U.S. yields.

Lower European yields are pressuring U.S. yields.

Supply and demand remains part of the equation as well. Headed into this week, issuance of U.S. debt was down 14 percent from this time a year ago and overall worldwide debt issuance was down 5 percent; US corporate debt issuance has been relatively steady, down 2 percent from this time a year ago. Couple that with the big run for yields coming from banking institutions around the world, other funds and insurance institutions worldwide, and U.S. private pension funds, and that imbalance is also contributing to an ongoing bull move in the bond market. (BofA-Merrill notes that first-quarter private pension fund purchases did slow from the second half of 2013.)

Treasury issuance is down, municipal bond issuance has declined, and the Federal Reserve is still holding a lot of debt overall. “Higher prices and falling yields can be caused by a number of things and this time around the cause is not a financial debacle,” Grant writes, and it’s hard to disagree on this one. Merrill notes that for the year-to-date, fund flows into all fixed income come to about $55.6 billion, about on a par with the $58 billion into equities – so the “everything is awesome” rally continues.

Where’s that leave other markets? Well, savers are going to continue to get hit on this – which encourages more risk taking, be it in stocks, real estate, credit or what-have-you. The lower rates may help offset some of the softness that the housing market has endured over the last few months, seeing as how it takes mortgage rates lower. Then again, several more strong economic reports are going to create a bit of a conundrum – it’s hard to see how real growth of 5 percent (that is, nominal growth of about 3 to 3.5 percent in the second quarter, plus inflation in the range of 1.7 to 1.8 percent) supports a 2.5 percent 10-year yield, but we may be about to find out.

Labor force participation day

May 2, 2014 21:36 UTC

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It’s jobs day! The Bureau of Labor Statistics reports the economy added 288,000 jobs in April, bringing the unemployment rate down to 6.3% from 6.7% last month. Numbers from the last two months were revised up by 36,000 jobs in total, putting the economy now in its third straight month with jobs growth over 200,000.

Over at Brookings, Jonathan Wright uses his own seasonal adjustment algorithm, which takes into account several more years of historical data than BLS does, and estimates that the economy actually created 304,000 jobs. Bill McBride once again updated his monster chart on recent recession job losses. Seven years after the beginning of the Great Recession, the economy is just 113,000 jobs away from its previous peak. “It is possible that 2014 will be the best year since 1999”, he says.

While the headline numbers were “shout-from-the-roof-tops, pop-the-Champagne fantastic”, says Neil Irwin, the report “pairs the excellent surface news with a soft underbelly”. Century Foundation fellow Daniel Alpert tweets that he’s “never seen such a huge divergence” between the leading numbers and the underlying data.

A big part of the disconnect comes from the unemployed becoming discouraged and dropping out of the work force. While the economy is creating jobs and the unemployment rate is falling, the labor force participation rate continues to fall. At 62.8%, it’s now at its lowest level since the late 1970s. The Federalist did the math and says if the labor force participation rate had continued at its June 2009 level (the official end of the recession), the unemployment rate would still be above 10%. Of course, the drop in the LFPR since then isn’t all because of discouraged workers, part of that decline is explained by demographic shifts. “The declining labor force is something we’re just going to have to get used to”, says Jordan Weissmann.

The fact that workers’ hours and earnings continue to be flat is also discouraging. “Both of those are pretty good predictors of future demand — and future hiring — so there’s not much hint of better times ahead”, says Matt O’Brien.

Jon Hilsenrath writes that the numbers make it pretty clear the Fed will continue the taper, but add to the confusion about whether it will raise interest rates in the near future. The Fed is in the middle of a big debate over whether the falling unemployment rate means inflation is near (and the Fed needs to raise rates), or whether the large number of part-time and discouraged workers means the Fed needs to keep rates low and continue helping economic growth. This month’s report contains plenty of evidence for both sides. — Shane Ferro

On to today’s links:

Wonks
More spending, not that many more jobs: making sense of the latest healthcare data - BI

Yikes
Miami has greater income inequality than Buenos Aires and Rio de Janeiro - Bloomberg

China
China’s housing and credit boom may be nearing its end - Ambrose Evans-Pritchard

Let’s Hope So
The end of employer-provided healthcare may be near - Neil Irwin
“Can you build a business by linking to stuff other people have made?” - Re/code

Innovation
“Just this morning, I uploaded some water into my mouth via cup” - Sam Biddle

Servicey
“Using a foreign language induces utilitarianism” - Marginal Revolution
4 ways to stop the US from becoming a Piketty-style oligarchy - Matthew O’Brien

Crisis Proto
The Brooksley Born meeting: when Bob Rubin, Larry Summers, and Greenspan blew a chance to avert the financial crisis - Peter Coy

MORNING BID – But I never could find…(sha na na na, sha na na na na)

Feb 7, 2014 14:05 UTC

An odd jobs report sets the tone for what’s likely to be another choppy day in the markets – stock futures plunged, briefly, after the Labor Department said nonfarm payrolls grew by just 113,000, but the household survey saw a drop (again) in the unemployment rate to 6.6 percent on a big gain in jobs in that survey. An odd decline of 29,000 in government payrolls offset the overall about-at-trend-but-let’s-not-kid-ourselves-about-this-being-awesome 140,000 or so gains in the private jobs market, so there’s a little bit to like, some to shake one’s head at, and still more to wonder about how many people didn’t get to work because their feet froze to the ground when they tried to get into their cars.

(More seriously on that point – the establishment survey doesn’t get some kind of massive job loss just because of a storm on a particular day of surveying, so it’s not as if a snowstorm destroys job growth, so let’s not overstate the weather issue here. It’s a factor, but don’t look for a revision to +300,000 or something.)

The activity in equity futures, however, seems to point to where we’ve been all along: jobs growth, factory activity and overall economic figures are just enough to put a brake on getting any kind of incipient rally and keeping the buyers less motivated right now, though the shallow correction we’ve seen so far appears to have hit a stopping point for the time being. Futures bottomed out around 1758 on the S&P E-Minis, a few points below the level the market had been sitting at before the downdraft that took futures to about 1730 for a few days. Stocks recovered from that level and now appear content to hang out around 1760 or so or even a bit higher, while the bond market is doing something similar – a quick post-jobs rally that took yields down to about 2.64 percent on the 10-year before the buyers eased off the throttle, lifting yields again to around 2.67 to 2.70 percent. Absent more emerging markets turmoil – and this appears to have been somewhat stemmed in the last few days, though maybe that’s just because we haven’t had bad news from China in the last day or two – these levels might end up prevailing for some time.

The jobs number of course raises the usual back-and-forth about whether the Fed might decide to accelerate or decelerate its schedule for winding down stimulus, but with the Federal Reserve – and especially with a new chair coming in – predictability when it comes to this policy is probably the preferred course of action. There’s enough weather-related shenanigans and uncertainty about global growth offsetting the relatively solid economic figures for the Fed to not want to jolt markets, and the Fedsters have been talking pretty tough on this one, essentially making it clear that this wind-down will become the equivalent of stock buyback programs: They continue, no matter what, unless something drastic happens to alter that expectation.

While we’re on the subject of buybacks, Apple is upping the ante on its own share repurchase schedule, succumbing to some of the pressure from the likes of Carl Icahn and others who have demanded the company boost shareholder returns in the absence of real spending plans. And of course, Apple has a ton of cash on hand, and they’re generating enormous profits even if they’re not the growth engine they had been in the past. It’s a bit early to say that the company should be lumped in with the likes of Exxon or IBM – gigantic businesses mostly notable now for moving money around, using up their free cash flow (and then some, thanks to low borrowing costs) for buying back their own shares.

Some analysts, notably Tobias Levkovich of Citigroup, have done studies that show that serial repurchasers – those who are steadily reducing their outstanding share count (share shrinkers, to come uncomfortably close to a Costanza-ism here) – have been better performers in the stock market over the last decade, with a total return of about 550 percent coming into the year compared with the S&P, which is up about 200 percent since the beginning of 2003. From a shareholder perspective, that works as long as these companies are so entrenched that their products deliver big sales at steady margins; once they fall behind, though, look out.

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