Here’s Some Of What The Jobs Numbers Tell Us
The Friday jobs numbers once again pointed to mostly minor restructuring within the economy. There are a couple big trends developing however that are have predictable outcomes. Here are the quick details:
- Payrolls rose 196,000, a shade above the 177,000-consensus estimate. Of that, 182,000 were private employment, while 14,000 were government.
- The automotive sector announced 8838 planned job cuts to bring the YTD total to 15,887.
- Energy companies announced 8149 cuts bringing the YTD total to 10,548.
- The unemployment rate remained at 3.8%. Labor participation fell a tick from 63.2% to 63%.
- The underemployment rate, or U6, remained at 7.3%.
- The average work week rebounded back to 34.5 hours after falling to 34.4 hours in February.
- Wages have risen 3.2% over the past year, but gains have slowed in recent months.
The Economy Is Near, But Not At, Full Employment
An unemployment rate under 4% is typically considered full employment. We stand at 3.8%. The U6 unemployment rate, which includes those who work part-time but would like to work fulltime, fell from 8.1% a year ago to 7.3%.
While those numbers seem impressive on the surface, there are some underlying problems. At present, the labor force participation rate stands at 63%. This is far below historical highs, though probably within 1% or 2% of what is feasible.
If you listen to CNBC’s Rick Santelli, he drones on about the labor force participation rate non-stop. His belief is that we literally have like a 100 million people who ought to be working that aren’t. Santelli is an idiot.
CNBC’s argument maker partner, Steve Liesman in response to Santelli, repeatedly says that the labor participation rate being lower than its highs has to do with demographics. He’s sort of right, but he doesn’t know why. He implies that it is Boomers leaving the workforce keeping labor participation from being higher. He’s wrong on that and frankly, lazy to say it.
What we know is that there are almost a million Millennial men who are not working.
We also know that a few more married couples are simply not having both spouses work fulltime as the Boomers did. With the cost of child care, this makes sense for couples when one of the parents is not highly skilled enough to out earn the child care costs.
It is realistic for labor participation to rise above 64% at some point, however, reaching 67% again is unlikely. So, add about 1.5% to the unemployment and U6 rates for a more realistic view of unemployment. Those Millennial men who are not working are the slack in the economy – pun fully intended.
Employers Remain In Control
Theoretically, there is supposed to be wage inflation when employment gets this tight. That has not happened though. Gains in wages have been modest. Not many economists have offered good answers for this theoretical discrepancy.
I would offer that the destruction of labor rights to collective bargaining in the United States since the early 1980s has a lot to do with a lack of wage increases. We know that since then, inflation adjusted wages for “the other 99%” have barely budged.
Employers have been able to very effectively use the threat of layoff or moving jobs, in order to, prevent employees, either collectively or on their own, from seeking wage increases. This has helped drive corporate profits and buybacks, which in turn, been a driver of wealth inequality.
Here I will pause. Recently, I defended buybacks. I still do. It is not the buybacks that are the cause of the wealth inequality. Corporations without better ways to invest should return money to shareholders, who in turn, can reinvest that money into more productive ventures.
If employees lack of power to ask for more money that is allowing the fattening up of about one-third of corporate balance sheets. Interestingly, about one-third of S&P 500 companies are so badly managed and face such secular headwinds that they will probably face major restructurings in the next decade. The final third floats along.
Until employees have more power to demand wage increases, this dynamic will remain.
Automotive Is In The First Inning Of A Major Overhaul
The losses in the automotive industry are just beginning. While President Trump can tell GM CEO Barra to reopen a plant in Ohio, that does not go to the heart of the issues.
The demand for internal combustion vehicles is about to get hit by a triple whammy.
The first issue is that cyclically, new car purchases rebounded tremendously since the Great Recession and “cash for clunkers.” This has taken a lot of new car pent up demand out of the market.
In addition, the replacement cycle for new car buyers runs about five years now, up from 3.5 years a decade ago. The average life of a car has also risen to 13 years from about ten a decade ago, largely due to quality improvements. The average vehicle will now have five owners – which could be an effect of rising income inequality.
There is also clearly a waiting game going on with many consumers as they wait for better EVs. I know it is a waiting game I am playing – though I keep hoping for a Toyota 4Runner hybrid by summer 2020.
The combination of cyclicality, wealth effects on new car purchases and a waiting game for EVs, with the potential for economic weakness in the next year or two, will make it difficult for U.S. and global car makers.
The legacy car companies, General Motors, Ford and Chrysler face a daunting task of upgrading factories to produce EVs. GM’s decision to close their Cruz plant in Ohio is a symptom of that. While the Cruz was a popular car, it was not profitable. If GM had raised the price a thousand dollars per unit that might have helped, but it might also have killed demand in a hyper competitive space with flat to falling demand.
While the TSLAQ traders focus on the ramp up of Tesla, I would suggest they ought to be focusing on the wind down and expensive revamping of the legacy automakers, both domestically and globally. There is no doubt in my mind that we see at least one, and probably a few, high profile bankruptcies in the traditional ICE automakers – so expect more job losses.
The job losses that come with the transition in the auto industry could have massive knock on effects for the broader economy. There are nearly a million automotive people working in auto manufacturing, and as we have seen, EVs are largely automated production processes. There are over 1.5 million people employed in auto sales – a process that will be streamlined with online buying.
There’s another roughly 575,000 working at parts and tire stores. EVs require less work. Though tires might wear quicker due to torque abuse.
Ultimately, the transformation of the auto industry will run through its own cycle with implications for the economy. First, we will see job losses and financial strain. Then, eventually, the survivors could see outsize profits as sales pick up again, likely after the next recession.
As investors, our trick will be to pick out the survivors and buy in the trough when nobody else wants to.
Energy Companies Tighten Up
I have been pointing out how oil and gas producers would have to tighten up on how they do business for a couple years now. That is finally happening. We are seeing it in the employment number, falling rig counts and lower planned drilling expenditures.
Financial pressure exerted by the banks, Wall Street and shareholders are forcing companies to focus on profit over growth. While this might seem self-evident, for years companies focused on growth because oil seemed to be forever.
Now that we know oil demand will start to fall once EVs penetrate the market enough, in the next five to fifteen years, growth is less important. Being able to pay down debt and return capital to shareholders is the new name of the game.
Companies that can operate out of cash flow will be the winners in an industry that is about to enter a long-term wind down – certainly taking at least several decades. As investors, we must remember that markets efficiently incorporate known information.
The known information is that oil will wind down, the unknown is time frame. As the time frame becomes clearer to the “smart money” that will turn the market. We will then see the traders and retail follow on.
The underlying key factor I see in determining time the time frame for oil to hit demand destruction is when non-toxic batteries with more range for less cost become ready for mass production. That looks like about five years from now, plus or minus a year. As soon as the next set of headlines hit, the market might have already turned. Could that be by 2021 or 2022? Quite possibly.
I believe that we see more slowing in the economy in coming quarters. There appears to be underlying major industrial changes going on that will impact the labor force and economic growth.
Will we hit recession by 2020? It’s hard to tell. There are a lot of things lining up that say we could see one. However, what seems most likely to me is a slowdown with “old economy” sectors doing poorly and “new economy” sectors doing well. There is almost certainly going to be more bifurcation in the investment universe, just as there has been with income inequality.
The difference between income inequality and the new economy vs old economy paradigm is that the shift to sustainability is a natural occurrence driven by need and accelerated by market forces – even if Green New Dealers see it as something else.
I want to exit what’s left of my “old economy” investments before the next recession. Capital will become tight for them and there will be bankruptcies. Many companies that avoid reorganization or liquidation will still need to dilute to pay off debts that are coming due soon.
I want cash available to deploy into growth industries. Whether you invest in stocks or ETFs is particular to your risk management and investment philosophy. I plan to own about 20 stocks and several ETFs with each group making up about 50% of my portfolio. As I sift for the companies, I will be increasingly heavy in cash.
I have already started raising cash by selling the gains in my portfolios and proportionately reducing holdings across the board except for energy stocks which are too beaten down to sell yet. I plan to add “smart everything” stocks that fit the sustainability economics model, i.e. smart grid, smart city, smart building, smart car, smart agriculture, solar, solar components, batteries, water and a few commodities that support the smart everything world.
I covered this today in my Friday webinar: