October’s ominous financial markets belie underlying job market strength
By Hafeez Esmail, Main Management
October brings with it the beauty of fall to most of America. It may also be the best time of year to visit the San Francisco Bay Area, where Main Management is based. However, with today being Halloween, it seems this October has spooked a number of equity market investors. While this month has historically not been a good one for stocks, there is concern that the long bull market run may be petering out. However, the job market suggests that there may be further room to go.
In the most recent data from the Bureau of Labor Statistics, the August Job Openings and Labor Turnover Survey (JOLTS) report was very much a continuation of what we’ve seen over the past few months. The number of job openings continued higher, to the most ever at 7.136 million, while the number of people hired did the same, climbing to 5.784 million. The JOLTS release also showed that the number of job openings was once again greater than the number of unemployed persons. This has been the case for the past 6 months and has never happened before.
The Job Openings vs. Unemployed chart above basically means that there are more jobs available than there are unemployed people to fill them. Part of this may due to a skill set mismatch, meaning that this anomaly may partially be explained by the fact that there aren’t enough people with the right training for a given job. Nonetheless it is staggering that the ratio of unemployed persons per job opening fell to 0.87 in August. This reading is the lowest on record, driven by a month in which openings increased while the number of unemployed persons decreased.
Taking a look at unemployment by race, it appears that all groups are benefiting from the current economic environment. Unemployment for African Americans is at the lowest level since the BLS started tracking these numbers in 1972. Similarly, Hispanic unemployment is also at the lowest level since these numbers were tracked in the early 1970s. While at lower absolute levels, both White and Asian Unemployment are also close to their lowest levels.
Turning to a different set of inputs, following the end of the quarter, job cut announcements rose 15.3% from the second quarter of 2018 to 120,879. However, this remains well below the long-term median of 179,580, indicating that firms are still hanging on to their workers.
The Challenger, Gray & Christmas layoffs report specifically for September showed that job cut announcements surged 43.7% from August to 55,285. This figure is also a 70.9% year over year increase from September of 2017. However, nearly half of the announced cuts are a result of Wells Fargo’s plans to cut between 5 and 10% of its 265,000 person workforce over the next three years (assuming they cut the higher percentage). So, the report may not as bad as it looks at first glance.
Another way of looking at the data is to examine how the three quarters of 2018 that we’ve had so far look against the longer-term quarterly averages for job cuts dating back to 1989. Thus far, 2018 has seen markedly lower levels, with each quarter coming in around 30% lower than its long-term average. Accordingly, businesses appear reluctant to cut jobs.
However, one concerning point in the layoffs report came in the section where companies disclose their plans for future hiring. The third quarter is typically when firms announce their seasonal hiring plans heading into the holiday season. The third quarter of 2018 saw hiring plans of 207,698, well below the long-term average of 466,581.
Overall, why is a strong jobs picture important to the economy? If an increasing percentage of the population are obtaining paychecks, each one of those are likely to purchase goods and services with the dollars they receive. This, in turn, helps to grow the revenues and profits of the companies providing those goods and services. One such measure is the US Redbook Index, a sales-weighted measure of the growth of sales in a store. It has been sustaining historically strong levels over the past couple months. It’s released weekly so there is some noise, but nonetheless, the weekly readings of late have been quite strong, averaging +5.6% Y/Y growth since July.
There are a number of macroeconomic risks that investors may want to be concerned about. The ratcheting up of tariffs with China, along with the potential impact on future corporate profits, seems to be the predominant ones. A resolution to the war of words and trade barriers could certainly help to ease the October jitters. However, with respect to the underlying employment picture, there still seems to be a number of reasons for optimism.
Hafeez Esmail is Chief Compliance Officer at Main Management, a participant in the ETF Strategist Channel.
A pioneer in managing all-ETF portfolios, Main Management LLC is committed to delivering liquid, transparent and cost-effective investment solutions. By combining asset allocation insights with smart implementation vehicles, Main Management offers a unique approach that translates into distinct advantages for our clients, including diversification, cost efficiency, tax awareness and transparency. http://www.mainmgt.com.