Birth/Death Adjustments Vs. Reality
There has been much discussion as of late about the "longest string of employment gains since the 90's." There is certainly no argument that employment has improved since the financial crisis, however, with the economy six years into a recovery we should certainly expect as much.
However, there has been much debate about the real strength of those employment gains given the fact that a large majority of the population, the highest levels on record, remain unaccounted for. As I discussed recently, the most perplexing of is the near record low participation rate of the 16-54 age group.
One of the issues that has come under fire over the last few years has been the method by which the Bureau of Labor Statistics (BLS) adjusts the employment data to smooth otherwise volatile data. One of the more questionable adjustments is the birth/death model which is a monthly guess at the addition and subtraction of businesses to the economy.
Gallup CEO & Chairman recently took the BLS to task on the measure stating:
"We are behind in starting new firms per capita, and this is our single most serious economic problem. Yet it seems like a secret. You never see it mentioned in the media, nor hear from a politician that, for the first time in 35 years, American business deaths now outnumber business births.
The U.S. Census Bureau reports that the total number of new business startups and business closures per year -- the birth and death rates of American companies -- have crossed for the first time since the measurement began. I am referring to employer businesses, those with one or more employees, the real engines of economic growth. Four hundred thousand new businesses are being born annually nationwide, while 470,000 per year are dying."
This is an extremely important point as it suggests that employment, as presented by the BLS, has been significantly overstated over the past six years. If we take the differential as stated by Gallup and compare that to the annual birth/death adjustment used by the BLS we find that jobs have been overstated by 3,678,000 or more than 613,000 annually.
How does this compare to the cumulative number of jobs as reported by the BLS since 2009? It is quite substantial.
If we assume that Gallup is correct in its assessment, this goes a long way in explaining the existing slack in the labor force and lack of wage growth. However, Jim summed it up best by when he stated:
"My hunch is that no one talks about the birth and death rates of American business because Wall Street and the White House, no matter which party occupies the latter, are two gigantic institutions of persuasion. The White House needs to keep you in the game because their political party needs your vote. Wall Street needs the stock market to boom, even if that boom is fueled by illusion. So both tell us, 'The economy is coming back.'
Let's get one thing clear: This economy is never truly coming back unless we reverse the birth and death trends of American businesses."
Yields Continue To Fall
In June and July of 2013, I began writing a series of articles discussing why the macro-view, that the "bond bull market" was dead, was wrong. As I stated then:
"I have been very vocal since the beginning of June that now is a great time to be adding bonds to portfolios. (See here and here) There are several fundamental reasons for my belief that the recent rise in interest rates was more related to a short term liquidation cycle rather than a shift in global economic sentiment."
Since then, not only have interest rates fallen, but they have recently pushed back below 2%. The last time rates were at this level was during the 2011 "debt ceiling debate" and during the 2012 "Eurozone crisis." Currently, it is the problem of a global deflationary spiral. The rush into Treasuries has also been magnified by the end of the Federal Reserve's "quantitative easing" program which marked the shift from "risk" to "safety" as the liquidity for the "carry trade" was removed.
Most importantly, there are virtually NO economists suggesting weaker economic growth in 2015. There is a firm belief that the foundation for continued economic prosperity is firmly planted despite rest of the globe struggling with economic weakness, recession, and deflationary pressures. However, as shown in the chart below, there is little historical evidence that falling bond yields have occurred in the midst of strengthening economic growth.
From this standpoint, as investors, it is worth considering that given the fall in inflationary pressures in the U.S. there is a rising risk of economic weakness to come.
Retail Sales Vs. Oil Prices
The mainstream view is that falling oil and gas prices are a boost to economic growth because it gives consumers more money to spend. However, as I explained in the articles above, that has historically not been the case. The reason is that in the economy, spending is a zero-sum game. If a consumer spends less on one item and redeploys those saving on another purchase, they did not spend MORE money. The only thing that increases consumption, is either increases in debt or incomes.
The retail sales report for December demonstrated this to be the case. For the month retail sales plunged much more than expected even after a substantial fall in energy and gasoline costs. More importantly, the fall in oil prices suggest that retail sales will likely continue to deteriorate in the months ahead as shown in the chart below.
The obvious ramification of the plunge in oil prices is that eventually the loss of revenue will lead to cuts in production, declines in capital expenditure plans (which comprises almost 1/4th of all capex expenditures in the S&P 500), freezes and/or reductions in employment, and declines in revenue and profitability.
The majority of the jobs "created" since the financial crisis have been lower wage paying jobs in retail, healthcare and other service sectors of the economy. Conversely, the jobs created within the energy space are some of the highest wage paying opportunities available in engineering, technology, accounting, legal, etc. In fact, each job created in energy related areas has had a "ripple effect" of creating 2.8 jobs elsewhere in the economy from piping to coatings, trucking and transportation, restaurants and retail.
Simply put, lower oil and gasoline prices may have a bigger detraction on the economy that the "savings" provided to consumers.
Keep a watch on retail sales, historically an annualized rate of growth below 3% has been a precursor to recessions.