Full Employment - Labor Market Filling Up

Don’t use the stock market’s reaction on Friday as a litmus test for the strength of the November labor report because the market has been very volatile. Job creation was a slightly disappointing. It might indicate the labor market is near full employment.

Overall labor force participation rate was steady at 62.9% which beat estimates for 62.8%. The prime age employment to population ratio was 79.7%. That's 1.1% away from the average cycle peak in the past 3 expansions.

Before the late 1980s cycle, women weren’t in the workforce at a high enough rate to form a valid comparison with this cycle.

From November 2017, to this November, the employment to population ratio has increased by 0.7%. That could mean the labor market will reach full employment in over one year. That’s in tune with the yield curve signaling a recession in 17 months.

This signal hasn’t gone off though as the 10 year yield is still higher than the 2 year yield. A takeaway is job creation in 2019 should be higher than population growth. But likely slower than the 2018 average of 208,000 jobs created per month. There’s no reason to sell stocks on this labor report.

Full Employment - Unemployment Rate By Education

The unemployment rate is low, but there’s still a little slack left. This thesis helps us understand the data when the labor market is broken down by education.

Labor participation for those without a high school degree is at a record high. Yet, it hasn’t recovered much for those with a college degree.

However, the unemployment rates for all education groups are near the 2000 lows as you can see from the chart below.

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The education gap has shrunk dramatically. By this I mean, the difference between the unemployment rate of people without a high school diploma and those with a college degree is low.

Those with a college degree are much less likely to be subject to layoffs in recessions. However, that might come closer to the overall unemployment rate next recession because so many people have a college degree.

The chart makes it look like the economy is in the period right before a recession.

Full Employment - Wage Growth Misses Estimates

Average hourly earnings growth was up 0.2% in November which missed estimates for 0.3% growth. In October, hourly earnings growth was revised from 0.2% to 0.1%.

On a year over year basis, average hourly earnings growth was steady at 3.1% which missed estimates for 3.2% growth. This isn’t great news for workers, but gives the Fed a reason to halt rate hikes. I have mentioned in previous articles that core inflation is falling.

The only justification to hike rates is wage growth. If even that is missing estimates, the Fed shouldn’t hike in December. If I was at the Fed, I wouldn’t hike rates again until inflation perks up. It may not perk up again as growth is slowing and there may be a recession in 2020.

Even worse for workers is the average workweek fell from 34.5 hours to 34.4 hours which missed estimates for no change. This caused weekly earnings growth to fall sharply.

It went from 3.4% to 2.8%. October weekly earnings growth was the 2nd highest of this expansion. November weekly wage growth was the lowest since October 2017. This sharp decline is similar to previous peaks in this expansion.

You would think with the labor market much closer to full employment than the wage growth peak in 2010, that growth would be more sustainable, but so far it has fallen again.

It’s still important to understand the fulness of the labor market because current growth is being realized by many more workers than at any other point in this expansion.

Full Employment - Production & Non-Supervisory Wage Growth Accelerates

The good news for workers is private production and non-supervisory wage growth was very strong in November. As the chart below shows, the 3.2% average hourly earnings growth of production and non-supervisory workers was the strongest since April 2009. That's when the economy was near the end of the last recession.

This is a very good sign for retail sales growth and explains the strong Redbook same store sales results during the week that included Black Friday.

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Full Employment - Latest Consumer Sentiment Report

Preliminary December consumer sentiment report showed it was 97.5 which was unchanged from the previous report. This beat estimates for 97.4. Volatility in the stock market still isn’t bothering consumers yet. Current conditions index was up 2.9 to 115.2 which means Christmas spending should be strong.

The expectations index fell 2 points to 86.1 which signals consumers are starting to worry about the 2019 economy. I expect this index to fall and jobless claims to rise in the next few months. Those will be the early warning signs about a recession in 2020.

12 month expectations for inflation fell by 0.1% to 2.7% and 5 year inflation expectations fell 0.2% to 2.4%. This is in tune with the CPI and PCE reports which show inflation is starting to moderate.

Full Employment - Consumer Credit Increases

Consumer’s saving rate is falling and consumer credit is expanding. This is the last hurrah for the consumer. The October consumer credit report showed consumer credit expanded $25.4 billion.

This beat the consensus for $15.3 billion and September’s increased of $11.6 billion. The increase in October was driven by revolving credit which is credit card debt. That purple line in the chart below shows it was up $9.2 billion in October after falling $0.3 billion in September. Non-revolving credit was up $16.2 billion after increasing $11.9 billion.

Full Employment - Conclusion

This wasn’t a bad labor report. Once you get into the details, you can see production and non-supervisory wage growth actually accelerated.

That growth along with the strong current conditions index in the consumer sentiment report and the increase in consumer credit make me believe this holiday season will have strong retail sales growth.

Can stocks crash in December 2018 if the next recession is still a few quarters away?