INSIGHTS

On July 25, 2012

Employers Maintain Capital & Employees in Face of Fiscal Cliff

Wayne Gretzky attributed his success in part to skating to where the puck was going and not where it was. We’ve used this analogy quite a bit over the years to explain that extrapolating current conditions is a bear trap that many economists and government financial workers (read U.S. Treasury and Federal Reserve) routinely find themselves. Monitoring economic data on a monthly, or even weekly basis, can cause paralysis that often masks the more important trends that ultimately impact asset prices.

The jobs environment surely is not as strong as anyone would expect and will become distorted for political gain over the next few months. However, some subjective and artistic interpretation is required when comparing the past recoveries to the distinct alterations of the most recent recovery. We believe that looking at the trend line is crucial as well as corroborating the trend with several correlated measures (if possible).

Above you see three distinct and slightly different measurements of the job picture. The trend lines are similar to past points of expansion, if even tepidly so.

When we look at what is hindering the jobs market, it is not difficult to ascertain why. For a business to commit to jobs, it is committing time and capital. Considering the average hours worked weekly and average overtime hours on a broad measure, you tend to see companies not willing to sacrifice the time and resources to hiring even with the abundance of capital. Why not make the sacrifice to hire? It appears on every survey, most companies cite uncertainty about taxes and policy as the primary reasons. Heading into the U.S. presidential election, this will only increase the uncertainty, and as such, expectations and results will be more benign.

However, as we have shown before, the continuing jobless claims number also points to another psychological facet that explains why we have more negative expectations for the employment number. Compared to points in the past, the continuing jobless claims number is running near the high points (worst points of past recessions). Recall, at these times, expectations often run for a worsening economic environment rather than for a growing economy. Often, this is when markets are most undervalued.

We have pointed to the average hours worked weekly and overtime hours worked as a sign of potential growth in the labor markets. The average hours worked weekly stands at 34.5 hours, above the 34.34 average over the last seven years. The overtime hours worked weekly for the private sector stands at 4.3 hours, well above the 56-year average of 3.6 hours. This is a good sign in that companies could adjust these two metrics to maintain profit margins in light of a tepid revenue increase, in our opinion.

Another interesting facet is the report out today from Bloomberg author Lorraine Woellert in her article, Companies Say 3 Million Unfilled Positions in Skill Crisis. According to the article, “almost half of the 1361 U.S. employers surveyed in January by ManpowerGroup say they can’t find workers to fill positions…companies have reported more than 3 million job openings every months since February 2011 according to the Department of Labor.”

We will get some job numbers over the next couple of weeks that we would expect to be a bit on the low side of expectations. What often gets lost with the barrage of negative and disconcerting macro news across the globe is the strides made and the trend line we find ourselves in with regard to the employment picture. Though you would be hard pressed to see the job numbers increase dramatically over the rest of the year, it appears that by looking at the current jobs market with the underlying strength shown in the average hours worked weekly and average overtime hours, one could reasonably see that we are at a base employment level. Though there might be some gyrations, it could be argued that companies may soon have a war for talent on their hands once tax cut extensions, policy uncertainty and ultimate resolution to the Fiscal Cliff are more apparent. We would also not want to discount the Fed’s statements about offering more support should economic growth slow. Once again, patterns of the past show up no matter how much some discount their merit. Ultimately, we have been here before and will slowly work through the challenges to a more prosperous time; all the while, a majority who consider themselves the minority will still call for catastrophe’s return.

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