Labor Market: Indicators to Monitor Its Health

As noted in [7], there is a very strong correlation between bank tightening, particularly at the small firm level, and employment. The percent of banks tightening on loans to small businesses leads nonfarm payrolls by about 6 months and suggests unemployment levels will be picking up in the coming months.

In this article, we will discuss different ways of monitoring labor market's health.

Recession

Recession was one of the most frequent media topics in the past months, with some sources even choosing "looming" as part of the description.^[12-17]

Recession happens typically after a period of:

• Over-investment
• Tight labor conditions
• Labor market usually peaks 7 months in advance of a recession
• Tight central bank monetary policies
• Significant capacity constraints^[8]
• The Federal Reserve monitors capacity constraints because they indicate where supply bottlenecks are developing and inflation is beginning to simmer
• In the last recession, the National Bureau of Economic Research (NBER) declared that the business cycle peak was December 2007. Yet, The capacity utilization rate began declining long before the recession began.

In this article, we will focus only on labor market or employment.

Bureau of Labor Statistics (BLS)

As everyone knows, BLS report is a big one for stock market movements. A number of BLS programs provide information about joblessness based on two types of survey:

• Business establishment survey
• Asks businesses how many people worked for them
• Typically, economists trust the establishment survey more because it has a larger sample and is less volatile
• Household survey
• Asks regular folk like you and me if we are working
• But the household survey does have value:
• It covers a wider swathe of the country, because it includes self-employed workers, farm workers, and people working in family businesses
• At times, the household survey picks up labor-market trends that the establishment survey can’t

Although many hours and words are wasted on trying to predict BLS' numbers, it is in fact not predictable. It comes in with a surprise in one direction or the other more often than any other set of numbers. 

And as a result it most often creates a one to three-day triple digit move by the Dow in one direction or the other.  In addition, whatever is the original direction in reaction to the report is usually reversed over the subsequent few days, and the market returns to whatever was its focus prior to the report.

Employment and Economy

As Richard Bernstein noted in [9], most of the numbers in the monthly employment report are LEADING or COINCIDENT indicators of the economy.  For example, some indicators of employment, like jobless claims and the length of the work week, are actually official leading indicators of the economy. Payroll employment is a coincident indicator.  Some economists even argue that:

In an environment of deleveraging and deflation, employment trends and monthly labor numbers become leading indicators as opposed to lagging.

However, most economists agree on that both unemployment rate and salary/benefit trends are lagging indicators—also a lagging condition in both directions. Stock market (which always looks ahead 6 to 9 months) will have already recovered significantly before the recession bottoms and the economy begins to recover. Like employment, earnings don't stop falling and begin to pick up until well after the economy has bottomed and is growing again (see the chart above).

Temp jobs and quits/layoffs (from #JOLTS) lead #NFP Labor.  Currently, market is cooling, but not crashing (Oct 2022)

Labor Statistics

To monitor labor conditions or economy, you should pay attention to the following statistics:

• Employment Cost Index (ECI)
• Labor is 40% of corporate costs according to the BEA
  
• Janet Yellen’s favorite wage indicator
• Two components of labor costs: 
• Wages 
• Roughly 70% of ECI
• Benefits 
• For example, paid vacation, Social Security, workers’ compensation, and health insurance. 
• Roughly 30% of ECI

• Personal Income
• To have organic US domestic economic growth is to have growth in income
• The character of personal income will determine outcomes in housing, auto sales, general consumption, and the pace and level of household deleveraging. 
• Components of income
• Wage and salary income 
• Accounts for 54% of total US personal income. 
• Benefits
• Accounts for 19% of total US personal income
• Driven by government social benefits, which not only includes unemployment benefits, but also SSI payments.
• Small Business' Health
• Insperity (old: Administaff)  is an excellent bellwether for how investors feel about the fate of small business
• Small Business Optimism Index (NFIB)
• The report is released on the second Tuesday of each month
• Initial Claims
• During current recovery, stock prices have been highly inversely correlated with initial claims
• Should initial claims start to rise again, it could spell trouble for the economic growth outlook and therefore stock prices.
• However, initial claims was not a good explanatory variable for stock prices during the secular bull market (1985-1999)
• Labor Market Conditions Index (Fed)
• Fed consolidates a number of traditional measures of unemployment to create a cohesive picture of the labor market.
• The Conference Board Employment Trends Index™ (ETI) 
• The Index aggregates eight labor-market indicators, which filters out “noise” to show underlying trends more clearly.
• Wage Growth Tracker (Atlanta Fed)
• Is an estimate of the wage growth of continuously employed workers - the same worker's wage is measured in the current month and a year earlier.
• Wage growth (Atlanta's Fed WGT is an example) measures that focus on the continuously full-time employed are likely to do a better job of gauging labor market strength, since they are constructed to more clearly capture the wage dynamics associated with improving labor market conditions. 
• JOLTS (Job Openings and Labor Turnover Survey)
• The Bureau of Labor Statistics (BLS) collects and compiles JOLTS data monthly from a sample of nonfarm establishments.
• A more detailed discussion of JOLTS concepts and methodology is available online here

Recruiting Firms

Another way to monitor the health of labor market is following companies whose business is to help people get jobs :

• MAN
• ManpowerGroup Inc. is a Germany-based provider of workforce solutions and services. 
• Employment conditions both domestically and in Europe should reflect the macro picture for ManpowerGroup,
• KFY
• Korn/Ferry International provides executive recruitment, leadership development, enterprise learning, succession planning and recruitment process outsourcing, among others. 
• Its clients include public and private companies, middle market and emerging growth companies, as well as government and nonprofit organizations.
• KELYA
• Kelly Services
• RHI
• Robert Half International 
• ASGN
• On Assignment
• KFRC
• Kforce
• TBI
• True Blue
• PAGE.L
• PageGroup PLC

References

1. Labor Indicators: Some of Today's Trends Pre-Date the Great Recession 
2. Chart of the Day: Nonfarm Payrolls and Bank Tightening
• The percent of banks tightening on loans to small businesses leads nonfarm payrolls by about 6 months since, as banks tighten, small businesses have difficulty funding their operations and layoff workers.
3. Weighing The Week Ahead: What Are The Biggest Market Worries?
4. Why Monster Worldwide Fell 36% Despite Q4 Earnings Beat
5. St. Louis Fed 
6. The Civilian Labor Force, Unemployment Claims and the Business Cycle
7. Update: Global Liquidity, LEIs, and Bank Tightening
8. Capacity Constraints
9. Why Was Weak Employment A Surprise?
10. The Mood In Silicon Valley Is Like The "Moment After The Titanic Hit An Iceberg"
11. Earnings Update
12. If There Is a Recession in 2016, This Is How It Will Happen
13. Bear Markets Without Recessions – It’s a thing
14. With recession lights amber, brittle markets vulnerable to all shocks
15. 22 Signs That The Global Economic Turmoil We Have Seen So Far In 2016 Is Just The Beginning
16. Smelling the Recession
17. 13 Charts On The Likelihood Of A Recession
18. Change in Labor Market Conditions Index
19. What Is the Labor Market Conditions Index?
20. Secular Trends in Employment: Goods Producing Versus Services Providing (good)
21. Payroll Jobs +215,000, Unemployment Rate Ticks Up to 5.0% as More People Enter Labor Force
22. Number of Civilians Unemployed for 27 Weeks and Over  (St. Louis Fed) 
23. Graph: Labor Force Flows Employed to Not in Labor Force: 16 Years and Over  (St. Louis Fed) 
24. A Statistic About The U.S. Economy That May Surprise You
• Changes to headline payrolls tend to lag corporate profit changes by a six-month time frame, according to BlackRock research
25. Small Business Optimism Index (NFIB)
26. Will April Be Another January For Investors?
27. Redefining the Labor Market (San Francisco Fed)
• Q: 
• Normally economy improves, we would expect to see wages to pick up. Why haven't we seen that?
• A:
• This is a math problem, not a wage problem.
• As economy recovered, lots of low-wage workers re-entered the labor market and, therefore, lowered the average wages 
• Earlier, low-wage workers exit the labor market and, artificially, raised the average wages
28. Labor force trends (good charts)
29. Recession Obsession And Full Portfolio Review
30. Fred JOLTS

Technical Indicator: A Case Study Using William %R

In his video starting at 7 min mark, Chris Ciovacco uses William %R to interpret the  overbought and oversold situation of NASDAQ index (i.e. $COMPQ).

In this article, we will learn more about the current stock market using the William %R indicator.^[1,2]

Interpretation of William %R

Developed by Larry Williams, Williams %R is a momentum indicator that is the inverse of the Fast Stochastic Oscillator.  As with the Stochastic Oscillator, Williams %R reflects the level of the close relative to the high-low range over a given period of time (or look-back period).

Overbought/Oversold

As a bound oscillator, Williams %R makes it easy to identify overbought and oversold levels.

The oscillator ranges from 0 to -100. No matter how fast a security advances or declines, Williams %R will always fluctuate within this range. Traditional settings use -20 as the overbought threshold and -80 as the oversold threshold. These levels can be adjusted to suit analytical needs and security characteristics. Readings above -20 for the 14-day (or 14-week look-back period) Williams %R would indicate that the underlying security was trading near the top of its 14-day high-low range. Readings below -80 occur when a security is trading at the low end of its high-low range.

NASDAQ

Using the NASDAQ index as an example, its weekly price and William %R chart looks like below for the week ending on 02/12/2016:

Based on William %R , NASDAQ is in the oversold territory and remains so in the last week.  Also the bounce on a William % perspective is tepid in the last couple of weeks (see the red circle).

When the price is in the oversold, it doesn't automatically translate to be bullish.  It becomes bullish only when it can clear the center line (i.e., -50) and stay in the upper half (between -20 and -50).

At this point, it is possible for the stock to launch a counter-trend rally.^[3]  Similarly, it's possible for the stock finding a bottom and starting a new up trend from here.  However, based on other evidences, that possibility is low.^[1] So, we need to wait until seeing other evidences to improve before we start to long the stock again.

References

1. How Meaningful Was Friday's Stock Rally?
2. William %R
3. A Counter-Trend Rally? Knowing Your Risks

Conflicts of Interest: Who's Talking the Book?

Billionaire investor George Soros comments on China's economic downturn during an interview^[1] with Bloomberg's Francine Lacqua at the World Economic Forum in Davos.

On 01/26/2016, China was reported to have “warned” hedge fund legend George Soros to “back off.”

Chinese state media has stepped up a salvo of biting commentaries against George Soros and other currency traders as the yuan comes under pressure, with the billionaire investor accused of “declaring war” on the unit.

What is interesting about China’s public warning regarding attacking their currency is not only the history – Soros is a legend for “breaking the Bank of England” and making millions betting against the British pound – but also the fact Soros didn’t exactly recommend shorting China. In fact, his trade recommendation was to short U.S. stocks!

Did Soros talk his book while he commented about China's hard landing at Davos?^[1]  We may not find out the truth until some time later.

In this article, we will discuss "conflicts of interest" which are widely observed in the financial world nowadays.

Conflicts of Interest

In the recent volatile stock market, Bert Dohmen has warned the casual investors that:^[4]

At the start of a bear market a casual investor, who is easily swayed by the opinions of others, should not listen to the opinion of any analyst with a conflict of interest. They are either with Wall Street or have investment management jobs. Both have big conflicts. None of those people can ever be candid about their opinions of the markets. 

If you want analysis and forecasts without conflicts of interest, find someone with lots of experience who doesn’t work for Wall Street, who doesn’t manage money or sell investments. You never want to guess if what you hear or read is tainted.

A Case Study

The buzz surrounding the late-afternoon bounce in stocks on 02/12/2016 revolved around the news that Jamie Dimon was buying 500,000 shares of JPMorgan Chase stock.^[5]

Was it an act of desperation in hopes of arresting the brutal slide in the bank’s shares?  Or, was it an act of confidence?  No matter what the truth may be.  Dimon's purchase timing was perfect and exactly at a key support level of BKX.^[5]

All investors do like to see a bottom has been found in the current stock market.   However, the credit market was far less impressed by Dimon's marginal purchase, and remains undeniably fearful of what may happen next.

As retail investors, we should remain vigilant.  Same as Chris Ciovacco, and John M. Mason, we should remain suspicious and treat Jamie Dimon's purchase as a case of "Talking his Book" unless it's proven different later.^[6,7]

References

1. Soros: China Hard Landing Is Practically Unavoidable
2. China Stares Down Soros, Issues Warning To Man Who “Broke The Bank of England”
3. George Soros Says The Next Financial Crisis Has Already Started
4. Why The Next Two Years Could Be Worse Than 2008
• Before the end of March, hedge funds will probably be hit with big redemptions because of poor performance. Junk bonds will take the worst hit. Debt defaults on banks loans or ‘rescheduling,’ will cause concerns about the banking system.
5. Banking On A Bounce? Jamie Dimon Vs The Credit Market
6. How Meaningful Was Friday's Stock Rally?
7. Nervousness About Banks: Don't Dismiss It
8. Recession might be in the cards, if history's a guide: Analyst
• Even main media is saying the recession might be in the cards.
• "That would simply take us to undo all of the QE, down to about 1,575 (S&P 500)," said Worth.
9. 5 things behind European bank rout:
1. Fundamental lack of profibility
2. Legacy problems - huge stock of non-performing loans
3. Negative rates
4. Faith in central banks
5. Winder economic slowdown