Follow the Real Numbers to Gage
the Strength of the Economy
Oceanside, CA – The recent jobs report was dismal, yet the unemployment level went down. What gives? Frank Chow, chief economist for Trade Show Executive Media Group, cautions readers not to misinterpret the data and misjudge the economy’s direction when making future business decisions.
“While many executives rely on the monthly jobs report as one barometer of the health of the economy, the data is no longer as reliable in gauging overall employment due to factors that distort the results,” said Chow. “There are other indicators that better reveal the economy’s strength and thus deserve more attention.”
The jobs numbers are being impacted by the following four factors:
- Three jobs become four. In 2013, organizations made staffing decisions based on the employer mandate requiring insurance for full-time employees. One of the unfortunate side effects of the Affordable Care Act (ACA) was a move by employers to reduce hours for some full-time employees, thus changing their status to part-time, and in the process, eliminating their healthcare benefits. In fact, a September survey by the International Foundation of Employee Benefit Plans found that 15% of large employers (50 or more employees) and 20% of smaller employers planned to reduce hours so that fewer employees would qualify for full-time medical insurance under the ACA. In some cases, the workload was spread among more employees, thus technically creating more jobs.
- Changing the definition of a “job.” The healthcare law recently defined a full-time job as 30 hours or more a week, while the Bureau of Labor Statistics (BLS) Unemployment Report sets it at 35 hours or more. And in the Payroll Report, if a person works at least one hour, it counts as a job. Before Obamacare, if someone worked 32 hours a week, it was counted as one job in the Payroll Report and one part-time job in the Unemployment Report. After Obamacare, if that same person was cut to 25 hours and then took another job working 10 hours, it would count as two jobs in the Payroll Report and one full-time job in the Unemployment Report. “This market behavior probably accounts for much of the surge in reported jobs and full-time and part-time employment without any tangible improvement in the economy,” Chow pointed out.
- Diverging economic fortunes. Most recent jobs have been created in low-paying sectors such as retail and hospitality. However, income growth in middle-to-lower income households has not kept pace with inflation since the start of the Great Recession. Meanwhile, incomes in upper-income households are concentrated in the higher-paying jobs. Moreover, the Federal Reserve QE stimulus has created a wealth explosion in financial markets where assets are held mainly by upper income households. Unfortunately, the generous unemployment benefits and other federal assistance programs have encouraged many lower-income workers to remain unemployed — and many are not upgrading their skills.
- Demographics. There has been much discussion about millions of people dropping out of the labor force. Chow believes this is mostly from baby boomers retiring. How much this phenomenon is affecting the drop in the unemployment rate is still a hot debate. We also do not have an accurate fix on how many are dropping out due to inability to get a job. However, it is clear the dramatic improvement in the unemployment rate is not all from gains in the economy.
Expect a Distorted Employment Picture
All four factors are long-term, meaning they will serve to distort the employment picture for 2014 and into 2015, Chow said. A good example is the December employment report released in January. The number of new jobs was up a measly 74,000, far below the 200,000 expected by most economists. However, the unemployment rate fell significantly from 7% to 6.7%, but it was mostly due to nearly 350,000 leaving the labor force, Chow pointed out. Most analysts were shocked by this result and caution against drawing a conclusion that unemployment levels are finally falling.
The disappointing jobs report can be easily explained by the Administration postponing for a year the Obamacare employer mandate in July, causing many staffing decisions to be suddenly put on hold. This halted the job surge at least temporarily. “I suspect the jobs reports during 2014 will be erratic and the unemployment rate will continue its decline due to retiring boomers, not job creation,” Chow said.
So, where should decision-makers look in 2014 to determine the real strength of the economy? Chow said one of the most important indicators is interest rates: How high and fast will they rise? The Fed tapering may accelerate, which will likely push interest rates higher.
Next, executives should follow the four trends highlighted in our January Trending and Spending column: a cooperative federal government, stable energy costs, a manufacturing renaissance and rising tech spending. So far, 2014 is following the script:
- Congress has already passed a budget/spending bill in January — the first time in almost five years.
- Both the Empire State Manufacturing report and the Philly Fed Manufacturing report for January came in much stronger than expected with gains in orders, shipments and employment.
- Gas prices nationwide will continue to fall in 2014, according to AAA and the U.S. Energy Information Agency. Gas prices averaged $3.49 a gallon of regular gas in 2013 and is expected to average below $3.40 this year.
- A survey by American Express and CFO Research found 76% of CFOs plan to increase tech investment in 2014 with 41% boosting spending by 10% or more. Worldwide IT spending is projected to rise 3.1% in 2014 up from the 0.4% growth in 2013, according to a Gartner forecast in January.
Also, keep an eye on consumer spending. In late 2013, we saw sales slow down in retail stores catering to lower-income clientele, whereas the luxury retailers did well. “Expect this to continue unless the asset markets crash,” Chow said. “If a higher federal minimum wage is enacted, this may increase spending by lower-to-middle income households, provided there are not a lot of job cuts or a slowdown in new jobs in response,” he said.
Finally, rising interest rates will temper recent growth in construction, home sales and prices, but by how much? U.S. new home construction declined in December at 9.8% lower than November’s pace, but ended 2013 with the best showing since the housing bubble burst, Chow pointed out. Wells Fargo CEO John Stumpf expects the U.S. housing recovery to continue, expecting more than one million new homes to be built in 2014. Refinancing will continue to wane, but home purchases will make up a larger percentage of mortgage activity. Wells Fargo, the largest U.S. home lender, is often viewed as bellwether for the housing market. However, the National Association of Home Builders reported a drop in January activity and home builders’ confidence, but the index reading of 56 was still positive and continues the upward trend shown throughout 2013, Chow said.
Another concern for housing is the dramatic increase in government regulations surrounding home purchases, loans, banking and credit standards that are meant to prevent another financial crisis, but will also serve to restrict home buying. Also a little known 3.8% Obamacare surtax on single filers of $200,000 and joint filers of $250,000 or more will come into effect in 2014 when they sell their homes. This may impact sales of luxury homes.
Overall, Chow is still mildly bullish on the U.S economy, citing the results from the International CES in January and forecasts from other large trade shows in 2014 as supporting his stance. As for the global economy, Chow believes Europe (excluding Spain and Greece), will be able to stay out of a recession while Asia remains shaky. More on this in future columns. Happy Lunar New Year to all our readers!
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