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5 million new private sector jobs and counting


The April gain in employment was less than expected, but with substantial upward revisions to prior months, net employment gains were actually slightly higher than expected. So there's no reason the news should be viewed as negative or disappointing. In fact, when you dig into the numbers and include the household survey in your dataset, the news continues to be mildly encouraging. The chart above focuses on gains in private sector employment, and what stands out is that the household survey continues to pick up more jobs than the establishment survey. This is fairly typical in the early years of a recovery, since the household survey is better at finding new startup companies and people who have gone to work for themselves. The establishment survey only surveys companies that have been in existence for awhile. According to the household survey, things have really improved over the past year.


According to the household survey, the private sector has added about 5 million jobs since the low in employment at the end of 2009; that works out to an annualized gain of 1.9%. But over the past year, the household survey shows a gain of 3 million jobs, which is a gain of 2.5%. The chart above shows the 6-mo. annualized gain in private sector jobs according to each survey, and here we see how the pace of jobs growth has picked up of late, especially in the household survey. If you just split the difference between the two, private sector jobs growth now equals or exceeds the best years of the prior business cycle (which doesn't say all that much, since it wasn't a very robust growth cycle). Jobs growth is going to have to pick up a lot more, of course, before the economy can begin to get back on track, but at least we continue to make progress towards that goal.


As an aside, here's an updated version of the chart from yesterday's post. With the upward revisions to the BLS numbers released today, it now looks like ADP's jobs number has been pretty close to the BLS. In fact, ADP has consistently underestimated private sector jobs growth, but not by much: year to date, the ADP total is +730K, while the BLS reports 827K., for a monthly difference of only 24K. That's a mere rounding error for this data. Same goes for the past year, with ADP reporting +1.85 million, and the BLS +2.03 million, for a monthly difference of only 16K.


Other than the fact that this recovery has been fairly tepid given the depths of the prior recession, this recovery stands out as being the first during which public sector jobs have taken a serious hit. This is painful for those involved, of course, but it is very encouraging from a macro perspective, because the public sector has enjoyed disproportionate gains over the past decade. As the chart above shows, the private sector has experienced only a very small gain since early 2000, while the public sector, after losing about 700K workers since the 2009 peak, is still 7% larger than it was at the beginning of 2000. If our fiscal house is going to be put in order, the public sector is going to have to slim down even more in the years to come. And that is especially true for compensation (including pension benefits), since numerous surveys now show that public sector employees enjoy substantially higher pay than their private sector counterparts.

Overall, I'd say that the news today was mildly encouraging. So far, however, the market seems to be disagreeing with me, with stocks down and bond yields down. But with the economic fundamentals continuing to improve, albeit only modestly, the market should eventually reconsider and reverse today's action.

Still no sign of a recession

Although recent data have not reflected any unexpected economic strength, it is also the case that to date there is no evidence that the economy is sinking into another recession. That's very important, because the level of Treasury yields and the level of equity PE ratios strongly suggests that the market continues to worry about a weak economy. If the economy simply avoids a recession and continues to grow at a moderate pace of 2-3%, the market is going to eventually reprice to more optimistic expectations of the future—Treasury yields and equity prices are going to rise.


In April, publicly announced corporate layoffs, as tallied by Challenger, Gray & Christmas (love that name!), remained at extremely low levels. No sign here of any deterioration.



The April ISM Service Sector report was weaker than expected, but this index has been unusually volatile in recent years, and it remains above 50, suggesting that the sector is growing, but only modestly. It would be nice to see it higher, but at the current level it is not consistent with recessionary conditions. The employment subindex also weakened in April, but remains at a relatively high level, pointing with more emphasis to continued growth. On balance, today's service sector report is perfectly consistent with an economy that is growing slowly but not experiencing any serious problems.



As the above two charts show, systemic risk in the U.S. (as reflected in swap spreads) is low, and systemic risk in Europe, while still relatively high, looks to be improving on the margin (note the continued improvement in Euro basis swap spreads, which reflects healthier liquidity conditions in the Eurozone banking sector). Conditions in the Eurozone are far from healthy, but on the margin they are getting better.

The only reason that the world is holding 2-yr Treasuries yielding 0.26% and 10-yr Treasuries yielding 1.9% is that the market collectively is very fearful that the U.S. economy will follow the Eurozone into another recession, and that the Fed will therefore need to keep short-term interest rates at or close to zero for as far as the eye can see (well, at least for another two years). If the market were to be convinced that the economy would grow by at least 2-3% for the next several years, it is my contention that Treasury yields would be significantly higher than they are today, because continued growth would remove the need for any additional Fed easing and accelerate the need for an eventual tightening. Equity prices likely would be much higher as well, since corporate profits today are at record levels, but PE ratios are below average.

Readers can infer that I am not in agreement with the conventional wisdom that says that Fed purchases of a significant portion of the Treasuries issued in the past year or so to fund the federal government's $1.3 trillion annual deficits are responsible for the depressed level of Treasury yields. The Fed could purchase all of the current year's deficit (although they are highly unlikely to make any net new purchases unless the economy sharply deteriorates) but that would still leave over $9 trillion of Treasuries in the hands of investors, institutions, and central banks around the world. And it would still leave many tens of trillions of MBS and corporate bonds that are priced at relatively low spreads to today's extremely low Treasury yields. The Fed is no longer making net new purchases of Treasuries, and they won't buy more unless the economy deteriorates significantly. So today's extremely low level of Treasury yields means the world is content to hold tens of trillions of high quality bonds with historically low yields, because the world is very concerned that the future looks bleak.

Weekly claims back on track



Weekly claims for unemployment came in way below expectations, but that says nothing about the economy, since it is now clear that the unusual and unexpected rise in claims in recent weeks was an artifact of the seasonal adjustment process (it appears that April is a particularly hard month for the seasonals to get right—we saw a similar surge in April of last year that was subsequently reversed). Claims are back on track.

The first chart above shows unadjusted claims, while the second chart shows adjusted claims. In both cases the gradual downtrend in claims that we have seen for the past three years remains intact. (The purple line shows the 52-week average of claims to abstract from the seasonal adjustment process.) So the story with claims is that there is nothing new here: the labor market continues to gradually improve, and that means that the economy is likely also continuing to grow at a moderate pace. Most importantly, given the market's fear of an economic downturn (as reflected in the extremely low level of Treasury yields), there is no sign here whatsoever of any deterioration.

Chart updates

We've been tied up with our trip to the north, and have just now got back to Tucumán. I know this is by now old news, but I wanted to briefly recap this week's new data releases.



The ISM Manufacturing Index was stronger than expected, and there is no denying that this was good news, coming as it did in the midst of ongoing fears that the developing recession in the Eurozone will spill over into the U.S. To be fair, I should note that the correlation between the level of the index and the growth of GDP hasn't been nearly as good in the current business cycle as it has been in the past (see top chart). Evidently, the manufacturing sector has been a good deal stronger than the rest of the economy, so the current ISM figure doesn't necessarily argue for 4% real GDP growth in the current quarter—2-3% is probably a better guess. Nevertheless, it seems clear that with the manufacturing index doing so well, and with the employment subindex much higher than the average of recent decades, there is not even a hint of emerging weakness. Worrying about the entire economy rolling over into another recession at a time when the manufacturing sector is improving on the margin is one more sign of the pessimism that is still ruling the market.


Auto sales have softened in recent months, but sales are still up a healthy 9.6% in the year ended April. The rebound in auto sales from the depths of the recession has been very impressive. When one sector of the economy rebounds so impressively, it is bound to drag other sectors along with it in a trickle-up effect.


The ADP payroll number was weaker than expected, but is this fresh evidence of an emerging downturn? I'm not sure at all. From the looks of this chart, the blue line appears to be doing about the same as the red line, only with a difference of one month. If Friday's BLS number is weaker than it was a month ago, then it might make sense to worry that the economy was indeed softening.

Purmamarca, Argentina


Yesterday we drove from Tucumán north about 4 1/2 hours to the town of Tilcara, which is about 40-50 miles south of the northern border of Argentina and Bolivia, and about an hour by car north of the city of Jujuy, which is the northernmost point in Argentina that you can fly into. Since this is a 4-day weekend, we had no choice but to stay one night in a hostel in Ticara. Our friends know the area well, and they booked a cabin for us with enough beds for our party of 9. We got several dozen empanadas at a local restaurant (Los Puestos), some wine and cheese at the only supermarket in town (very small and very rustic I might add), and had a great dinner in the kitchen of our very rustic cabin. Like most places in Argentina, it had free WiFi, and so after dinner we looked at the crystal clear night sky with the help of "Star Walk," an iPad app that let's you identify anything you happen to look at in the night sky. The Milky Way was the star attraction. (Tonight we saw the Southern Cross.)

Tilcara (elevation 8,000 ft) is located in the Quebrada de Humahuaca, which is a huge area of massive valleys with hundreds of miles of spectacular scenery and very few people. It's high, arid country, but it receives enough rainfall occasionally to cause significant erosion of the sedimentary rock which then displays an incredible variety of colors. All of the photos in this post were taken in Purmamarca, which is just 10 miles south of Tilcara. Tilcara is the more established town, but Purmamarca has the more spectacular views. The shot above is the approach to the town, which lies at the foot of multi-colored mountains that are breath-taking.



Most tourists don't see this view, since you have to skirt around the edge of the town and go up a narrow dirt road for a mile or two. The variety and intensity of the colors are something to behold.


Another shot of the back country, taken from higher up.


And yet another shot, to put it into better context.


Here we are sitting at a spot that overlooks the town of Purmamarca. The mountains on the left display a subtle but wide range of color. Recent rainfall has given the mountains in the distance a hint of green.


Adjacent to the town is the hotel "Manantiales del Silencio," which is undoubtedly the classiest and most luxurious of all the hotels in the region. We had a fantastic lunch there, and then relaxed in the gardens out back, which enjoy views such as you see above. This hotel was the choice of Prince William of Holland and his wife, Princess Maxima (Argentina's most favorite homegrown celebrity) when they came to the area not too long ago. A room for two is pricey by the standards of the region, but costs only about $200 a night, including breakfast. (We tried to get a room but their 12 rooms were booked solid.) There were a number of very nice-looking hotels that we saw in and around Tilcara, and I imagine you can get a great room for around $100. Tilcara also has a surprising number of nice-looking, small, and very charming hotels and restaurants.


The photo was taken about 15 miles west of Purmamarca, just off the highway that goes to the Paso Jama that leads to Northern Chile.


It's difficult to capture the beauty of some features of the landscape. The mountain in the background of the above photo almost looks like it were made of a golden brown ceramic. Note the hints of purple in the middle area. My point with all these shots is to emphasize the highly unusual, colorful, and varied nature of this unique part of the world. You could spend an entire week exploring. The accommodations are very nice and very reasonably priced, the food is very good, and the people are very friendly. I was surprised that we didn't run across a single American tourist either yesterday or today. Most of the tourists are young Argentines. I'm told that it is best to avoid the summer months (Jan-Mar) because the youth population reaches disturbing proportions. Winter months can be cold (tonight it's about 38-40º outside), but the sky is almost always bright blue.