January 2017 Employment

The January employment report was released today. The headline unemployment rate rose from 4.7% to 4.8%, but I really don’t pay attention to that in this analysis. The employed percent of population (ePOP) rose from 62.4% to 62.5%. That is what I pay attention so let’s dive into the numbers.

To calculate the ePOP, you need the Employment Level and the Population. Surprisingly, the employment level fell by 1.271 million people, but even more surprisingly, the population fell by 660 thousand. There is a note in the release stating the Census Bureau updated their estimates and the Labor Department followed. With that, it seems clear this should be the baseline month for the beginning of the Trump administration. We will start with the level of 150.527 million employed people as we watch the next four years to see how well he reaches his target of 25 million new jobs.

December 2016 Personal Income

Real Disposable Personal Income for December 2016 was released today. A quick glance at the headline number will say it was a good month as the measure rose 2.8% on an annualized basis. This measure is very noisy with last month’s change being -3.0% and the change from one year ago being +5.6%. To get away from the monthly noise, I typically look at the one-year, three -year, and five-year annualized rate of change. I am going to change those figures to start looking at the one-year, four-year, and eight-year annualized rates of change.

  • One-year rate of change: +2.1%
  • Four-year rate of change: +1.2%
  • Eight-year rate of change: +1.9%

None of these periods show good numbers. President Trump has mentioned reducing taxes, reducing regulations, and creating jobs. All three should have significant impacts on personal income.

December 2016 CPI

Yikes! I skipped the November release of the Consumer Price Index. I think I was still in election mode or caught up in the end of the school semester. Nevertheless, the December CPI was released last week. Time to catch up.

The incoming Trump administration is talking about major changes to the government and fiscal spending. This will affect what the Federal Reserve does. The widely anticipated rate hike in December was performed and there are expectations of three rate hikes in 2017. I mentioned in the commentary on the October release the Federal Reserve was falling behind. Let’s look at December.

The year over year CPI rose from 1.45% to 2.07%. The 2.07% level hasn’t been seen since June of 2014. The annualized ten-year rate of change fell from 1.98% to 1.96%.

I break out the components of the index into three groups. The first group consists of components experiencing increasing inflation (this is the second derivative where the rate of change is increasing). The components of this group constitute 77.9% of the index and on a weighted basis have a year over year inflation rate of 2.71%. The weight of this group increased from 65.9% last month and the weighted rate increased from 2.33%. The components in this group are Housing, Apparel, Transportation, Medical Care, Recreation, and Other.

The second group is the decreasing inflation group (this is where the first derivative is positive and the second derivative is negative). For the first time in two years, no components were members of this group.

The third group is the deflation group (this is where the first derivative is negative). This group includes 25.2% of the index and has a weighted inflation rate of -0.16%. The weight of this group is down from 40.5% last month and the inflation rate is up from 0.44%. Members of this group are Food and Beverage, Apparel, and Education and Communication.

Apparel is in both the increasing inflation and deflation groups because it is increasing, but it is also still negative.

From my perspective, the Federal Reserve is justified to raise rates again soon. Looking at the changes in the groups leads me to think there are increasing price pressures in the economy that need to be arrested. I know there are significant delays in the impact of rate changes, but the Fed was already behind and now needs to catch up. I suspect there won’t be any change expected until the March meeting. I will look forward to a change then.

Update: It occurs to me there are core items that I skipped talking about. Core items are different from Components in that Components are subsets of individual measures and Core consists of four categories: Food, Shelter, Medical Care, and Energy. There are two Core items that merit attention due to their differentials. Food is currently in the Deflation group while All Items Less Food is in the Increasing group. Energy is in the Increasing group while All Items Less Energy is in the Slowing group. Energy is now up 5.4% year over year. The time when Energy was a key measure that was slowing the entire index has passed.

December 2016 Employment

December employment numbers were out a couple of weeks ago. I should catch up! The participation rate fell from 62.6% to 62.4%. The only demographic group that exceeded this percentage is Men over the age of 15 with a 68.6% rate.

I’m going to declare the Obama Presidency to be complete as of the December reading. With the January reading in two weeks, I’ll declare the start of the Trump Presidency. I want to focus on employment over the next four years because President Trump has stated he will create 25 million new jobs. With that, I’ll look at the prior eight years.

In January 2009, the participation rate was 65.4% and the unemployment rate was 8.5%. With the most recent report, unemployment has fallen to 4.5%. President Obama has received credit for decreasing the unemployment number, but let’s take a deeper look since the participation rate has fallen.

The employment level has risen from 140,436 to 151,798 (these numbers are in thousands). That’s a net increase of 11.362 million jobs. To judge whether that is good or bad, let’s use the beginning participation rate and apply it to the current population level (current population times the beginning participation rate minus the current labor force). Using this calculation yields an additional 7.553 million employed people if the participation rate has remained constant. My conclusion is President Obama should get credit for increasing employment by 11 million and should get criticism for not increasing employment by the combination of 11 million and 7 million.

If President Trump is going to reach his target of 25 million new jobs in four years, he will need to increase the participation rate. The employed level is 151.798 million people and the labor force is 158.968 million. If we add together the current employed number plus the 25 million and divide by the population level, we get an implied participation rate of 69.4%. This is a remarkable number since the maximum rate over the last fourteen years is 67.0%. The highest this series has reached since 1947 is 68.1% in July 1997. I’m not saying it is impossible to achieve 25 million new jobs, but achieving it would be an amazing feat.

November 2016 Personal Income

Personal Income for November 2016 fell compared to October 2016. That’s not good, in case you were wondering.

The one-year rate of change 2.3%, down from 2.7% last month.

The annualized three-year rate of change is 3.2%, down from 3.4% last month.

The annualized five-year rate of change is 2.4%, the same as last month.

The annualized ten-year rate of change is 1.8%, the same as the prior two months.

Every Account Needs a Job

One of the consequences of having two jobs is a lack of time to spend reading. I subscribe to several free economic and investment newsletters. Thus, when the quarter ends, I spend some time catching up. It was yesterday afternoon when I read an essay by Ben Hunt of Epsilon Theory. He was writing on how every part of a portfolio needs a job. This was intriguing to me because I have been caught in the past with accounts trying to serve the same purpose.

My investing philosophy has evolved significantly over the years. I now have multiple accounts with distinct purposes. The latest account is with Lending Club. I had originally designated this account as a fixed income account, but I think that is changing slightly. I was surprised to see how quickly rates can change on the platform. I had assumed they would change as market rates change, but it appears they change with risk as well. Recently, there has been an increase in losses by investors. As a result, interest rates on new loans has increased. While I am pleased to see this reaction, I am forced to acknowledge the heightened risk in the investment. Because I am making a new investment each week, the possibility of changes in interest rates paid on principle has me considering this is no longer strictly a fixed income investment.

Instead, this is a counter cyclical investment. When the economy is doing poorly, interest rates on new investments will rise. When the economy is doing well, interest rates on new investments will fall. That should be the opposite of the two equity investment accounts I have, providing a level of stability to the overall portfolio.