Yoda to the Rescue: Can He Save American Jobs?

Today was much busier than the closing numbers make you think.

A very surprising jobs report made sleepy traders jump this morning, then an hour later we learned about some new cast members for the Federal Reserve, and then we started seeing corporate earnings reaction.

The employment report has some experts scratching their heads. It was much weaker than anyone expected — and a sharp contrast to the more positive trend of recent months.

What’s going on?

***

As always, we’ll go straight to the source. Here is a link for you:

Employment Situation for December 2013

Quick summary: The unemployment rate fell from 7.0% in November to 6.7% in December. Total nonfarm payrolls rose 74,000 last month.

These numbers are considerably different from what analysts expected just one day ago. The 74,000 new jobs figure is well-below even the most-pessimistic estimates in the Bloomberg survey.

News reports quickly pointed at holiday retail hiring and cold weather. Both factors are important — but they happen every year.

We all know it is usually cold in December and that stores will hire temporary workers. The BLS makes seasonal adjustments to account for them.

So why was everyone so wrong? I’m not sure anyone knows the answer. My best guess is that we’re seeing a quirk in the seasonal adjustments along with some demographic changes.

Let’s talk about those changes.

***

The postwar Baby Boom generation (born from 1945 through roughly 1964) is reaching retirement age. The oldest boomers are now in their late 60s.

Of course, not everyone retires exactly on his or her 65th birthday. Exiting from the labor force is a more extended process for most people.

The last recession hit the older Baby Boomers at a particularly bad time. Many who lost their jobs now find employers want younger workers with specific technical skills. Most boomers probably lost a chunk of their retirement savings, too.

As a result, I think many of those approaching 65, finding the job market not friendly to them, decided to accelerate their retirement plans. They scaled back their dreams to fit reality.

Some boomers found part-time work to make up the difference, and now they are exiting the workforce faster than expected. This causes the unemployment rate to look lower.

I know this description applies to many of our readers. What about you?

If you are a Baby Boomer, try to think back 8-10 years. What were your expectations then, as compared to your situation now? Are you where you thought you would be in terms of employment, retirement and financial security?

My guess: Most Americans born in 1945-1950 went through an especially rough time since 2008.

How did you adapt? I’d like to share the stories with other readers next week. Click here to submit yours.

***

The unemployment rate’s sharp drop from 7.0% to 6.7% in one month is significant for another reason.

The Federal Reserve regards 6.5% unemployment as a key level at which they will begin letting short-term interest rates float higher. We haven’t seen this level since 2008.

Most people didn’t expect the rate to fall toward 6.5% until late this year at the soonest. Now just one more month like December could do it.

Have no fear; Yoda is here!

***

Today the White House confirmed that President Obama will nominate Stanley Fischer as the Fed’s vice chair beside Janet Yellen.

Uncommon Wisdom Daily Afternoon readers knew this might be coming. Here are my two stories from last month.

I had some fun with the way the media gushed at Fischer’s name. The praise was so absurd, I even wondered if it was some kind of political trick.

Now it seems like the original stories were right. Today’s revived excitement brought commentary like this at Business Insider.

“While Yellen is incredibly qualified, it‘s exciting to have Fischer beside her.

“He‘s a legend in central banking and economics circles, and for good reason. Fischer‘s a highly accomplished monetary economist, and excelled as Israel‘s central banker.

“When rumors of his nomination cropped up, Morgan Stanley‘s Vincent Reinhart wrote that it would create a Fed Dream Team.“

Dream Team? I’ll concede Fischer has a great resume and plenty of experience. That doesn’t mean he can single-handedly save the world, as some folks seem to expect …  like the President himself:

“He [Fischer] is widely acknowledged as one of the world’s leading and most experienced economic policy minds and I’m grateful he has agreed to take on this new role and I am confident that he and Janet Yellen will make a great team.“

The team will also, presuming the Senate agrees, add Lael Brainard as a new Fed governor and invite current member Jerome Powell to stay for a second term.

***

Today’s news has two other interesting angles.

First, what does it say about the direction of Fed policy? Much of the Fischer praise relates to the contrast with Yellen, along with his supposed ability to influence Yellen and the other governors.

Second, was it coincidence the White House released the news just an hour after today’s surprising jobs report? We know the president’s advisers get an early look at the data. I’m sure all three nominations were already coming — but did they move up the announcement as some kind of signal to Wall Street?

We may never know.

***

Faithful reader Tom R. couldn’t wait for the weekend and already sent me his employment report reaction.

Reader Tom R says: “Brad, I put a lot more faith in the ADP employment numbers than in the “official“ numbers. The ADP report is based on mostly real numbers and the government‘s is pretty much manufactured and contrived.“

Brad: Thanks for the instant comment, Tom! I think your key word is “faith.“ None of us knows the full answer. Employment is a huge, complicated set of statistics. Every measure has its own strengths and weaknesses.

Shadowstats has another alternate unemployment rate. I think the best answer is to look at all the estimates and try to understand them in context.

***

As always, I welcome reader feedback on my afternoon thoughts or any other topics. Click here to send me an e-mail.

***

Here is your Friday afternoon wrap-up …

  • Today the Dow lagged the S&P 500 and Nasdaq Composite, but not by much.
  • The bigger action was in bonds. The 10-year Treasury yield fell from 2.97% on Thursday to 2.86% today.
  • For those with a shorter time horizon, the three-month Treasury bill rate rose from 0.03% to 0.04%. Yippee!
  • Falling bond yields make dividend-paying stocks relatively more attractive. That may be why the Utility sector outperformed today.
  • Sears (SHLD) retreated 13.8% to $36.71 as shoppers continue to desert the once-mighty retailer. It was a $120 stock as recently as 2010.
  • Gold prices climbed as the jobs report and Fischer nomination raised inflation fears.
  • The February 2014 gold futures contract rose 1.4% to $1,246.90 this afternoon.