On the heels of news that private payrolls increased less than expected in the United States, today a legend in the business sent King World News a powerful piece discussing what is really happening in the United States as well as what surprises to expect in this Friday's Employment Report.
From Art Cashin's notes: "Whispers On Payroll Number – The ADP projection for payrolls this morning will garner a lot of attention and subsequent discussion. Wall Street watering holes have been chattering about the number for days and the whisper numbers seem to be leaning to the possibility of a number under 200,000.
The low ball estimates seem to be based on a couple of things. First, the employment components in many regional economic reports have been rather weak. Secondly, the employable universe, based upon education, is not structured for easy growth. I wrote on this topic last month, but the real expert in this area is Nick Colas over at Convergex. Here's a bit what Nick wrote:
The first thing we do is look at monthly tax receipts, courtesy of the U.S. Treasury’s daily statement of money flows into and out of their coffers. This is a remarkably underutilized dataset, for it shows how much the U.S. government took in from “Individual Tax Receipts and Withholding” with only a 2-3 day delay. We’ve included two charts with this report, one which has only payroll-oriented tax and withholding, and the other that includes the one-off/quarterly tax payments common among the self-employed (think real estate agents and small business owners).
Both tell the same story: growth in tax/withholding receipts is slowing, and likely with it job and wage growth. A few data points to support that observation:
- May 2015 saw only 4.2% growth in withholding and income tax receipts versus last year. OK, the month just ended did see the highest level of such inflows to government coffers of any May since the Financial Crisis. However, the 3 month average growth is 5.8%, and the 12 month average growth is 5.1% – both better than the month just ended.
- When you roll in non-withheld payments, the May comparison pops to 5.3%, but still below the 3 month average of 7.5% and 12 month average of 6.0%.
- Three reasons fall to hand to explain this slowdown. One, high earning individuals (+250,000 annual income and above) that pay a large chunk of Federal taxes are seeing lower levels of wage growth. That seems…. Unlikely. The other two reasons are the pace of new entrants into the workforce is slowing, and/or wage gains are generally on the decline. Since jobs growth has been slowing in recent months and wage gains are muted, those seem like logical explanations.
- Against the consensus estimate of 225,000 added in May 2015, therefore, we will put our marker down somewhere between 180,000 – 200,000. The 12 month average is 249,000, so the tax data seems to show we are 20% or so below those levels. If we come in somewhere inside the Bureau of Labor Statistics’ 105,000 plus-or-minus margin of error, we’ll declare victory.
Nick then begins to review the educational levels in the data:
As for the unemployment rate, we like to look at a breakdown of labor market conditions based on educational attainment. Like the Daily Treasury Statement, you don’t hear much about this dataset (Table A-4 in the monthly release), but it tells a compelling story. Here it is:
· Workers with a college degree do not have any structural problem finding a job. Of the 51.1 million college graduates in the labor force, only 1.4 million are without a job, for an unemployment rate of 2.7%. And while individuals within this cohort will experience problems with employment, as a group the college-educated demographic is now at maximum employment.
· The real slack at this point in the economic cycle is not with workers that have ‘Some college or an associate degree (4.7% unemployment) or even those with high school diplomas but no college experience (5.4% unemployment); it is with workers that did not finish high school (8.6% unemployment). In fact, last month’s headline print of 233,000 jobs added was entirely due to this cohort finding employment. The other three segments netted to negative job growth (College:-249,000, Some college/associate: +241,000, high school: -113,000).
· Further job gains, like this month’s expected 225,000 added positions, must come in jobs that do not require college degrees or, in some cases, a high school diploma. Employers looking for college-degree hires will struggle, simply because there are very few candidates with that credential that don’t already have a job relative to the total population of Bachelor degree holders. And simply poaching someone to come work for you does not add to the BLS’s “Jobs Added” calculus anyway.
The bottom line is that we are cautious heading into the Friday Employment Situation Report. Tax receipts are slowing, the economy simply is not creating the types of jobs needed to increase employment levels, and there is still an overly optimistic tinge to the consensus forecasts. That’s our story, and we’re sticking to it. If we’re wrong, we’ll be looking for pigeon in July.
Consensus – Optimism in Europe – on both Greece and Draghi have lifted markets across the pond and U.S. stock futures. Traders will home in on bond yields as charts near key resistance levels. Stick with the drill – stay wary, alert and very, very nimble. ***ALSO JUST RELEASED: The Fantasy Is Unraveling As Disastrous Policies To Impact The Net Worth Of Everyone On The Planet, Plus A Bonus Q&A CLICK HERE.
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