More than half a million people left the labor force in December, bringing the total for 2013 to 2.9 million. This is not an insignificant amount, especially in light of other statistics. The quantity of people in the ranks of the “employed” increased by just 1.4 million for the year, less than half the number joining the “not in labor force” designation. Additionally, the population grew by 2.4 million. Only 1.4 million jobs for 2.4 million new people sounds like a recipe for the unemployment rate going up. However, the opposite happened. The “official” unemployment rate plunged from 7.9% a year ago to just 6.7% in December.
A significant portion of the year’s improvement came last week when the Bureau of Labor Statistics (“BLS”) reported the unemployment rate dropped from 7.0% to 6.7% in the month of December. Investors focus on the headline number most of the time, and a headline this good should have been a disaster for the bond market. However, after many months of controversial employment reports, investors decided to look at the data behind the headlines this time. Especially since the 0.3% reduction in the unemployment rate sounded too good to be true.
Investor skepticism appeared to be accurate. Before the BLS issued its monthly reports, the consensus opinion among economists was for a hefty increase of 196,000 new jobs, which would have been enough to keep the unemployment rate steady at 7.0%. When non-farm payrolls increased by only 74,000 jobs, a “mere” 62% shortfall, the logical conclusion was for a rise in the unemployment rate. When it was reported that unemployment fell to 6.7%, skepticism turned to disbelief. Instead of bonds taking a hit, they posted one of their strongest one-day rallies in recent history with the 10-year Treasury yield dropping from 2.97% to 2.86% on Friday.
As crazy as all this sounds, the math behind the employment report calculations is correct. This brings us back to the 525,000 people who left the labor force. When the denominator is “adjusted” by a factor seven times larger than the numerator’s change, the math can appear to be doing funny things.
Reasons behind the historically large number of citizens leaving the labor force are subject to debate. One camp believes it is because these people have been out of work so long they have given up looking. This theory paints a negative cloud over economic activity. Another camp believes the people leaving the labor force are just retiring and is a natural result of an aging population. The current economic recovery will likely be studied for years, and the real reason will not be known until it becomes history.
The FOMC is scheduled to next meet in two weeks, on January 28 and 29. At that time, we will learn more about its assessment of the economy. Perhaps more importantly, we will learn if the Fed intends to continue reducing its monthly asset purchases. Given the fact the following meeting isn’t until mid-March, we are anticipating the Fed will announce another $10 billion monthly reduction from $75 billion to $65 billion.
Health Care, led by a surge in biotechnology stocks, blazed a new path to the top of our rankings. The sector was also in the lead five weeks ago, but it stalled in December and slid down to the middle of the rankings. This week’s jump from fifth place back to the top is a testament to its newfound strength. Industrials and Technology, formerly #1 and #2, were both pushed down a peg this week, yet both remain strong. Materials maintained its fourth place position while the surrounding categories all moved. Financials climbed one spot to fifth. Consumer Discretionary slipped three places to sixth as retailers and homebuilders slumped. Telecom lost momentum but was able to keep its seventh place ranking. The bottom four sectors are now quite compressed. Consumer Staples moved slightly ahead of Energy and now leads this group of laggards. Real Estate edged in front of Utilities, and both flipped from negative to positive momentum scores today.
Micro Cap continues to separate itself, in a good way, from all other style-box designations. While the majority of categories lost momentum for the week, Micro Cap seemed to soak up what the others lost and moved further to the upside. Small Cap Growth was the only other category to gain momentum and now firmly holds the ground between Micro Cap and the rest of the pack below. Ranking scores are compressed across the nine lower categories, almost to the point where relative positions do not carry much weight. It is interesting to note some of the anomalies though, as they can potentially provide clues to an evolving trend. One example is the fall of Small Cap Value from sixth to last place while the other Small Cap designations remain at the top along with Micro Cap. Additionally, the three Value categories and Mega Cap now sit on the bottom. This hints that today’s narrow Growth over Value premium could expand in future weeks.
Last week, the U.S. was attempting to wrestle the first place spot away from Europe. Today, it is clear that attempt failed as Europe posted strong results and widened its lead over other regions. The U.K. was also in the mix and today finds itself in second place. The strength in Euroland and the U.K. caused the U.S. to slip to third. EAFE and World Equity round out the top five positions. Japan and Canada continue to hold down sixth and seventh place, although Canada is in danger of slipping to a negative trend. The bottom four categories of Pacific ex-Japan, Emerging Markets, China, and Latin America are in the same relative order as a week ago and remain in the red.
“In December, 2.4 million persons were marginally attached to the labor force, little changed from a year earlier. These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.”
–from the Bureau of Labor Statistics Employment Situation Report for December 2013
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