"Kee" Points with Jim Kee, Ph.D.

  • Payrolls and Labor Markets 
  • Other Items of Interest 
  • Flattening Yield Curves 


Payrolls and Labor Markets  

Payrolls seemed to dominate trade concerns last week, as Friday’s strong 213,000 payroll number (i.e. the number of new jobs created in June) buoyed investor confidence. April and May’s numbers were revised upwards as well. Monthly payroll numbers are of little value to investors, but broader 3-6 month averages do give a sense of overall trends. June’s number brings the average monthly job creation rate over the past three months to 210,000. That is pretty good for an economy heading into its 10th year of an economic expansion. 

Wages have also been increasing at a faster pace than recorded earlier in the expansion (WSJ), and the unemployment rate ticked up a little bit from 3.8% in May to 4% in June as new entrants entered the labor force. That is exactly the way markets should work: if demand for workers starts exceeding the supply of workers at current wage rates, wages should start to get bid-up by employers competing for workers, and that should attract new entrants into the market. Nothing bad there, just markets at work. 

On trade concerns, I was intrigued last week by an insight from economist David Goldman (Asian Times). In “Sitzkrieg, not Blitzkrieg” (the former a phase of war with little action, the latter a war with intense action), Goldman argues that China’s response to US tariffs on Chinese imports is limited right now. That is because China cannot engage in an intensive “trade war” without securing alternative (to the US) access to key technologies, like semiconductors, from countries like Taiwan and South Korea. This could take at least a year and a half, and will be (according to Goldman) characterized by “a crash program to replace key high-tech components with domestic substitutes,” and by “subtle military pressure on Taiwan and South Korea.” That makes sense to me, and is pretty much what I expect to see. The implication is that the US/China trade war isn’t going away or getting resolved any time soon.

Other Items of Interest  

Another item of interest last week was a pick-up in business borrowing (preliminary second-quarter data), which reflects business confidence (borrowers) and confidence in business (banks/lenders). The Wall Street Journal also had an article that noted that a surge in stock buybacks has not boosted stock prices. That makes sense to me. Share buybacks are more wealth distribution actions, not wealth creation actions. If a business is profitable, the market should reward actions that increase current and future earnings, which means reinvesting earnings into the business. That is a wealth creation action. Share buybacks are usually only rewarded when markets are anxious about cash building up, i.e. “will the company do something stupid?” Given current (higher) valuation levels, I would say markets are pricing in or expecting more growth, meaning reinvestment of earnings, and less apt to reward wealth redistribution (share buybacks).

One Final Thing:  Flattening Yield Curve  

The flattening yield curve continues to make headlines in the press, and it has generated debate within the Federal Reserve. For example, Federal Reserve Bank of Atlanta president Raphael Bostic was quoted in the Wall Street Journal last week as saying that, “Any inversion of any sort is a surefire sign of a recession,” where an inversion means the long-term rate is above shorter-term (e.g. 2-year) rates. Right now, the 10-year rate is only 30 basis points above the 2-year rate. But research published recently by a Fed staff economist has argued that a more reliable gauge can be found by looking at the difference between short-term Treasury bills and the yield implied by futures markets for the same Treasury bills six quarters later (WSJ). That is certainly more consistent with research I have been involved with in my career. Some, like Federal Reserve Bank of Boston President Eric Rosengren, favor this measure, which has implied (correctly) a low probability of recession in recent years and currently implies the same.