The Real Jobs Report: June 2013
A new tempest is blowing the winds of economic change. A fundamental shift is afoot.
The good news is last Friday’s monthly jobs report for June showed better than expected job growth. +195,000 non-farm jobs were created and both April and May totals were revised up.
The bad news is that U.S. Treasury bond yields have emerged as the primary driver of future U.S. economic growth. 10-year yields are up a hefty +0.62% since June 6th. Not good.
The labor department’s jobs report tells us where the labor market has been, but not necessarily where it is going. For the future, look to U.S. Treasury bond yields.
The era of cheap money is coming to a close.
BLS June Jobs Data
The numbers change, but the story remains the same. Recovery from the Great Recession of 2008 remains painfully slow.
Highlights from the June Jobs Report include:
- +195,000 non-farm jobs created in June
- +70,000 added to April and May job totals
- Unemployment remained unchanged at 7.6%
- Aggregated total unemployment leaped from 13.8% in May to 14.3% in June
- Wages went up by 10¢/hr last month and 2.2% over the last year
- -40,000 federal sequestration-related job cuts since February
The +195,000 is especially strong given that the previous two month’s job growth were both revised higher. The jump in wages is sweet.
The fly in the ointment is aggregate total unemployment. It leaped +0.5% to 14.3%. That is the highest single month jump since mid-2009.
Aggregate unemployment is the sum of regular unemployed, discouraged workers and forced part-time workers because of economic conditions. It doesn’t include workers that simply gave up and dropped out of the workforce all together. Give-ups happen a lot.
Finally, revised real GDP figures released on June 26th undercut the pleasantly good June employment numbers. Real GDP growth for the last two quarters were revised down. Not good. That made them the weakest two-quarter GDP growth since mid-2009, too.
This stuff is all very enlightening, but the real driver of the future economy is U.S. Treasury bond yields!
What is a Treasury bond “yield”?
In banker lingo, the interest rate paid on Treasury bonds is called the “yield”.
For example, at the close of business yesterday the yield on 10-year Treasury bonds was 2.70%. That means that if you bought a bond costing $10,000 then over 10 year’s time you’d be paid $10,270 by the government if held to maturity. You’d make $270 on the deal.
The yield is a free floating percentage determined by open market conditions. It goes up or down depending on real-time decisions made between buyers and sellers.
Bond yields have dropped drastically since 1990. That drop helped fuel 1990s prosperity.
Why do Treasury bond yields matter?
Treasury bonds, in one form or another, back most loans in the USA and a lot of the world.
A huge pool of money is held in the federal reserve system backed by U.S. Treasury bonds. That is the pool that major banks borrow from to fund loans to other banks who, in turn, loan to individuals for homes and autos and loan to businesses that create jobs.
They also ultimately finance large-scale federal, state, county and municipal projects to pay for infrastructure projects and such. Treasury bond sales are the prime funding source paying for federal government debt.
The Changing Face of Debt
Debt has transformed greatly since the year 2000 when 10-year yields were at 6%.
Back then GDP was $10 trillion and federal debt was $5.7 trillion. That is a debt-to-GDP ratio of 55%.
Today, GDP is $16 trillion on federal debt of $16.8 trillion. Debt is 3 times what it was just 13 years ago and the debt-to-GDP ratio has ballooned to 105%.
Yet, during that time yields have plummeted, defying economic sense. It came about because T-bills are treated as a global “safe-haven” investment in bad economic times.
It doesn’t look like much on the above graph right now, but yields have turned a corner since Ben Bernanke announced an end to easy money Fed monetary policy last month.
Yields are entering an upward trend and that will continue. Yields are out of whack with debt reality and a necessary correction has started.
This month’s job creation numbers were better than expected, but they were tempered a bit by dismal real GDP revisions and a big jump in aggregate unemployment.
But the biggest economic news last month did not come from the ‘up’ jobs report, it came hidden in an anticipated change in Fed monetary policy. The era of free money is coming to a close.
Nothing has even happened yet, but Treasury yields reacted quickly, jumping +0.62% so far. Treasury bonds are the backbone of the U.S. loan universe. As yields rise, so does the cost of borrowing for everyone, including the federal government itself. That stifles growth.
Rising yields will keep a weak recovery weak for years to come.
Pray, though, that yields don’t rise to quickly! That would bring back economic chaos.