The National Federation of Independent Businesses released its Small Business Economic Trends report for May on Tuesday, showing an increase in small business optimism from 96.9 to 98.3, ahead of consensus estimates and above the 96.1 average for the index since 2000. The sales component of the report had its largest one-month gain of 11 points, up from -4 to +7, reaching the highest level since May 2006, which translated into higher earnings also having the largest one- month gain since April 2012, up nine points from -16 to -7 to reach the highest level since October 2005. Yippee ki yay!
Then we looked at the labor section. According to the report, "job openings are near 42-year record-high levels and ... over 80% of those hiring or trying to hire in May reported few or no qualified applicants." When asked about what issues are posing the biggest problems to their business, the quality of labor came in third, behind taxes and government requirements and red tape. We could have told you taxes suck and government continues to be a serious pain in the you-know-what, but these guys can't find anyone qualified?! Well, these are small businesses and maybe after the crisis people want the sense of security a big company may give, so let's take a look at the broader labor market.
Yesterday, the Bureau of Labor Statistics (BLS) released JOLTS (the Job Openings and Labor Turnover Survey), which showed that April job openings hit a new all-time high, with 5.376 million reported openings that employers have not been able to fill. Uh-oh, it's everywhere. Even more concerning is that the number of hires, which usually exceeds the number of openings, fell below openings by 396,000!
We've got lots of job openings, but it's tough to find qualified applicants? Are we just running out of people to work? Looking at the civilian labor force participation rate, courtesy of the St. Louis Federal Reserve, that certainly isn't the problem! The participation rate stands at a meager 62.9% of the population, a level not seen since the late 1970s!
Let's take a look at what jobs are getting filled. Last Friday's employment report was heralded as a blockbuster, knock-it-out-of-the-park report that may push the Fed to increase rates sooner, beating expectations for 225,000 new jobs, but how about if we take a deeper look into the data, as headlines rarely give a complete picture. With all this glory and hallelujah over the labor market, you might be wondering why consumer spending was so grim in the first quarter and then flat in April, despite lower fuel costs. In the face of all this hoopla, median household income is still well below where it was over 15 years ago!
While it is better to see more jobs than less in Friday's report, we also have to take into account the quality of those new jobs, particularly when we see families still struggling. The two largest contributors to jobs were education and health services coupled with government, each representing 15.5% of the total jobs added, followed by professional and business services with 13.9%, retail trade at 11.0%, leisure and hospitality at 10.7% of total new jobs.
Education and health services average weekly pay for May, when annualized, is just 78.7% of Sentier Research's median household income for April 2015. Retail trade pay represents 52% while leisure and hospitality is the absolute lowest paid, at 35.7% of median household income. Those three, which represent 62% of all new jobs, are all well below median income. In fact, 70% of the new jobs in the report are below median income levels!
Putting it all together, the U.S. has a smaller and smaller percentage of the population working, despite having record-high job openings that can't be filled given the current skills in the marketplace. The jobs that are getting filled are mostly lower skilled, therefore lower paying. This means employers need to do a good job of keeping the employees they have happy and growing the skills of their employees. For investors, this means tailwinds for companies like Towers Watson (TW), Insperity (NSP), Kforce (KFRC), ManpowerGroup (MAN) and Robert Half International (RHI). At the moment, Hawkins analysis indicates to her that most of these are a bit rich at these levels, so she's working on the shopping list she pulls out during a market correction. All of this also means companies will be ferreting out qualified candidates as best they can, which means pulling out all the stops and potentially engaging firms like Monster Worldwide (MWW), LinkedIn (LNKD) and DHI Group (DHX) to get a bead on those wily varmints.
Before we bid adieu this week, we'd like to discuss last night's decision by MSCI against a partial admission of Chinese domestic A shares, which are those listed on the mainland rather than in Hong Kong, into its flagship emerging-market index for the time being. The latest proposal after that decision points to potential inclusion by May 2017, but has left room for an earlier move if China is able to satisfy MSCI's criteria for inclusion sooner. This has made it clear that China will be included in the index at some point, it is only a matter of when, which means global demand for its shares will rise. So far, the news hasn't had a noticeably negative impact on the Shanghai index, which was down by just 0.15% as of this writing.
We believe China's inclusion in most major indices is inevitable, for as the Financial Times pointed out today, it is already one of the world's largest and most liquid equity markets, which may push many fund managers toward inclusion of Chinese shares in their emerging-market funds despite MSCI's decision.
MSCI's decision also gives an indication that China will likely need to "do more on capital-account opening in order to win the yuan a chance for SDR," according to a Bloomberg interview with Li Miaoxian, a Beijing-based analyst at BOCOM International Holdings, something the Chinese government is keen to achieve, as we've discussed earlier. We'd say this makes the probability of inclusion in the SDR basket a bit lower, but we will be watching for how the government responds. We continue to favor iShares China Large-Cap ETF (FXI), Market Vectors China A Share ETF (PEK) and PowerShares Chinese Yuan Dim Sum Bond Portfolio (DSUM) for those interested investors.