October 2016 – Monthly Commentary

October 2016

Prior to the release of the October employment report, Bloomberg television welcomed a prominent economics professor to the show, asking him to give his first impression of the then soon to be released economic data.  During their idle chatter prior to the release, the professor reminded viewers that years back, Jack Welsh, the former CEO of General Electric had insinuated that the employment report was “made up” and not an actual reflection of employment.  The professor clearly thought that Welsh’s comment was preposterous.  We found that ironic because the number is absolutely made up.  The initial report is the Bureau of Labor Statistics (BLS) best guess, based on phone sampling and is reported after being massaged with seasonal adjustments.  To arrive at a number more reflective of the employment situation, we look past the headline number to the subcomponents of the report and compare that data over several months.  In that way, we’re able to identify a trend.  To look at a single month and declare the economy weakening or strengthening is myopic.

The October employment report was a glaring example of why the headline non-farm data belied a much better employment situation than the report suggested.  Economists were expecting 173,000 new jobs for the month but the BLS reported a below expectations increase of 161,000 workers.  Investors initially reacted by pushing fixed income prices higher, as usually happens when economic data falls short of expectations.  What investors failed to understand was that nearly 200,000 people weren’t able to work during the month due to weather, primarily because Hurricane Matthew shut down a whole swath of the eastern United States.  The BLS estimates that on average, 45,000 workers will be prevented from working due to weather in any given October.  In the most recent report, the Labor Department calculated that figure at 193,000.  Add those workers back to the number reported and you have robust job growth of 354,000.

Digging further into the report yielded more signs of a strong and growing economy.  Namely, the unemployment rate for men and women 25 years and over fell to 4.0%, and for those with a college education, the rate was 2.6%.  But that’s not to say that only college-educated people are participating; average hourly earnings for the entire workforce grew 2.8% year-over-year.  That’s the fastest rate of earnings growth in more than seven years.  The October employment report has done nothing to dissuade us that the U.S. economy is in a virtuous circle of employment growth, consumer spending and rising GDP.

During the month AT&T announced another blockbuster merger, this time seeking a tie up with Time Warner, paying $85 billion for the media content king.  Recall that AT&T paid $48.5 billion for DirecTV last year.  The merger is the latest round of consolidation in the amorphous television/telecom industry, as the number of competitors continues to shrink.  The remaining few have invested mightily to build out their infrastructure to deliver voice, wireless, television, data, and home services such as security and climate control.  To support their ravenous capital investment budgets, they’ve upped the ante on an already fierce competition for new customers.  Ordinarily, such intense competition would drive prices down, but as most wireless subscribers will attest, the array of new services, subscriptions, and fees seems to only go higher.  Clearly, AT&T is betting that by expanding their offering base, they’ll reap a commensurate rise in profits.  What’s troubling is the staggering amount of debt AT&T has taken on to fund acquisitions and their infrastructure expansion.  Assuming the Time Warner purchase closes, AT&T’s liabilities will total approximately $330 billion, that’s more than a 100% increase over the $157 billion they were on the hook for at year end 2010.  Of course, with interest rates artificially depressed the interest expense to the company is manageable, at least for now.  The bigger question is will AT&T be able to manage the debt load when interest rates normalize.