Last Friday’s employment report was a shocker with non-farm payrolls increasing by a mere 38,000 vs the expected 162,000. David Rosenberg, Chief Strategist, and economist at Gluskin Sheff was quoted in Barron’s stating:
“May’s 38,000 drop [sic] in goods-producing payrolls was the steepest since February 2010. This critically sensitive sector contracted for the fourth consecutive month…This is precisely the sort of rundown we saw in November 1969, May 1974, October 1989, November 2000, and May 2007 – each a presaging a recession by an average of five months.” (1)
For reference, in normal recoveries analysts consider 250,000 new monthly payroll increases a minimum, and 150,000 new payrolls is a zero net gain to offset those leaving the workforce due to events such as retirement, disability, and death.
Also reported on Friday is the unemployment rate plunging to 4.7% from 5% in April, due to 664,000 people leaving the workforce which is more than every man, woman, and child in the Bernie Sander’s state of Vermont.
Where are the workers going? More importantly, how are they paying their bills?
The hope is the disappearing employee workforce is reappearing in the “gig” economy of entrepreneurs. For those that have not found employment in the traditional workforce and are determined not to fall into the trap of government subsidies are possibly starting a small business or becoming self-employed. The evidence is developing that people are not sitting at home collecting unemployment checks and food cards. Uber has exploded around the world and not because everyone hated riding in yellow cars. Everywhere I travel I use Uber and enjoy the experience of hearing the stories of the drivers. I appreciate their enthusiasm offering me water or snacks as they are ready to tune their iPhone to whatever music I want. The more industrious drivers are building “Uber franchises” by purchasing multiple used cars and contracting people to drive for them for a flat weekly fee.
Recently in Texas, I went into an independent convenience store for coffee and was enthusiastically greeted by a young man offering me breakfast burritos he made in the back section of the store. While making my burrito, I was perplexed by his enthusiasm until I asked if this was his “business.” Indeed, it was, and he explained that he approached the store owner and worked out a deal to set up his cooking station making breakfast burritos for their customers (look out McDonalds).
Another “gig” economy is YouTube. The top 25 income earners in 2015 on YouTube all earned more than $1M in income. These are not Ivy League graduates with prestigious careers or billionaire venture capitalist. Most are under the age of 30 with a clever angle to draw an audience to their channel.
The lifeblood of the US economy is small businesses which is not monitored by reports for unemployment or new payrolls – small business owners are not considered “employees”. Small business, defined having fewer than 500 employees, employ more people than any other class size of companies in the US. According to the SBA’s Office of Advocacy:
“Small firms accounted for 63 percent of the net new jobs created between 1993 and mid-2013 (or 14.3 million of the 22.9 million net new jobs). Since the end of the recession (from mid-2009 to mid-2013), small firms accounted for 60 percent of the net new jobs. Small firms in the 20-499 employee category led job creation.”
WHAT DOES THIS MEAN TO ME?
The earnings of the largest publicly traded companies represented by the S&P 500 have declined three consecutive quarters and have not increased shareholder value since June 2015. Your best investment may be in your own company. For your retirement or 401k accounts, it may be the small cap mutual funds. Since 2000 through April 30, 2016, the annualized compounded return of the S&P 500 is 2.23% while the returns for the same period for the S&P 600 (Small Cap Index) is 8.4% or nearly 4X better return. One caveat is small companies are the most vulnerable to economic, market, and interest rate risks. Investing in small companies can be a rocky experience but even during the past 16 years of high volatility and two market crashes the smaller company index has still outperformed its large cap counterpart.
(1) Barron’s June 6, 2016 Vol XCVI No. 23