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Investment Banking News

On the whole, employment in the U.S. has done quite well over the past few years.  Unless some massive revisions occur in the months ahead, it is likely that 2015 will be the fifth year in a row of above-2 million job growth for the year.

Such broad strength poses the question – how did the financial industry do?  And, how did the various components of the financial industry, such as private equity, investment banking, and hedge funds, perform compared to one another?

The next two sections take a look.


The Broad Financial Industry View

First, a look at the broadly defined financial industry jobs picture.

The industries with the largest gain in employment were Education & Health, up 665K for the year, followed by Professional & Business Services (up 605K), Trade, Transportation, & Utilities (up 445K), Leisure & Hospitality (up 419K), and Retail Trade (up 274K).

Where’s Finance?

Finance shows up about in the middle, with total employment in 2015 up 147K compared to where it was at the end of 2014.

Middle of the pack – not too bad, not too great.

Employment Growth in 2015 by Sector (Cumulative by Month)

The Investment Banking, Private Equity, and Hedge Fund Industry Employment Picture

Now, shifting to a look at 3 of the large component sectors of the Financial industry – investment banking, private equity, and hedge funds. Before looking, which industry – private equity, investment banking, or hedge funds – would you guess did the best in 2015?

Interestingly, the winner is the private equity industry. In 2015, the private equity industry added an amazing 8% to its employment base. Not far behind the private equity industry was the hedge fund sector, adding a little over 7% to its employment base. In last place – the investment banking sector, adding just 0.3% to its employment base.

IB, PE, and HF Employment Growth in 2015


What’s behind the weak performance of the investment banking sector?  Why was it such a laggard in 2015?

A couple of general reasons.

First, in contrast to the the private equity and hedge fund sectors, the investment banking industry is heavily regulated.  And, with the investment banking industry under pressure from Dodd-Frank, it’s completely unsurprising that the investment banking industry would be somewhat nervous about expanding its employment base.

Second, investment banking business conditions are weaker.  Private equity and hedge funds continue to see cash inflow (at least for the time being), while the investment banking industry saw weaker than expected trading and equity dealflow.  These two put downward pressure on revenue and profits.


When comparing financial industry employment growth to the economy as a whole, the performance of the financial industry comes in about in the middle, having added about 170K new jobs to its employment base.

When shifting to a look at how the investment banking industry did against the private equity and hedge fund sectors, the picture is not as positive for the investment banking sector.  In 2015, the investment banking industry only grew about 0.3%, compared to 8% and 7% for the private equity/hedge fund sectors, respectively.

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One of the brightest stars of the American economic recovery and boom (if you can call the past couple of years a boom) is the American labor market.

Here’s a look at 5 charts on how the American labor market did in 2015 and where it might be heading in 2016.

#1: Jobs Created

The headline employment measure is the number of jobs created.  The following graphic has this view.

Interestingly, compared to what we’ve seen this century, 2015 is a fairly strong year.  With the exception of employment growth in 2014, the 2.308 million jobs created in 2015 place this year in second place behind 2014’s 2.787 million through the first 11 months of the year. Certainly, the economy has come a long way from the terrible 2008/2009 recession years.

The strength in the jobs market in 2014 and 2015 presents some concern for the 2016 outlook.  One generally safe observation is worth noting. Prior to the 2008 and 2009 global financial recession, American job growth began decelerating two years before the recession occurred.  Job growth peaked in 2005 at 2.5 million.  In 2006, job growth dropped to 2.1 million, and then further decelerated to 1.1 million net new jobs in 2007.  Macroeconomic conditions became unhinged in 2008, with net job destruction taking over.  The total number of jobs lost in 2008 was 3.6 million.

With this as the background, job growth in 2016 is likely to come in somewhere around 1.5 million, which would be a hefty drop from the 2014/2015 experience, although still positive, averaging 125K net new jobs per month.

Jobs by Year, 2000-2015

#2: Wage Growth

Next in importance to job creation is wage growth.  Here’s a look at American wage growth on a year-over-year basis.

The current 2% figure is incredibly weak after 6 years of recovery and boom. The weakness is probably going to fade somewhat in 2016, with the upward drift becoming somewhat strong.  Overall wage growth may accelerate to somewhere around 2.5% to 3.0% by the end of 2016.

YY Wage Growth


#3: Labor Force Participation

The third indicative labor market measure to watch in 2016 is the Labor Force Participation Rate. In the past couple of months, the rate has ticked up marginally, from 62.4% in September to 62.5% in November (the most recent figure). With job growth likely to decelerate further in 2016, Labor Force Participation is likely to only marginally move from where it is right now, perhaps reaching 63% by the end of 2016.  That’s a big perhaps.

Labor Force Participation Rate

#4: The Unemployment Rate

Perhaps the most well-known labor market indicator to watch, and number 4 on our list, is the 2016 Unemployment Rate.

The current unemployment rate, 5%, is strong enough for the Federal Reserve to start raising rates. During the technology bubble of the late 90s/early 2000s, the unemployment rate bottomed out at around 3.8%. In the housing boom of the mid-2000s, the unemployment rate bottomed at 4.4% in 2007. Both suggest that there’s a good deal of improvement in the unemployment picture before any concern of an overheating economy is warranted.

In 2016, the unemployment rate is likely to continue to drop, perhaps to around 4.5%.

Unemployment Rate

#5: The Industry Picture

The last point here is the industry makeup of job growth.  In 2015 (through 11 months), Education & Health and Professional & Business Services accounted for almost half of all job growth. This dominance can’t go on forever.

Part of the reason job growth is likely to slow in 2016 is due to some saturation in employment growth in these two sectors.  Teachers, nurses, and doctors can’t continue to grow faster than the populations they serve for too long. In 2016, it will be interesting to see how strong retail employment grows, as well as finance and natural resources.

Employment Growth in 2015 by Sectorr


Overall, how the many facets of the American labor market will perform throughout 2016 will be something worth watching. Of the many intriguing story lines, perhaps the five most interesting are net job creation, wage growth, labor force participation, the unemployment picture, and the industry makeup of job growth.  Each factor provides a glimpse at the evolving American labor picture.

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If there’s something investment bankers like to talk about outside of money, it’s policy.  In particular, economic policy.  And within the economic policy world, it’s hard to find a more hotly debated topic among financial professionals (investment bankers chief among the policy-minded ones) than the minimum wage.

The issue brings up notions of the free market, slave labor, class warfare, and a host of other philosophical issues.  These broad philosophical issues are not addressed here.  Rather, this is simply a look at what has happened to retail employment growth in states that imposed higher minimum wages in 2014 and/or 2015 compared to states that left the labor market as is.

The Minimum Wage

First, a look at the minimum wage rate by state since 1980. As shown, over time the minimum wage across states has slowly ticked up from the initial 25 cents per hour in 1938.

The minimum wage varies widely by state, with the highest state minimum wage in the country at the end of 2015 in Washington at $9.47 per hour. The most common minimum wage rate is $7.25, which is the federal minimum wage rate.

Minimum Wage


The wide variation in the minimum wage rate poses the obvious question: are states with higher minimum wage rates missing some retail jobs or do they experience lower overall employment growth?

The next section takes a look at the most recent experience.

Retail Employment Growth

If the minimum wage is adversely affecting employment growth, it would most likely show up in retail employment first. Here’s a look at retail employment by state for 2014 through 2015. The chart is divided into two groups – states that imposed higher minimum wage rates in 2014 and/or 2015 and states that did not. On the left are states that left the labor market as is.  On the right are states that imposed higher minimum wage rates.

Looking first at the laissez-faire states.  In 2014, states that left the labor market to itself were (on the median) seeing retail sales employment growth of 1.40% per year.  In 2015, that jumped to 1.55%, an acceleration of 0.15%.

Switching to states that imposed higher minimum wage rates in the current or previous year, in 2014 retail employment growth was slightly higher at 1.61%.  In 2015, that dropped to 1.21%, a drop of about 0.40%.

So interestingly, perhaps the common sense view is correct.  Higher minimum wage rates are pushing down on retail employment.  Of course, it’s still early, but perhaps Bill Gates does know what he’s talking about when he talks about higher minimum wage rates encouraging automation and other adverse employment effects.

min wage1


In looking at what has happened with retail employment growth in states that imposed higher minimum wages in 2014 and/or 2015 compared to states that left the labor market as is, the initial evidence looks like what most would expect – retail employment grows slower.

The total job growth differential is about 0.55% (0.15% + 0.40%) for retail employment growth.  This recognizes that there are a plethora of other factors that affect the labor market situation in a given area…but that notwithstanding, retail growth appears to have been slowed in states that imposed a higher minimum wage rate compared to states that left the labor market negotiation up to the (potential) employee/employer.

It’s still early, of course, to know exactly what the long term impacts will be.  Only time will tell the full story.

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Are Central Bankers Biased?

November 23, 2015

In the world of central bank policy, a world intricately connected with the investment banking universe, a key issue keeps resurfacing (recently, the issue has come to the fore more prominently).  The issue is central bank independence, or more particularly, whether the Federal Reserve is playing politics with interest rates. A number of potential Republican […]

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International Ranking of US Jobs per the Recent Jobs Report

November 9, 2015

The U.S. jobs report came in quite good this month at +271K compared to the +160K the market expected. Even more amazing, full-time employment – a key indicator of the real strength of economic growth – came in +540K.  In the past two months, full-time employment in the U.S. has expanded by an incredible 1.12 […]

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Which of These Comes First – More Treasury Hoarding or a Rate Hike?

October 26, 2015

In the investment banking universe, there’s no more contentious issue than Federal Reserve policy.  This week’s interest rate decision will be no different. On Wednesday, the Federal Reserve is set to announce its decision on the Federal Funds target rate.  Unless the Fed shocks the world, and with Janet Yellen at the helm that’s a […]

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A Topic Every Investment Banker Loves – Poverty

September 28, 2015

Secretly, every investment banker loves to debate poverty.  In one way or another, finance is intricately connected with various poverty policies. Because of this, and given that presidential politics are soon to take over dinner tables, here’s a look at poverty by U.S. president. Before diving in, which U.S. president would you guess is best […]

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