From the monthly archives:

January 2016

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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If you follow Wall Street analysts’ economic predictions, you’re likely well aware that a majority see China weakening further in 2016.  Most western analysts see little possibility that Chinese growth will meet the government’s expectation of 6.5%.

At the same time that analysts see a weakening China, many have the American economic growth outlook brightening.

The final data points of 2015 paint a complete opposite picture, with the divergence of the two mattering a good deal for the practice of investment banking this year.  Are the year-end data points correct or are the majority of Wall Street analysts?

Here’s a look at the data points.

China Manufacturing

The last data point of 2015 was manufacturing and non-manufacturing PMIs out of China. Overall, manufacturing activity peaked in July 2014 and has since continually decelerated through the end of 2014 and the first 3 quarters of 2015.

The weakening changed in fall 2015, with the Manufacturing PMI now 5% above its September low of 47.2. This suggests business in China has already bottomed, with the weakness already in the rear view mirror.

1 China MFG PMI

China Non-Manufacturing

Akin to the Manufacturing PMI, the Non-Manufacturing PMI shows growth in China re-accelerating since bottoming in October 2015. Overall, non-manufacturing conditions started decelerating following the May 2014 reading, and continued to decelerate throughout most of 2015. That changed after Halloween with conditions strongly re-accelerating in the past couple of months. Whether the past couple months of readings are transitory anomalies, or constitute a trend, remains to be seen.

It should at least put some doubt on the consensus view that China is, for sure, heading south.  That’s probably not the case.

2 - China Nonmfg PMI

U.S. Initial Claims

Shifting to the U.S. picture, here’s a look at the final 3 most influential economic indicators. The first is Initial Claims. Initial Claims surged 20K to 287K to end the year.

Overall, since bottoming in October 2015, an upward trend has emerged for Initial Claims, something that can’t continue too much longer if analysts’ U.S. economic forecasts are to come to fruition.


U.S. Continuing Claims

A similar story, albeit to a lesser degree, is present with Continuing Claims. Continuing Claims have floated higher since bottoming in early November.


Chicago PMI

The third year-end point giving a counter prediction to the majority of Wall Street analysts is the Chicago PMI, which came in at a recessionary-like 42.9.

Chicago PMI


Conventional 2016 forecasts have business in China deteriorating further and American conditions re-accelerating. In looking at the final 2015 data points, an opposite picture is painted. Growth in China appears to be reigniting, and economic growth in the States may be peaking.

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