CHART OF THE DAY: The Gig Economy is Alive and Growing

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Managing Director Neil Howe. Click here to learn more.


"... One is part-time workers, who have grown as a share of the workforce by about 2 percentage points since the Great Recession. Another is independent digital contractors, who—while still few in number—are surging. JPMorgan Chase finds that, as of August 2015, 1 percent of adults make money in the “online platform economy” each month (as Uber drivers, Airbnb renters, etc.)—a tenfold increase from October 2012. During the same time period, the share of Americans who report ever having worked in the online platform economy exploded 47-fold to 4.2%."


CHART OF THE DAY: The Gig Economy is Alive and Growing - neil 6

The Gig Economy is Alive and Growing

“I entered the work force cleaning breast pumps at the pharmacy! It was a part-time gig while I was at school… no interview required.”

-Chris Hemsworth


Humor aside, and as the Demographer on the Hedgeye research bench, it’s my job to make sense of the larger trends we’re seeing across the country. Taking the Early Look pen for Keith this morning, I see an important rhythm-of-history subtext playing out related to the “gig” economy.  


Yes, the gig economy is alive and well – but could America be reaching peak gig? I think it's likely. The generation most attracted to gig work (Gen X) is now reaching maturity. The generation now rising in the workplace (Millennials) accepts informal and impermanent work arrangements less by preference than out of necessity: If offered the choice, what most Millennials prefer in their workplace is community, security, institutional attachment, and long time horizons – i.e., something very ungiglike.


Meanwhile, with both parties vying to offer workers greater protection against job loss, pay cuts, and uncompensated overtime, the political wind is definitely blowing in the Millennial direction. It is only a matter of time, and perhaps not much time, before policy makers accompany this "formalization" of employment with measures to prevent employers from making end runs around the rules via "gig" workers. Uber's insistence that its drivers are contractors and McDonalds' claim that its franchisees are independent employers are just the opening salvos of this emerging generational weather front.


Back to the Global Macro Grind


The Gig Economy is alive and growing. What’s happening?  The Commerce Department recently proposed a four-part definition for what it calls “digital matching firms.” (Think of your Ubers, your Airbnbs, and your TaskRabbits.) According to the definition, these firms use technology to facilitate P2P transactions, rely on user reviews for quality control, offer worker hour flexibility, and rely on workers to use their own assets to perform their job duties.


Why is this important? Because it’s the first significant step anyone’s taken in some time to try to define—and ultimately measure—the so-called “gig economy.”


It seems silly, really. Everyone from Hillary Clinton to Barack Obama has been urging regulators to protect gig economy workers—yet nobody seems quite sure of who works in the gig economy, whether or not it comprises a growing share of the workforce, or even what it is. The last official study of this sector took place over a decade ago by way of the BLS 2005 Contingent Work Supplement (CWS).


One thing is for sure: Though the number of digital matching firms is expanding rapidly, these companies represent only the tiniest sliver of a growing gig economy.


How big is the whole gig economy, exactly? Again, your bureaucracy is working on it—and it’s left to analysts like me to draw their own inclusions.


What is the Gig Economy?  Experts often define the “gig economy” by equating it with so-called contingent employment. At its narrowest, the BLS classifies contingent work as a strictly impermanent position, typically expected to last no longer than one year. Using this definition, the BLS reported that in 2005, between 1.8% and 4.1% of the workforce was contingent—a share that had declined slightly since 1995.


The Gig Economy is Alive and Growing - neil 1


The BLS also releases monthly data on another, slightly broader component of the gig economy: self-identified “self-employed” workers. Here too we see a decade-long period of gradual decline: Since 2006, the self-employed share of the population has slid from 11.5% to 10.3%.


The Gig Economy is Alive and Growing - neil 2


But here’s the thing: These BLS figures leave out a vast share of the true gig economy. Think about it. An agency temp, an on-call staffer, and even a standard part-time employee can and perhaps must be considered “contingent.” But these workers are left out by either of the above measures because they are not strictly “impermanent” or “self-employed.”


This is where an important 2015 GAO report on the gig economy comes in. The GAO broadens the notion of contingent workers to include “all individuals who maintain work arrangements without traditional employers or regular, full-time schedules.”


Using this more comprehensive measure, we see that the gig economy is much larger than the previous BLS estimates. By looking at historical CWS data, the GAO found that a whopping 30.6% of laborers were contingent in 2005.


Not only that, but the gig economy is also growing steadily. By analyzing more recent General Social Survey data, the GAO determined that the contingent share of the workforce grew to 40.4% by 2010. (Some of this growth may be due to differences in the sample populations surveyed.)


The Gig Economy is Alive and Growing - neil 3


The Gig Economy is Alive and Growing - neil 4


Within this GAO-defined gig economy, there are several categories of work that we know are growing rapidly.


One is part-time workers, who have grown as a share of the workforce by about 2 percentage points since the Great Recession. Another is independent digital contractors, who—while still few in number—are surging. JPMorgan Chase finds that, as of August 2015, 1 percent of adults make money in the “online platform economy” each month (as Uber drivers, Airbnb renters, etc.)—a tenfold increase from October 2012. During the same time period, the share of Americans who report ever having worked in the online platform economy exploded 47-fold to 4.2%.


The Gig Economy is Alive and Growing - neil 5


The Gig Economy is Alive and Growing - neil 6


All told, economist Gerald Friedman estimates that as much as 85% of the jobs added since 2005 have been temp, on-call, or contracting positions. Sara Horowitz, executive director of the Freelancers Union, asserts that, "The sector of workers who don't have traditional full-time jobs—whether by choice or not—is a sizable and growing portion of the workforce."


If anything, even the broad GAO definition may underestimate the gig economy. Virtually no full-time workers would self-identify as contingent workers, but at least some alternatively employed individuals—such as contractors—consider themselves regular full-time workers.


Why The Gig Economy is Growing: Drivers 

“Artisanal” makes a comeback. Before 2000, CPG companies and big-box retail chains were marginalizing mom-and-pop stores virtually to extinction. However, in the last decade-plus, we’ve seen the pendulum start to swing back toward freelancers. In agriculture and retail, much of the growth has been at the bottom of the market, from the small-scale organic farmers surging in popularity to the do-it-yourself Etsy crowd selling handmade products with great success.


Service sector grows, production stagnates. The growth of the gig economy is also rooted in the broader expansion of the service sector. (It’s hard to think of a contingent worker who isn’t providing services, whether it’s an Uber driver, a TaskRabbit “Tasker,” or a part-time musician.) Since 2006, service-sector employment has climbed by 10%, with the sector adding roughly 12 million new jobs. By contrast, goods-producing industry employment has not even come close to its pre-recession levels, falling by nearly 13% since 2006 (amounting to 3 million lost jobs).


The Gig Economy is Alive and Growing - neil 7


The service sector’s growth is also evident when we dig deeper into the newest GDP numbers. Buried in the overall negative report is this tidbit: The personal consumption of services, which grew by 1.3% during Q2 2016, contributed more than 100% of all Q2 GDP growth (which registered just 1.2%).


Generational change. Since the 1980s, generational forces have been tilting the economy toward more gig-like work arrangements. Boomer young adults were the first to separate from the conventional 9-to-5 jobs of their parents, preferring to “get by” rather than sell out.


Sure, many of these Boomers are now retiring. But they’re being replaced in the workforce by a generation that is even more gung-ho about gig work: Xers. This generation practically invented the phrase "free agency" and “be your own boss”—and now, the rise of the sharing economy has given them the chance to work as little or as much as they want depending on their personal obligations and financial needs.


Millennials have similarly flocked to piecemeal, part-time gigs—though many had no choice in the matter. Despite their reputation as job-hoppers and tech entrepreneurs, a much larger share of Millennials would prefer the security of a conventional full-time position. This generation joins their elders in this contingent labor force, but more as underemployed “perma-temps” stuck there unwillingly rather than as contingent workers by choice.


Broader Implication. Go long on businesses and services that create and manage a gig economy framework. Platforms that help gig economy companies manage their operations are a solid bet. For example, an IT-managed service provider could be the perfect solution for a business trying to migrate to a contractor-based workforce but unsure of the HR implications.


Privately held San Francisco-based startup Payable, which created a software-as-a-service product to make it easier for contractors to get paid, has seen heavy business-side demand from companies looking to manage their own independent contractor fleets. Services like QuickBooks Self-Employed, offered by Intuit (INTU), are valuable tools for freelancers trying to navigate the complex world of reporting earnings from a multitude of sources.


Brace for the continuing legal battle between the government and gig economy firms. Both political parties are increasingly concerned with kick-starting the economic fortunes of the lower and lower-middle class, whether by raising the minimum wage or ensuring overtime rights. The important stage two of this fight (which is already coming into view) is protecting all of the people who fall through the cracks because they have nontraditional jobs. The various lawsuits brought against gig economy giants like Uber are the government’s way of trying to bring contingent workers into the net of formal employment.


Millennial gig economy workers would be thrilled to get the same benefits and rights as traditional full-time employees. But the real battle of this socialized work movement will be between government regulators and Xer freelancers who don’t want assistance—i.e. rules that hamper their freedom and their earning opportunities.


To learn more about my sector and receive my demography work please contact .


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.46-1.60%

SPX 2156-2193 

VIX 11.01-14.76 
EUR/USD 1.09-1.12

Gold 1 


Best of luck out there today,


Neil Howe

Managing Director

August 12, 2016

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10-Year U.S. Treasury Yield
1.60 1.46 1.57
S&P 500
2,156 2,193 2,186
Russell 2000
1,205 1,240 1,229
NASDAQ Composite
5,100 5,256 5,228
Nikkei 225 Index
16,092 16,998 16,735
German DAX Composite
10,048 10,858 10,743
Volatility Index
11.01 14.76 11.68
U.S. Dollar Index
95.00 96.75 95.84
1.09 1.12 1.12
Japanese Yen
99.29 103.98 101.98
Light Crude Oil Spot Price
38.99 44.33 44.23
Natural Gas Spot Price
2.50 2.91 2.55
Gold Spot Price
1,324 1,375 1,350
Copper Spot Price
2.12 2.22 2.19
Apple Inc.
102.52 109.95 107.93
750 780 771
Netflix Inc.
91.11 96.99 95.89
J.P. Morgan Chase & Co.
62.78 66.91 65.46
Ford Motor Co.
11.28 12.56 12.31
SPDR S&P Oil & Gas Explore
32.40 36.65 35.78
1230 1276 1239
Intel Corp.
34.02 35.89 34.68

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JT TAYLOR: Capital Brief


JT TAYLOR:  Capital Brief - JT   Potomac banner 2

“There is nothing new in the world except the history you do not know.”

               -  Harry S. Truman


HILLARY’S HANDICAP: Republicans are seizing on the opportunity to thrash Hillary Clinton for recently uncovered emails from State Department aides to the Clinton Foundation, believing that they show serious signs of impropriety between the two – think conflict of interest and pay for play. The latest in a steady stream of revelations suggest that she was hiding her discussions by disposing of nearly 30,000 emails from the private server, supplying Clinton critics with easy fodder. The email saga, which has dragged on for more than a year and has recently been given new life (on the heels of a post-convention image bounce) thanks to Russian hackers, continues to erode the public’s trust in her. Donald Trump would typically stand to benefit from the backlash, but...


CODE RED: Trump’s campaign is caught in a downward spiral and that’s what’s prompted RNC Chair Reince Priebus to deliver a shot across the bow after a constant drumbeat of Republican defections and an open letter from more than 75 Republicans urging him to cut off funding to Trump. Priebus threatened to sever ties altogether, shifting focus to the Senate and House of Representative races, unless Trump turns his campaign around. A continued Trump implosion could result in the RNC channeling their resources to bring out voters who may vote for Clinton while also backing Republican incumbents – an important coalition for Marco Rubio in FL and Rob Portman in OH, among others. The Trump campaign and top party officials are expected to meet later today to hash out their differences and plot a turnaround with 87 days left in the campaign. Hmmmmm.


CLINTON DRAWS A CONTRAST: Clinton took her turn laying out her own set of plans for fixing the economy while taking Trump to task for his new tax-cut proposal, which she labels as a “friends and family discount.” Agree with her or not, her plan goes into much more detail than Trump’s, diving in deeper on topics Americans want to hear about, like an infrastructure spending plan that builds off of a long lost promise of the Obama Administration. Appealing to working class families, Clinton wants to invest $500 billion in new, high-priority public infrastructure projects to help create jobs. And, in an attempt to win over blue collar voters in the Rust Belt and ward off further Trump criticism (good luck with that), Clinton delivered a flat rejection of the TPP deal she once praised, and helped President Obama negotiate.


FRENEMIES WITH BENEFITS?: Clinton’s Republican outreach effort is picking up, but to many of her progressive friends, she may be taking it a step too far. Liberal allies of Clinton are wary of her courtship of Republicans believing that their endorsement may come with strings attached and threatens to impede their own progressive agenda. To make it work, Clinton has to walk a fine line, promising progressives that Republicans are joining because they simply can't stomach Trump, not as a quid pro quo.


MISSED OPPORTUNITY PART XIII: Remember that this was supposed to be the week dedicated to Trump’s big, long-awaited economic proposals? Yeah, neither do we. Trump spent this week inciting more controversy, bestowing President Obama with a new executive title as the “founder of ISIS” and threatening Clinton with the 2nd Amendment when he should have pushed his new plan into the media spotlight. With absentee voting beginning in some states next month, Trump has no time to change course – and no one expects him to stay on message in the meantime.


NEUSTAR NUMBER PORTABILITY CONTRACT EXTENDED BY SEVERAL MONTHS: Our Telecommunications-Media Policy Analyst Paul Glenchur shared his insight on Ericsson, the Telcordia subsidiary, inking its number portability contract; how the longer transition adds cash flow to NSR; and how the legal fight is still the main focus. You can read his piece here.


Chasing the Curve

Takeaway: Outlining a key Q3/Q4 debate with regard to an energy sector recovery.

The reflexivity of the back of a debt-funded peak capital spending boom in resource-heavy sectors looks much tamer than it did in February and March. High-yield energy OAS has been more than cut in half since February (+720 from +1600 in Feb), with the BGG high-yield energy index +42% off the 2016 lows.


Relief in spot prices and a continuing flattening in the yield curve have been large drivers, but credit has been largely immune to the most recent leg-down in crude since June 8th. High-yield energy OAS is 100bps tighter over the same period and has nearly reverted back to cumulative high yield spread levels since the dollar broke out in July of 2014:


Chasing the Curve  - Commodity Producer Interest Expense


Chasing the Curve  - High Yield OAS Indexed to 100


Below we offer a short outline of a key Q3/Q4 debate with regard to the large amount of capital getting behind a recovery in the energy sector.


Is the consensus opinion short a capacity-driven turnaround at current levels, or is there room for another leg down?

  • More than $100Bn has been raised from buy-out firms and distressed debt funds over the last 2 years  - BBG  
  • According to an E&Y survey in June, the 100 PE firms that partook in a survey had ~$1T of dry powder to sink into the oil & gas sector – 25 said they planned to get something done by year-end 2016


The space as a whole looks more levered, much shorter of the credit cycle, and longer of an industry recovery than it was 6 months ago. To hold current levels into year-end, S&P 500 energy companies may have to demand much higher multiples, looking more levered in the process without a sustained commodity price recovery.

  • Corporate leverage broadly (median debt/ EBITDA) reached record highs this week as reported by S&P:  LINK  
  • With negative operating margins for S&P 500 energy constituents, EV / Forward EBITDA multiples and Net Debt / Forward EBITDA multiples touched a cycle peak today
  • Expectations do not look completely blown out yet. Reporting season is finished for the 37 energy companies in the S&P, and earnings growth missed estimates by -9.5% vs. the S&P as a whole which has beaten estimates by 4.1% this far
  • With regard to expectations, embedded in that peak cycle forward EV / EBITDA multiple is triple digit consensus earnings expectations for Q1 and Q2 of 2017

Chasing the Curve  - S P 500 energy Operating Margin


Chasing the Curve  - S P Energy EV EBITDA Multiple


Chasing the Curve  - Net Debt to EBITDA


Chasing the Curve  - S P Rev.   Earnings omps


While cyclicals do tend to look most expensive when it’s time to look for opportunities:


1)      Expectations that recover sharply by the end of 2016 may need to be taken down first

2)      Year-end 2016 will bring another round of impairments, write-downs, and balance sheet contraction without a +10-20% rebound in prices in short order

3)      Mgmt. guidance, realized prices, and 2015 price levels for the regulatory treatment of assets signals the worst could be over with the capital flush unless the bottom falls out in crude for the duration of the year (see the charts below for a sample of XLE members)

4)      Capital in play per unit of production has shrunk which we called out in January as a #creditcycle catalyst before the first big round of asset revaluations. Given that domestic production has just started to roll, even many of the largest producers will need to fill the funding gap into 2017 (second chart below) - the need for incrementally cheaper funding or sustained lack of credit market deterioration would be necessary tailwind. 


Chasing the Curve  - Earnings Expectations


Chasing the Curve  - PP E per oz. 15 in xle


From a pure base effects GIP modeling perspective, energy and inflation comps broadly are much easier in the latter part of the year (our GIP model is currently tracking to Quad 3 and Quad 2 for Q3 and Q4 respectively). And given where forward rate hike expectations are currently, we’re wrestling internally with the next policy catalyst for the U.S. dollar that doesn’t involve some kind of “quantitative easing” in front of it.

We’re sticking to the top-down quantitative signals with regard to reflationary assets, and WTI has failed to breach its bearish TREND resistance level in recent weeks – to weigh in, we’re fine continuing to sit out a position when the market is trading at all-time highs and peak forward multiples with expectations that we continue to view as optimistic (consensus expects positive earnings growth in every sector by Q1 2017).


See the link for the most recent updated thoughts from our energy policy team with regard to renewed production freeze talks: Freeze September Sequel Will Have Similar Ending: No Agreement


Chasing the Curve  - Net PP E vs. Production YY 15 in XLE

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