There has been lots of chatter recently about the strength of the U.S. employment picture. The early March knockout employment report, at +295K net new jobs, seems to have increased the discussion about whether the employment picture is peaking.

Is it? How much longer can the labor market keep accelerating?

(As a note, acceleration means that the rate of the year-over-year growth rate continues to increase.)

The Month-over-Month Employment Picture

As background, here’s a look at the month-over-month employment picture. Since bottoming in the fourth quarter of 2013, the U.S. labor market has been on a tear, gaining more than 200K jobs since February 2014.

The strongest month over the period occurred in November 2014 at an amazing 423K. The weakest month was in August 2014 at +213K.

What’s clear when looking at the month-over-month figures is that U.S. job market growth has experienced a marked improvement from the lackluster growth years of 2012 and 2013.

mm jobsThe Year-over-Year Look

Although Wall Street analysts tend to prefer the month-over-month growth figure as their measure of strength in the U.S. jobs market, many economists opt for a somewhat less tangible figure, year-over-year growth.

Here’s a look at the year-over-year growth in U.S. jobs since 1971. Notice any behavior that is close to today’s labor market picture?

Two prior experiences stand out when comparing with what the U.S. labor market has done since February 2014. The experiences are 1986 to 1988 and 1996 to 1998.

The Acceleration Period

First some explanation.

The gray area in each chart is the mid-cycle acceleration period.  It is the time frame in which the year-over-year growth in employment accelerated consistently.

The yellow box represents the period after which the acceleration ended, which here is called the “cruising speed” period.

As shown, the economy experienced a mid-cycle uptick from June 1986 to March 1988, a total of 21 months. A similar mid-cycle uptick occurred from January 1996 to January 1998, a total of 24 months. The current mid-cycle uptick has lasted 12 months.

So, if the past two experiences are any indication, the current mid-cycle strength has another 9 to 12 months of acceleration left.

Cruising Speed

Following the acceleration period is cruising speed. As shown in yellow, the time spent in cruising speed can be somewhat short to relatively long.

After reaching cruising speed in 1988, the economy stayed there for about 11 months. The experience after peaking in 1998 lasted 28 months.

yy empConclusion

Overall, although there’s lots of chatter about a potentially peaking U.S. employment picture. If one looks at the past two similar experiences in the U.S. labor market, the chatter appears to be premature. There’s lots of time for the labor market to continue to impress.

The strength or boom period has another 9 to 12 months to go, while the cruising speed has another 11 to 28 months to go.

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After the dot-com bubble burst in 2000, all markets collapsed. However, amidst the rubble, private equity found a bid.

In September 2003, the Carlyle Group and Welsh, Carson, Anderson & Stowe closed the second and final part (Dex West) of their purchase of Qwest Communications’ yellow page directories business. The second part of the transaction was valued at $4.3 billion. The close of Dex West marked the completion of the $7 billion transaction, which was the largest U.S. buyout since 1989 and the third largest in American history. This was the beginning of a private equity boom that grew larger all the way up to just before the crash.

Kohlberg Kravis Roberts and Texas Pacific Group bought TXU Corporation, the largest power producer in Texas, for $45 billion in February 2007. It was the largest leveraged buyout ever. Seven years later, they filed for bankruptcy.

2008 changed the entire financial world, including private equity. The crash punished bad decision making and forced even the best managers into tough spots. As the recovery slowly meanders forward, the dramatic industry shifts and difficult lessons of 2008 become clearer than ever before.

The leaders of Bain’s private equity group wrote an important article called “The New Rules of Private Equity Success.” When Bain speaks, you should listen closely. The authors describe the “new normal” in the marketplace, a state of ultra-competitive business in which only the very best survive. The market is saturated with “premium-priced assets,” which doesn’t make buying low and selling high the easiest job. While it may be tempting to buy high and sell higher, that kind of mindset is what caused the crash in the first place. Getting involved in record-breaking deals might earn you a place in the hall of shame rather than a spot on the Wall Street A-Team.

In an expensive market, what can the private equity manager do?

According to the private equity leaders at Bain, private equity professionals have to dig deeper than ever before by networking extensively with their industry contacts. The due diligence process must become even more rigorous. One has to be on the lookout for “hidden traps” – details that can sabotage entire deals. Likewise, the manager must have a keen eye for “buried treasure” – details that can turn a mediocre deal into the capstone of the firm.

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Recently, chatter has focused on whether the technology industry is in a bubble.  Is it?

Individuals following say, home prices in San Francisco, one might get the impression that it is.  Since bottoming in January 2012 at about $621K, the median home price in the Bay Area is now approaching $1.1 million, a growth of about 75% in just 3 years.

Median Home Price in San FranciscoValuations

Others point to the enormous valuations some of the “rockstars” of the tech industry are getting for their companies as a signal that things are getting a little frothy.

As examples of frothiness, just look at what the valuations of some tech industry companies are getting.  Uber, the ride sharing service, recently raised $1 billion on an enormous $40 billion valuation.  Snapchat, the more private way to share pictures and texts, is purportedly raising money on a $19 billion valuation.  And Pintrest, the site where mostly women comment and post about the niceties in their lives, is raising funds at an incredible $11 billion valuation.

How could there not be a bubble with such unproven valuations?

The One Chart That Answers the Question

But, are these indicators really reliable signals that the technology industry is in another bubble phase – 15 years after the internet stock bubble exploded in 20o1? Here’s the one chart that should answer this question.

On the left axis and in blue is the amount invested in IT industry startups, as measured by Price Waterhouse Coopers’ MoneyTree survey. On the right axis and in orange is the number of deals in IT industry startups, again, as measured by Price Waterhouse Coopers’ MoneyTree survey. It’s impossible to miss the “bubble” that occurred in 1999 and 2000.

The dollar volume of deals exploded from $9 billion in the first quarter of 1999 to a peak of $41 billion in the second quarter of 2000. Simultaneously, the number of deals expanded from 1,306 in the first quarter of 1999 to 3,087 at the peak in the second quarter of 2000.

How does this “bubble” experience compare to today? Simply put, today’s strong technology industry startup scene is simply experiencing a “boom.”

It’s easy to see the booms and busts since 1995, but one thing is fairly clear – bubbles are much less common and current conditions in the IT industry startup world are, right now, nowhere near bubbly territory.

IT Industry.fwConclusion

Overall, the chatter that the startup scene in the IT industry is probably overblown. When looking at the history of the number of deals and the amount invested, there’s a clear distinction between “bubble” territory and simply strong growth that’s likely to experience some bust in the next year or so.

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2015 Chicago Booth Private Equity Conference

February 18, 2015

This Friday is the 14th annual Beecken Petty O’Keefe & Company Private Equity Conference. Each year, the private equity conference focuses on a unique theme through a series of fireside chat and panel sessions with various industry experts. This year, the conference’s theme is “Return Realization: Positioning and Timing the Ideal Exit.” The conference will […]

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Pay and Performance in 2014

February 9, 2015

In the financial sector, pay is, unsurprisingly, a big factor in employees’ satisfaction. What does Job Search Digest’s recent compensation report indicate happened with pay changes in the past year? Here’s a look. Change in Pay from 2013 to 2014 The first measure compares the growth in pay from 2013 to 2014 among firms operating in the […]

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A Record Year for Private Equity Buyouts

January 26, 2015

Pitchbook is out with initial estimates on the number of venture capital exits via private equity buyouts in 2014. Perhaps surprisingly, the figures show some incredible strength. Initial estimates put the number of private equity buyouts via venture capital exits at 138, an increase of about 25 percent from 2013. Private equity purchases via venture capital exits […]

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When Will the Oil Price Drop Show Up in the Labor Market?

January 12, 2015

The private equity industry is, surprisingly, closely connected with movements in the oil market. Part of this certainly stems from macroeconomic forces and their effect of the private equity business as a whole. Another part stems from the massive involvement the private equity industry has in putting together deals for the oil and natural gas industry. Given […]

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Some Highlights on Job Search Digest’s Private Equity and Venture Capital 2015 Compensation Report

December 29, 2014

Job Search Digest recently released their 2015 Private Equity and Venture Capital Compensation Report.  In it is a great deal of detail about how firms reacted to the changing market conditions in 2013 and 2014.  Among the various interesting findings, here are three. Job category with Highest Bonus as a Percentage of Total Compensation Of […]

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A 2015 Outlook for Private Equity Jobs

December 15, 2014

2014 is coming to an end.  With the year almost over, it seems fitting to review h ow private equity employment did through the year and what we can expect for the year ahead. A Look Back at 2014 – Actual Employment The following is a look at total private equity employment since 1990.  Overall, […]

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Recent Survey Results on Environmental and Social Governance of PE Firms

December 1, 2014

Pitchbook recently released some interesting results of its environmental and social governance survey of PE firm policies.  The following is a review of some of the more salient points. Existance of an Environmental and Social Governance (ESG) Policy First, Pitchbook asked the 104 general and limited partners whether their firm had an ESG policy. Unsurprisingly, from […]

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