Employment - The Macro Trends
The May jobs report came in better than expected at 175,000 jobs with the labor force ticking up slightly from the lowest levels since 1979. With the markets deeply oversold on a daily basis the report provide the catalyst necessary for traders to return to the stock market. However, what we need to know from an economic perspective, as well as a long term investment view, is what does 175,000 jobs actually mean? Putting economic data into context gives us a much better picture of where the overall economic trends are and what we should be expecting in the months and quarters ahead.
Population Growth Still Outpacing Employment
As we discussed yesterday in "4 Tools Of Corporate Profitability" the issue of increases in population relate directly to employment growth. As I stated:
"...despite increases in employment in recent months it has been a function of population growth rather than a improved outlooks by businesses. The issue of population growth is ignored by most analysts and economists when discussing employment. However, when businesses are geared for a certain level of demand, increases in population will incrementally increase demand requiring fractional increases in business productivity and output. However, in order to keep costs minimized businesses have resorted to temporary hires rather than full-time employment which incurs additional costs of benefits and health care. The expectation is that temporary workers will eventually become full-time employees, however, with the impending effects of higher health care costs due to the Affordable Care Act - temporary hires may be the new normal. The chart below shows full-time employment relative to the population."
There is little debate that the current labor market is very tight. We know this by looking at the median duration of unemployment, which remains extremely elevated from a historical perspective and the labor force participation rate remains near its lowest levels since 1979.
Within this context we can surmise that businesses are maintaining minimum staffing levels to meet current demand. As stated above increases in population create additional demand which is met with incremental hiring. Unfortunately, many of those jobs are in the low wage paying service based categories which keeps wages and income growth suppressed.
The Real State Of Employment
In order to put perspective on the current employment situation we need to step back and take a look at the long term view of employment in the U.S. The chart below shows the growth in the number of employed persons since 1948 along with a growth trend line.
While growth in the labor force ebbed and flowed over time remained contained within a 5% band above and below the long term trend line. That is until 2008 when the deviation from the previous 60 year trend plunged to over 11%. As of May 2013, despite claims of economic and employment recovery, the deviation of employed persons from the long term growth trend is a negative 11.5%. This is only 0.2% above the historic low of 11.7%.
If we dig a little deeper into the data from 2009 to present we can see the real disparity in hiring trends. The chart below shows the change in full-time versus part-time employment.
While there is no argument that full-time employment has most definitely improved since 2011 it has been part-timers finding a bulk of the jobs. Since 2009 part-time employment is up 1.3 million while full-time is only up 418,000. This goes a long way to explain the surge in food stamp participation rates.
Economic Reports Don't Support Further Gains
One important point to remember is that corporate hiring decisions are grossly affected by the overall strength or weakness of the economy. In the recent post "Economic & Employment Composites Indicate Further Weakness" I specifically addressed the employment issue stating:
"If you strip the employment components out of the EOCI index and weight them into their own composite index we find that the hiring intentions of employers is clearly weakening. The chart below shows the Employment Index smoothed with a 4-month average and compared to the annual rate of change in Total Non-Farm Employees."
"As with the EOCI index above - employment activity clearly peaked in early 2012 and has begun to wane. The recent uptick in the employment index, remember this is a 4-month moving average, is due to the effects from the uptick in economic activity from "Hurricane Sandy." This index will turn down in the next couple of months as the recently monthly data points have declined.
What is clear from the two composite indexes is that the broad economy, and by extension underlying employment, has clearly peaked and has began to weaken. This is well within the context of historical trends and time frames. While the mainstream analysts and economists continue to have optimistic views for a resurgence in economic activity by years end the current data trends, both globally and domestically, suggest otherwise."
Part-Time For Economic Reasons
This problem with part-time employment is that it does not increase economic prosperity. Part-time employment, as discussed in the "Labor Hoarding Effect," has been an aggressively used tool by corporations to suppress wage growth, reduce overhead costs and increase profitability. The problem is that with the Affordable Care Act gearing up to start in 2014 even more businesses will resort to part-time employment to reduce the increased health care tax burden. I stated that:
"The issue of 'labor hoarding' is an important phenomenon that is likely obscuring the real weakness in the underlying economy. Without an increase in the demand part of the equation businesses are likely to continue resorting to further productivity increases to stretch the current labor force farther to protect profitability. However, as we may currently be witnessing, businesses may be reaching the limits of what they can do to continue increasing profits at the bottom line while revenue declines at the top. The implications for the financial markets going forward are clearly negative."
There has been little improvement in the number of people working part-time for economic reasons. However, as I stated, such weak employment leads to dependence of government subsidies which explains the rise in disability claims and food stamp participation as individuals seek to make ends meet.
The problem is that suppressed wage growth leads to weaker consumer demand which keeps businesses on the defensive to protect profitability. This can be seen by the commercial lending versus job trends chart below.
Depsite historically low borrowing rates for businesses the demand for loans appears to have peaked for the current economic cycle. In turn if businesses are cutting back on borrowing for capital investments the need to hire additional employees will likewise be scaled back.
"Muddle Through" Employment
One thing is for certain -- the job market is very tight as layoffs and discharges have reached the lowest levels since the turn of the century. While this is leading to lower initial jobless claims it is not translating into higher levels of full-time employment relative to the population. This is shown in the chart below.
The "good news" is that for those that are currently employed - job safety is high. Businesses are indeed hiring; but prefer to hire from the "currently employed" labor pool rather than the unemployed masses. Furthermore, the weak state of employment is likely to keep the Fed engaged in its current liquidity programs for longer than previously expected. With the debt ceiling debate just around the corner and weak economic reports it is simply too soon to start taking away the "punch bowl."
It is not surprising that with an economy that is mired at a near 2% economic growth rate that employment is "muddling" right along with it. While the economy is indeed creating jobs, as I previously stated, it is a function of population growth rather than a sign that the economy is on the road to recovery.
What is clear is that current detachment between the financial markets and the real economy continues.