Employment Report Less Than Meets The Eye
The headline unemployment numbers came in better than "expected" this morning and the markets got a bit of a boost early due to the upside surprise. However, let's remember that the trend in employment is clearly negative and much of the employment number is due to seasonal adjustments as the household survey saw a contraction in employment as expected. Here is the run down of the numbers:
- Change in Non-Farm Payrolls M/M 117K vs. Exp. 85K (Prev. 18K)
- Change in Private Payrolls (Jul) M/M 154K vs. Exp. 113K (Prev. 57K)
- Change in Manufacturing Payrolls (Jul) M/M 24K vs. Exp. 10K (Prev. 6K)
- US Average Hourly Earnings (Jul) M/M 0.4% vs. Exp. 0.2% (Prev. 0.0%)
- US Unemployment Rate (Jul) M/M 9.1% vs. Exp. 9.2% (Prev. 9.2%)
- Private payrolls rose 154k vs est. 113k (range 70k-150k);prior revised to 80k from 57k
- Unemployment fell to 9.1% vs est. holding at 9.2% (range 9.1%-9.4%)
- Unemployment decline due to labor force participation rate decline to 63.9%, a cyclical low, says Bloomberg economist Joseph Brusuelas
- Avg. hourly earnings 0.4% increase a function of minimum wage gains; govt. continues to furlough workers, says Bloomberg economist Rich Yamarone
- Underemployment rate 16.1% vs prior 16.2%
- Monthly growth below 150k not consistent with supporting sustained unemployment declines, notes Brusuelas
- TJ Marta writes that the report is not all bright: unemployment rate fell because labor participation fell to 63.9% from 64.1%
- Payrolls “beat” was within +/- 50k statistical “white noise” for non-farms econometric models
- Longer term, report doesn’t change downward trajectory of economy, which needs 150k+ just to keep pace with new entrants to labor force
- Household survey showed 38k decline in employment
However, while I missed my number this morning (my estimate was for a near zero print in job growth and the unemployment rate moving to 9.3%), the reality of the situation is that is most of the numbers were seasonal adjustments then we will most likely see deteriorating job growth in the coming months. This outlook also jives with the recent doubling in the number of anticipated job layoffs as reported last week in the Challenger Job Layoff Report and the recent announcement by Cisco Systems, Merck and others of layoffs in the coming months.
The unemployment rate did decline but the number of people not working rose. “Discouraged workers,” or those who were unemployed but not out looking for work during the reporting period, is where there was a very large spike - up from 982,000 to 1.119 million, a difference of 137,000 or a 14 percent increase. These are the folks that have run out of their 99 weeks of unemployment benefits and are now just unemployed and broke. So, generally, they are not included in the government’s various job measures because we don't want the numbers to appear materially worse than they are now, would we?
Jeff Cox wrote today: "Therefore, the drop in the unemployment rate is fairly illusory—stick all those people back in the workforce and you wipe out the job creation and the drop in unemployment.The average duration of unemployment rose for the third straight month and is now at a record 40.4 weeks—about 10 months and now double where it was when President Obama took office in January 2009. The total number unemployed for more than half a year now stands at 6.18 million, 130 percent higher than when the president’s term began."
The decline in the participate rate is also a real concern as well as the household survey which both continue to point to weaker job growth in the future. The number today, again is a one month number, and does not put us into the position to be wanting to be significantly invested in "risk" related assets [read: equities] at the current time.
As shown in the chart the number of people actually employed relative to the work force is at levels first seen in 1953. That's not a typo...1953. Each month new entrants enter the workforce that need to be absorbed and the problem that we have today is that in order to return to the "full employment" levels of the past two Administrations we will need to create over 400,000 jobs a month, or a total of 43 Million jobs by 2020. That hardly seems likely given the current "balance sheet recession" that we are working through which is crimping the growth of the economy. Each month as this chart is updated we will begin to see the deviation between what is needed and reality.
David Rosenberg pointed out a very interesting tidbit this morning as well: "The three month average in private payrolls has softened from 240,000 in April to 186,000 in May to 140,000 in June to 111,000 as of July. Just prior to the last four recessions, this was the pattern: 207,000 to 166,000 to 145,000 to 101,000. To reiterate, recessions began, quite unexpectedly to most, three months later on two occasions and by eight months twice.
In other words, it is not the July stand-alone number that should be concerning the bulls, it is the pattern. Since equity valuation is a discounting mechanism that usually peaks three to six months before the downturn actually starts, perhaps we are seeing a consistent price signal of late as it pertains to what Mr. Market is telling you about the economic outlook. The only real question for investors is whether enough recessions risk has been priced in."
With this we obviously concur since our mantra for the past four months has been to raise cash and fixed income as the economy was showing signs of serious weakness.
There were also other very disturbing issues underlying the employment report as well this morning.
- Aggregate hours worked inched up by only 0.1% in the last month and has shown no growth at all since April. As we have discussed before the average worker is working longer hours but unfortunately real wages are failing to keep up.
- As we stated above - one of the more disturbing aspects of the report is the actual decline in the Household survey which has now shown contraction over three of the last four months. Full time jobs are declining as corporations pare back on wages and salaries as much as possible to offset the year over year declines in profit margins.
- The jobless rate declined to 9.1% not because of people getting jobs but because of the mass number of individuals that are falling off of the unemployment claims rolls as they run out of the ability to collect benefits. They now fall into the uncounted realm of those who are considered to have "given up looking for work." This is also reflected in the labor force participation rate (as shown in the first chart) to 63.9% which is the lowest level we have seen since 1983.
Our recommendation in yesterday's blog "Market Trashed-Again" was to NOT panic sell in portfolios but to move to our allocation model in the weekly newsletter, which is overweight cash and fixed income versus equity related [risk] assets, on any rally in the markets as the economy is showing real signs of economic weakness.
Furthermore, the risk related to being heavily is further increased by the rising pressures in the Eurozone. Italy is on the verge of following Greece down the road of default which will have a real impact on the global financial markets. The probablity of missing any substantial rally is far outweighed currently to the overall risk of decline.