Employment - The Good, Bad & Ugly
"Got Jobs?"....apparently the U.S. doesn't. The most watched, anticipated, debated and manipulated of all reports, the Employment Report, is out this morning showing that only 80,000 jobs were created in the last month. This report, affectionately known as the U-3 report by those on the inside, only reports those that are currently unemployed and receiving benefits. It excludes those that are working part-time for economic reasons and, most importantly, those that have run out of benefits entirely and have fallen into that dark abyss know as "having given up looking for work". In other words, the U-3 employment report tells us very little about the true state of employment in the U.S. when nearly 1 in 4 individuals are unemployed, underemployed or out of the work force entirely.
However, behind the headlines, there were some positive, as well as negative, components that actually do tell us something about the state of employment in the economy. On the plus side the median duration of unemployment actually declined from 40.5 weeks to 39.4 weeks. This was a surprising drop as the rate had been steadily climbing since the last dip in July, 2010. Of course, the real question is what type of jobs are being created. Unfortunately, many people are taking temporary and part-time jobs to make ends meet as we move into the end of year hiring for the holiday shopping season. In 2012 we will get a clearer picture of any longer term improvement in hiring.
The labor force participation rate remained unchanged last month's reading of 64.2 but is slightly higher than its recent low of 63.9 in July. The labor force participation rate is a very choppy number from month to month so we will need to see several months of improvement, as with the duration of unemployment, to determine if the participation rate is actually picking up not.
More good news came from the Employment trends. The trend of employment has turned positive over recent months and as employment has increased 1.2 million jobs on a year over year basis. The only issue with this is just a reminder that we are still working on filling a very large hole from the massive job losses during the recession plus the number of new entrants each month to the job market itself. On average the population increases by about 200-250,000 persons a month. Of those about 150,000 a month are entering into the workforce either from leaving school (graduating or dropping out), immigration or returning to the workforce (such as a parent that had stayed home to raise a child).
However, pay close attention to the chart. The uptick in the employment trend DOES NOT rule out the possibility of a recession. In every case employment trends ticked up just prior to the onset of a recession and in some cases sharply so. In 1948 jobs ticked up 323,000 just before losing over 1 million jobs in the next year. In June of 1953 there was a jump of 437,000 jobs just as the economy rolled into recession. The same occurred in 1957 with an uptick of 344,000, April of 1960 with a hiring spree of 1.2 million, 1969 with 199,000, 499,000 in October of 1973, 359,000 in December of 1979, 395,000 in July of 1981, May of 1990 saw 299,000, December of 2000 picked up 292,000 and a whopping 647,000 in November of 2007 and in each case a recession ensued within a 2 month period following. Caution is advised to anyone who reads too much into employment as an indicator of economic improvement.
The bad news comes to the average hard working American. On a year over year basis average hourly earnings have been in a steady decline since 2007. This is not surprising given the large labor pool which increases job competition. However, at the same time, the average weekly hours worked has been rising until just recently. This falloff in weekly hours worked is potentially due to the drop off in demand that we have seen in the manufacturing reports from drops and in new orders to backlog reductions.
This also doesn't bode well for consumption going forward with incomes declining and overall inflationary pressures rising. This is particularly the case with food and energy, which is consuming more than 22% of wages and salaries, which are inescapable for the average American and reduces their ability to consume in other areas. This is a "stagflationary" environment at its worst when combined with the inability to obtain credit and a delveraging process in the works.
The ugly part of the report is the reality that employment in the U.S. is woefully short of where it needs to be and has a tremendously long way to go to return to levels that are associated with full employment.
In what I call the "real situation" report I have displayed the number of employed persons in the U.S. with a linear trend line. Previous to this period of stagnation employment has stayed contained primarily within a +/- 5% deviation of the long term trend. With employment currently approach a -20% deviation from the trend you can see how far "off track" we have gotten.
As my friend Doug Short showed today in his posting on employment we have had the least amount of job recovery of ANY post World War II recession. This is why I prefer to look at the Employment to Total Population ratio which shows you the real degradation in employment. Currently, we are at levels of employment relative to the population that have not been witnessed since 1983.
The decline of employment relative to the population also has some other potential deleterious effects which I have extrapolated in the chart. Assuming a continued rise in population due to immigration and births of about 200,000 people a month, the current rate, and a slow growth economy going forward due to the delveraging process, we could see a deterioration in the employment levels relative to the total population. This has an impact on the amount of dollars being invested in the financial markets. As you can see there is a correlated trend between the S&P 500 and the employment to population ratio.
There is also the issue of the 78 million baby boomers now moving rapidly towards retirement which only further exacerbate the number of people pulling on the system versus those that are putting into it. In the late 70's there was roughly 10 workers paying into the system for every 1 retired person. Today it is 1 for 10. The unsustainability of that equation is going to negatively impact markets in the future by slowing the overall rate of growth in the markets and is something that must be factored into portfolio management strategies and retirement planning. This is exactly the problem, and the same result, as Japan has experienced over the last decade. Will things get better. Absolutley. It is just a question of time and survivability.