The Real Employment Situation Report
This morning's release of the Employment Situation report from the Bureau of Labor Statistics was in truth bitter sweet. On the positive side there were 120,000 jobs created in the previous month and the unemployment rate fell from 9.0% to 8.6%. Furthermore, September and October jobs were also revised higher. That is the sweet part. Unfortunately, while the headlines give us the sweetness the underlying data provides the bitter.
As we discussed earlier this week with the ADP Employment report, which showed a 206,000 job increase, this is the seasonally strong time of year for employment increases due to the retail shopping season. Therefore, it is no surprise that we saw a fairly healthy jump in employment but unfortunately these jobs tend to be very temporary in nature. Secondly, 120,000 new jobs is well below the necessary job creation level to return the country to full, healthy, employment. I say "healthy employment" because technically if enough people fall off the rolls into the category of "discouraged worker", where they are no longer counted, we could have a much lower unemployment rate - it just won't be a good thing.
First, let's start by putting things into perspective. If you take a look at the actual number of those "counted" as unemployed that number has dropped from the recessionary peak. However, in reality the number of unemployed is still far in excess of levels normally associated with recessions - not recoveries.
We have pointed out in the past that while the headlines may say one thing it is important to remember that there are several "fudge" factors in the data that must be accounted for. The first is to remember that these are estimates and we will very likely see negative revisions to this year's data next year. The 2011 revisions to the 2010 data took nearly 1 million jobs out that were believed to have been created. The second is the "birth/death" adjustment. This is an adjustment to the data for the number of new businesses that are guessed to have been created or closed during the recent reporting period. In more normal times this adjustment is necessary to smooth the data. However, these are far from normal times and the adjustments to the payroll count are somewhat suspect. This is all part of the reporting and is included in all of the analysis - it is just important to remember that these numbers when initially released can ultimately be far off the mark.
However, for today's discussion, it is the third point that is more important today than ever in past history. This is the number of individuals that have "fallen off" the rolls entirely due to running out of the ability to file for unemployment claims. Those individuals not counted as part of the labor force swelled by 487,000 to a record 86.5 million. This in turn led to a drop in the labor force participation rate to 64% from last month's 64.2%. This is the lowest levels of labor force participation that we have seen since the early 1980's. This weakness is further confirmed by the duration of those out of work which climbed to a new record of 40.9 weeks.
If, and that is a big "IF", employment was truly improving we would be seeing these numbers begin to reverse course. They aren't and the reason is due to population growth.
Yes, we put 120,000 individuals last month just in time for the seasonally strong shopping period, however, the population has been growing at roughly 200,000 people a month at the same time. This is why the number of individuals of working age, 16 years and over, that are NOT in the labor force has continued to rise. The offset is that while job gains are modest, and primarily located in lower paying temporary employment for the end of year seasonality, the population continues to grow at an unfettered clip. In simple terms the economy is not creating jobs fast enough to keep up with population growth.
This is why I prefer to look at the employment to population ratio as a better means of understanding the real employment situation in the country. In order for the country to return to the long term trend of employment by 2020 we will need to be creating nearly 400,000 jobs each month. This of course is a far cry from 120,000 that we saw this month. With the employment to population ratio remaining at levels not seen since 1984 the real pressure on the economy remains focused on the consumer.
There are two very negative ramifications of this large and "available" labor pool. The first is that the longer an individual remains unemployed the degradation in job skills weighs on future employment potential and income. The second, and most importantly, is that with a high level of competition for existing jobs; wages remain under significant downward pressure.
Business owners are highly aware of the employment and business climate, and regardless of the ranting and raving about the "cash on the sidelines", businesses are not in the business of charity. Business owners are milking the current employment climate for all it is worth in order to maintain profitability. With high competition levels for existing jobs, and the impeding threat of job loss for those working, employers can work employees longer hours at less pay. This is great for profit margins and workers won't complain because there are plenty of individuals that take their job and will take it for less pay.
This impact on wages as inflationary pressures rise hits the consumer where it hurts the most. We have discussed recently the recent declines in wages and salaries and the rising costs of food and energy consuming more of the household income. This bleed on incomes has led to significant slides in the personal savings rate and the ability for the consumer to continue to spend outside of the main necessities to meet their basic standard of living. This pattern is very unsustainable long term and sharp decreases in personal savings rates have historically been precursors to the onset of recessions.
One of the key questions to be answered is whether or not the recent increases in employment potentially negate our recessionary call for 2012. While there are certainly several influences that could postpone the next recession into the end of next year such as further Quantitative Easing (QE) programs in the U.S. and/or a massive bailout program in the Eurozone, employment isn't one of them.
The table details every recession going back to 1948 as identified by the "Start Date" which is the first month of the recession as identified by the National Bureau of Economic Research. The table shows the month-over-month increases in payrolls beginning 3, 2 and 1 month before the actual first month of economic recession.
The first thing to notice is that there are only 4 months in the entire table that actually show job losses. Employers are generally very slow to hire and fire employees which is why employment is a lagging indicator. However, if we look at the net change of employment over a 3 month period what we notice is that job gains were actually quite strong just prior to the onset of an economic recession.
The chart of the 3 month net change in jobs shows this a little more clearly. As you can see the 3 month net change in jobs tends to peak just prior to the onset of a recession. What is important to note here is that the 3 month net change in jobs has already peaked at normal historical levels and has begun to trend lower.
This may go a long way to explain the recent declines in the employment sub-indexes in several of the manufacturing releases. With the end of the holiday shopping season fast approaching it is likely that we will see renewed weakness in the employment reports in the coming months ahead.
While today's data was certainly better than a "sharp stick in the eye" the reality is that the economy is currently struggling along at a very anemic pace. Without employment growing fast enough to offset labor pool overhang we are unlikely to reduce the real unemployment problem that persist in the U.S. This bodes poorly for the consumer, the economy and ultimately the markets as this weakness leaves all three very susceptible to unexpected system shocks. While we certainly hope for the best - "hope" is not an investment strategy that we can use.