Improvement In Employment - At Least For Now
The employment picture has begun to show signs of tentative improvement - that is the good news. However, there are a couple of questions that we need to ask before jumping on the "hope express" of sustainable economic recovery. The first is whether the current improvement is sustainable. The second is whether employment is really improving or more of a statistical mirage?
First let's start with unemployment claims which came in at a better than expected 372,000 claims in the last week. Of course, as always, the previous week was revised up to 387,000 and likely this weeks drop will be revised up above 380,000 in the next week. However, even with that being the case, the number of claims has been steadily declining since the peak at the end of the last recession. Furthermore, this does help to confirm the "buy signal" that is currently occurring with markets, which will discuss in this weekends newsletter, but as you can see the S&P 500 (inverse scale) has had a historically close relationship with the ebb and flow of jobless claims.
Of course, I can't ignore the +325,000 employment increase reported by ADP this morning which had everyone shaking their heads a bit as the number came in 8-standard deviations above expectations. There are a couple of issues with the ADP report that always need to be remembered. The first is that in order to counted as employed a person only had to work ONE hour during the given period. This is hardly a reason to call someone employed.
The second is that ADP has only about a 50-50 correlation to the BLS employment report which is due out tomorrow. (We are expecting to see about a 160k increase in that report) Furthermore, the ADP report is badly skewed in the November-December periods due to the seasonal hiring of temporary workers as witnessed by the +273,000 service jobs. It was only December 2010 when we saw ADP report a +246,000 increase in jobs but the BLS only saw a rise of 174,000. Finally, the most recent report looks to be quite an anomaly as it was an absolute record. At the peak of the last cycle the ADP report never got above 275,000. The increase in employment also confirms our belief of margin compression and productivity weakness which lead to a decline in corporate profitability in the coming year.
The reality is that at this point the employment picture, like the stock market, are both beginning to reach maturity levels. The stock market has cycled through its normal recovery phase post-recession as corporate profitability surges from very depressed levels. Now that cycle is beginning to mature as corporate profits have begun to reach the peak of this current cycle. Likewise, as shown by the JOLT survey, the current employment cycle has had a very minor recovery and hires relative to job openings is beginning to approach its maturity trough.
During the last post-recession decline in 4-month average of Hires minus Job Openings decreased from roughly 1700 to a low of 635. During that decline; employment increased from just below 130 Million to a peak of 138 Million just before the onset of the financial crisis. Now, almost 3 years after the post-recession lows, employment has risen only modestly from 129 Million to 131.7 Million currently. During that small increase in employment the 4-month average of Hires minus Job Openings has declined 810 from its peak of over 1400.
To put this into further perspective there are two other measures that provide more depth to the real lack of hiring and employment in the U.S. The first is the percentage of people that are NOT in the labor force at all. Currently there are over 86.5 Million individuals that are not counted as part fo the labor force. A big part of the recent decrease in the unemployment rate was not due to a massive surge in employment but rather due to a large group of individuals that are "giving up looking for work".
Furthermore, recent increases in employment have also been primarily focused, as witnessed by the ADP report today, in lower paying service jobs. This is why we have seen incomes decline of the past two quarters along with personal savings rates. The evidence of this is reflected in the number of people that are working "part time for economic reasons". Those economic reasons are simple to understand - they have to eat, pay rent and put gas in their car.
With this in mind we can now answer our original two questions. Is the current level of employment increases sustainable? Not likely. With the consumer driving down their savings rates, working off of declining incomes and faced with uncertainty it is unlikely that there will be a large resurgence of consumer spending to drive end demand. Furthermore, it is very likely that the increases that we have seen in recent economic reports are the result of the restart from the near "economic freeze" due to the combination of the Japan earthquake, Eurozone and Debt Ceiling crisis' this past summer. That "pent up demand" has likely run its course and while Q4 may look good there is likely going to be weakness in the first half of 2012.
The second question of whether employment is really improving or more of a "statistical mirage" is really answered by the labor force participation rate. There has been discernible increase in the number of individuals participating in the labor force. With the employment to population ratios at levels not seen since the early 80's we are witnessing employment that is only managing to maintain the status quo of a shrinking labor force. The reality is that if those individuals that were once part of the labor force re-entered it the unemployment rate would not be 8.5% but closer to 12.5%.
Are there jobs being created? Yes, and that is good news. However, the reality is that we have a very long way to go before we start to see a healthy economy that not only creates jobs but also causes higher wages due to a shrinking available labor pool. When we see that occurring - then we will have something to talk about.