The "Real" Employment Report - March 2012
Unexpected. What a great word. It is used by the media for every occassion. Friday's release of the March employment report "unexpectedly" came in much weaker than the average economists' estimates. We have been discussing for several months that the effect of the warmest winter in 65 years had been skewing the data due to the impact of the seasonal adjustments. It was interesting to watch the economists on CNBC scramble to come up with an explanation for the miss. After months of proclaiming that the previous numbers we had seen were surely a sign of economic recovery - today, they went straight to the previously much dismissed weather skew. In this month's update of the "real" employment situation report we will examine not only what is going on behind the headlines but also what the coming months will look like as the seasonal adjustments and the weather once again become aligned.
There were some positive highlights in the report such as the number of people employed full-time rose while the number of part-time workers declined. Wages ticked up modestly as the work week remained stagnant. While still at very high levels; the average duration of unemployment has moderated somewhat. Of course, after 3 years and trillions of dollars of liquidity injections by the government, one would expect to see some improvement. If we put things into some perspective we find that if we look at the actual number of those "counted" as employed we have seen employment increase from the recessionary trough. Unfortunately, employment is still far below the long term historical trend. Currently, the deviation from the long term trend (first chart above) is still mired near the widest deviation on record. That spread is going to require a much greater, and very consistent, rate of growth in employment over the next decade to close that gap.
As we begin to look at the numbers it becomes a bit of a task to strip out the "real" from the statistically massaged data. As we have discussed in the past the unseasonably warm winter has skewed the data in recent months higher. January, February and March all have very large seasonal adjustments. For March, the historical average seasonal adjustment is about 820,000 jobs, therefore, the 120,000 job gain in March was 14.6% of the seasonal adjustment for March. The real problem coming ahead is that the data skew will begin to dissipate as the seasonal adjustments are minor in April. In May and June the adjustments begin subtracting jobs from the survey by 670k and 1.035 million jobs respectively. This is why we will likely see job creation cut in half in the coming months ahead. These "seasonal adjustments" to the data also feed into the fact that while the employment numbers have been improving - the labor force participation rate and duration of unemployment remain at very economically negative levels.
How can this be if the unemployment rate is falling?
To answer that question we only need to look at the number of individuals that have "fallen off" the rolls entirely due to long term unemployment. Those individuals not counted as part of the labor force swelled by 330,000 to a record 87.9 million in March. How big of a number is that? According to the latest numbers available there are 242,604,000 Americans over the age of 16 (working age) which means that 36.2% of the population is no longer part of the work force and are "no longer counted". The decline in the labor force participation rate, the lowest level since the early 1980's, is the primary reason for the drop in the unemployment rate. The important difference is that in the 80’s the participation rate was rising – not falling.
IF, and that is a big "IF", employment was truly improving we would be seeing all of these numbers begin to reverse course. They aren't. The reason is due to population growth. During the last month it is estimated that the number of individuals of working age, 16 years and over, rose by 169,000 but you only "created" 120,000 leaving a 49,000 job deficit carried into next month. The offset is that while job gains are modest, and primarily located in lower paying temporary, service and leisure employment, 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 more than 250,000 jobs each month and every month consistently. This, of course, is a far cry from 120,000 that we saw this month or the fact that in the last 6 1/4 years that number has only been surpassed 5 times. 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 - in other words they become "unemployable." 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. Regardless of the ranting and raving about the "cash on the sidelines" by the media, businesses have a "profit motive". Business owners are fighting rising input costs that cannot necessarily be passed onto the consumer. 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 feeds directly into the maintainability of profit margins at a time when consumer demand is down.
This impact on wages, as other inflationary pressures rise, hits the consumer where it hurts the most. We have discussed the recent declines in wages and salaries combined with the rising costs of food and energy are consuming more of the household income. This bleed on incomes has led to significant slides in the personal savings rate. Without access to mortgage equity withdrawals, and consumer credit strained, the ability for the consumer to continue to spend outside of the main necessities to meet their basic standard of living is difficult. This pattern is 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 are sustainable. We have been fairly vocal that 2012 could potentially see the start of the next recession. However, does the recent uptick in employment dissuade us about our call? Not really. 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, an employee 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.
With the seasonal adjustments and weather related patterns now beginning to realign themselves it is very 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 persists 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.