Friday, February 07, 2014 - Jobs Report Friday

Jobs Report Friday

By Sinclair Noe

DOW + 165 = 15,794
SPX + 23 = 1797
NAS + 68 = 4125
10 YR YLD - .03 = 2.67%
OIL + 2.21 = 100.05
GOLD + 9.30 = 1268.10
SILV + .07 = 20.12

The best 2 days in a row for stocks in almost 4 months. For the week the Dow was up 97 points, and the S&P 500 was up 15 points on the week. The VIX, the volatility index slipped back down to 15, indicating a general happy go lucky outlook for stocks, with just the slightest hint that the past couple of days were part of a short squeeze; especially considering the lousy nature of the unemployment report.

This is Jobs Report Friday and I tend to get a bit wonkish with the numbers but I think it is important economic data, so here goes.

The Labor Department reported the economy added 113,000 jobs in January while the unemployment rate dropped slightly to 6.6%. The number of jobs added fell short of expectations; analysts had projected job growth of around 185,000.

While weather was believed to have weighed on hiring in December, it did not appear to be a major factor last month. There were strong gains in the weather-sensitive construction sector, and while a survey of households found 262,000 Americans were unable to work due to the weather, the department said that was in line with historical trends.

This comes on the heels of an even weaker December jobs report. Today’s report included revisions to November and December numbers. November was revised from 241,000 jobs up to 274,000, and December was revised from 74,000 to 75,000.  The past two months of job growth have been the weakest performance in 3 years, even with revisions; and well below the average monthly gain of 178,000 positions over the last six months.

The Labor Force Participation Rate increased in January to 63.0% from 62.8% in December. This is the percentage of the working age population in the labor force.  In the past we’ve seen the unemployment rate dropping as the participation rate drops. It’s a pretty simple idea really; as the pool of working age people gets smaller, it would require fewer new jobs to see the unemployment rate drop. In January, however, the pool got bigger and the unemployment rate still dropped. There are many reasons why the labor pool gets bigger or smaller. The pool of labor gets bigger as the population expands and as discouraged workers look for jobs again. It gets smaller because people give up looking for work or slip into the underground economy or retire; a lot of Baby Boomers are retiring and that has some impact on the labor pool.

Since the participation rate declined due to cyclical and demographic reasons, in other words, the bad economy and an aging population, we can look to the key working age group of 25 to 54 year old workers. The 25 to 54 participation rate increased in January to 81.1% from 80.7%, and the 25 to 54 employment population ratio increased to 76.5% from 76.1%. 

The best explanation I’ve seen for this discrepancy is that there was a benchmark revision going back to March 2013 to include certain service sector jobs, specifically for services for the elderly and people with disabilities, and these jobs had previously been uncounted or undercounted. Or maybe the discrepancy is just that the unemployment rate is based on a separate survey of households, and this whole process is slightly imprecise.

This month there was a huge discrepancy between the two surveys. The less-reliable and much more volatile household survey shows employment shooting up by 616,000 positions, and the employment-population ratio increasing by two-tenths of a percentage point. That’s very good news: It shows a stronger economy leading workers back into the labor force.

The more-reliable establishment survey shows employment growing by just 113,000 jobs. So, in many respects, this report raises more questions than it provides answers. However, one thing is becoming increasingly obvious; the unemployment rate (now at 6.6%) is becoming less and less reliable; and less and less representative of the strength or weakness of the economy. The unemployment rate went down last month but this was a bad jobs report. Unless you look at the household survey, which was very good.

Over time, the two surveys generally move in tandem, but over short periods they can diverge wildly. Over the past three months, the household survey says employment has increased by an average of 580,000 per month. The establishment survey says payrolls have increased by just 154,000 per month. So, we either saw the best 3 month stretch since 2000 or the worst 3 month stretch since 2012.

The U-6 measure of unemployment dropped to 12.7%, down from 13.1%. U-6 includes the unemployed plus the underutilized workers; people working part-time because their hours were cut back or they weren’t able to find full-time work.

In the January report, one sector holding back payrolls was the government, which shrank by 29,000 jobs in January. State and local governments lost 17,000 jobs; federal lost 12,000. Excluding that loss, private employers added 142,000 positions, a slightly better showing, and is now 291,000 below the previous peak. Total employment is still 866,000 below the peak in January 2008.  It is possible that private employment will be at a new high in March or April. The public sector has declined by more than 760,000 jobs under the Obama administration, and this has been a significant drag on overall employment. A big question is when the public sector layoffs will end.

Education, health care and retail also lost positions. In December and January together, just 2,600 health care positions were filled. By contrast, as recently as November, nearly 25,000 health care workers were added to payrolls. The retail sector lost 13,000 jobs in January; some of that reduction might be related to excessive hiring for the holidays, but the cutbacks are also likely related to weak performances by several retailers. For example, JC Penney and Loehmann’s and Target announced job cuts last month. Manufacturing and construction sectors led overall employment gains in January, adding 21,000 and 48,000 new jobs, respectively.

There are about 3.6 million workers who have been unemployed for more than 26 weeks and still want a job; this is down from 3.8 million in December and this is the lowest level since March 2009. And because off Congressional inaction, about 1.7 million and counting, long-term job seekers are losing emergency unemployment insurance benefits. The Congressional Budget Office estimates that extending those benefits would add 0.2 percent to gross domestic product growth and 200,000 jobs to the economy this year.

According to separate BLS data there are 3 unemployed people for each job opening. The number of people that reported having lost a job involuntarily increased, while the number that reported leaving a job voluntarily and the number re-entering or rejoining the workforce declined. Temporary employment services, often a stepping stone to permanent future employment, added just 8,000 jobs in January.

The average work week remained unchanged at 34.4 hours, and overtime hours notched down to 3.4 hours, meaning that employers have considerable room to increase worker hours before they need to hire additional people.

One mystery arising from today’s report is why employment gains have not kept up with economic growth as measured by gross domestic product, which picked up substantially in the second half of 2013. The annualized pace of expansion was 3.2% in the fourth quarter, and 4.1% in the third quarter. One reason may be that new technologies are allowing employers to make do with fewer workers, for instance the use of automated customer service systems instead of call centers, or Internet retailers’ taking over from brick-and-mortar stores. In other words, the robots are taking over. Maybe.

Or maybe technology has just passed over certain parts of the country. In many cities in central California, unemployment remains about 10%, while on the coast of California the unemployment rate is about the lowest in the nation. In the rust belt regions of Illinois, Michigan, and Ohio, unemployment is very high and may be stuck at high levels as business and industries that supported those jobs in those regions are gone and not likely to return; especially as skill levels erode for the long-term unemployed.

Another possible explanation might be found in a report yesterday on the labor share index. In the fourth quarter of 2013, the labor share index dropped to 95.5, its lowest level since the 1940’s. This might indicate higher demands on worker productivity per unit produced, or labor cost per unit, resulting in a gap between  the work done and the compensation paid. Even though productivity was soft for last year – up just 0.6% last year, the Labor Department reported productivity rose at a 3.2% annual rate in the fourth quarter after increasing at a 3.6% pace in the third quarter. Unit labor costs, a gauge of the labor-related cost for any given unit of output, fell at a 1.6% rate in the fourth quarter, showing weak wage-related inflation pressures in the economy.

This almost certainly should be considered a positive for corporate profits. According to Thomson Reuters data, of the 343 companies in the S&P 500 that have reported earnings through Friday morning, 67.9% have topped Wall Street expectations, slightly above the 67% beat rate for the last four quarters.

And for the Federal Reserve, today’s jobs report probably doesn’t change their thinking. The unemployment rate went down, even for dubious reasons, and so they can continue with their taper. The Fed has committed to taper, and it would take a big jolt to knock that train off its track; or as Dalls Fed President Richard Fisher said today, the Fed won’t be swayed by a single number. Indeed, the focus on the Fed now shifts to interest rates, as we get closer to 6.5% unemployment, which you may recall, the Fed set as a target for their pledge to hold low rates steady.

For whatever reason, Wall Street shrugged off the jobs report, at least for today.