Great News!!! 9.4% Unemployment?

We supposedly received great news on Friday…we only lost 345,000 jobs in May. This was far better than expectations – so things are improving. When the news was released, the futures market showed a 100 point jump.  Unfortunately, the unemployment rate rose to 9.4%. By the end of the day, the day’s rally was gone.  I want to take you through some background material about the employment report and then the data.

Background
The Employment Situation is a monthly report put out by the Bureau of Labor Statistics. The report is actually two surveys:

1. Household Survey – a sample of 60,000 households in which they determine whether each person (16 years and over) is employed, unemployed or not in the labor force.

2. Establishment Data – collected from payroll records; the sample includes approximately 160,000 businesses and government agencies. Approximately 40% of the sample comes from small businesses.

The key differences in the surveys are that the Household Survey:
1. includes agricultural workers, the self-employed and unpaid family workers
2. includes people on unpaid leave (among the employed)
3. counts each person only once (while the Payroll Survey may capture some people twice)

Key Data From the May Report (Released June 5, 2009)

1. There were 345,000 jobs lost in May according to the Establishment Data. This is approximately half the average monthly decline for the prior six months. The Establishment Data provides the job loss (or creation) number that everyone uses – it’s more reliable.

2. Using the Household Report, the number of jobs lost was 437K. In the Household Survey, the number of unemployed persons increased 787K to 14.5 million. (The Household Survey showed 437K people losing jobs and 350K more people in the work force for a total increase in unemployment of 787K). Since December 2007, the number of unemployed people has risen by 7 million. Using the Establishment data, 6 million jobs have been lost (but the Establishment data doesn’t include certain groups).

3. Out of the 14.5 million unemployed people (Household Data), 48% have been unemployed for 15 weeks or longer. One year ago, less than 33% of unemployed people had been unemployed for 15 weeks or longer. As the job losses slow, this percentage will likely increase to over 50% in the coming months (because there will be a smaller percentage that has been unemployed for a short time if job losses slow). This means that approximately seven million workers will be unemployed for more than four months – this puts most people in a really difficult situation.

4. The unemployment rate increased from 8.9% to 9.4%.

5. The broadest measure of unemployment reached 16.4% (1 in 6 people)! This measure includes the 9.4% of the work force that we already described as unemployed plus people who are not typically included as unemployed (people who don’t look for a job because they are discouraged, people who didn’t look for a job in the last four weeks because they had other things to take care of and people who accepted part-time work even though they wanted full-time work). In effect, you can think of this as unemployed plus under-employed (the part-time workers).

6. The Establishment Data reports that 19 million people (14% of the work force) work in “Goods-Producing” industries (i.e., construction, manufacturing, etc.) and 113 million (86% of the work force) work in “Service Producing” industries. Yet, 65% of the jobs (225K) were lost in Goods Producing industries and 35% of the jobs (120K) were lost in Service Producing industries.

7. Since its most recent peak in February 2000, employment in motor vehicles and parts has fallen by approximately 50%.

8. The one-month diffusion index (which roughly measures the percentage of industries which increased employment) jumped to 32.7 in June (from 25.8 in May and 19.6 in March).

Final Thoughts
The employment report for May was certainly an improvement. With that said, the unemployment situation is ugly and it’s going to continue to get worse. We all knew that we weren’t going to keep losing 600K jobs each month. But we need to create 150K jobs each month to keep up with new workers entering the work force. We’re still far below that level (there is a 500K difference between losing 350K jobs and creating 150K jobs). I think that the job market will improve, but it will happen slowly. I still expect that we’ll go above 10% unemployment this year. My guess is that unemployment will peak between 10 – 11%. Of course, that assumes that there is no other shoe that drops…

In addition, the alarming thing is that the employment situation is unlikely to have a strong rebound in the near future. Chairman Bernanke summed it up when he testified before the Budget Committee on Wednesday:

Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further. We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes.