The Employment Situation

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This week, you’re going to see some variety in the blog.  Today, I’m going to discuss the jobs report in detail.  Later this week, I hope to spend one day discussing the paper (mentioned last week) about CEOs hedging.




I also encourage you to share your predictions with each other (see the end of the article).




I hope you enjoy it.




Now, on to the jobs report.




Why the Jobs Report Matters

Consumer spending accounts for approximately 70% of GDP (in normal times).  Consumer spending is premised on income and borrowing.  (While borrowing ticked up in January, it’s been very weak for the past two years; asset / collateral levels are lower, banks are less willing to lend and consumers want less credit.)  In order for consumers to have income, they must have jobs.  So without jobs, we’ve got problems.  In addition, unemployment exacerbates our deficit: fewer people are paying taxes and more people are receiving transfer payments.




The Jobs Report is particularly important because there is uncertainty in the market as to what the current jobs status is.  Below, I will take you through some of the arguments used by bulls and bears.




Background

The “jobs report” is actually called “the employment situation” and it really is comprised of two reports:

1. The Household Survey
2. The Establishment Survey

The Establishment Survey is larger. The Household Survey is a sample of 60K households.  The Establishment Survey covers 140,000 businesses and government agencies (covering ~ 410,000 worksites and approximately one-third of all nonfarm payroll employees).




Each of the two surveys has some advantages. The Household Survey includes the self-employed, unpaid family workers and private household workers.  It also includes people who are on unpaid leave.  The Household Survey doesn’t duplicate people (whereas a person could be on two payrolls).  Unfortunately, the Household Survey is more susceptible to “puffery” from participants and requires a much larger change to be considered significant.




The Establishment Survey is larger and is based on hard data.  Contrary to common thought, the Establishment Survey does include small firms.  Approximately 40% have fewer than 20 workers.  The Establishment Survey also has an adjustment to account for business births and deaths.




There are two headline numbers: the unemployment rate (9.7%) comes from the Household Survey and the number of jobs lost (36K) comes from the Establishment Survey.  The numbers are not always consistent.




Severe Weather

Many commentators are suggesting that severe weather may have affected the numbers, but the BLS can’t quantify it.  It’s very hard to determine the impact.  Certainly, people might not have been hired due to the storms.  With that said, some people found employment because of the storm (cleaning up, doing repairs, etc.).  The joke going around is that bosses couldn’t get to work to fire people.  Many people think that the storm results in undercounting jobs because the job numbers jumped in 1996 in the month after some big storms.

Severe storms shouldn’t have a huge impact.  In the Employment Survey, if you were paid for the period including Feb. 12, you were counted as employed (even if it was for one hour).  You have to have been off for the entire period in order for the storm to matter.  In the Household Survey, you were counted as employed if you missed work for weather-related events, even if you were not paid for time off.  On the flip side of all this…it’s hard to create jobs when then world is shut down because of snow.




Bullish Arguments About the Employment Situation

Job losses have abated. Nonfarm payroll employment dropped 36K in February.  This continues the trend of fewer job losses and is a particularly strong number given the inclement weather.  Remember: from November 2008 – March 2009, we were losing more than 600K jobs per month!




The February data corroborates the January numbers. January’s loss was only 26K and February was 36K.




In both surveys, the number of unemployed people was close to unchanged. In the Household Survey, the number of unemployed person was essentially unchanged at 14.9MM.  The Payroll Survey showed an increase of 36K unemployed people.




The Household Survey (unlike the Payroll Survey) showed a huge increase in the number of people who are employed. The number of employed increased 541K and 308K in January and February.  During that time, the labor force grew by 453K.  This is (1) population growth of 74K; and (2) 378K fewer people are “not in labor force” (re-entrants).  This increase in jobs shows why the unemployment rate (which we get from the Household Survey) dropped from 10% to 9.7% in January (and stayed at 9.7% in February).




The unemployment rate stayed at 9.7%. There has been a lot of fear that we would head toward 11%.  The fact that the number has stayed in single digits is better for confidence and it can be a self-fulfilling prophecy.




Temporary services increased jobs. Temporary help services added 48K jobs.  Since September 2009, this has risen 284K.  This is often a precursor to full-time jobs.




Other important sectors have stopped losing jobs. Manufacturing was unchanged.  Retail employment was unchanged.




The number of long-term unemployed has dropped. The number of long-term unemployed (27+ weeks) has decreased from 6.3MM to 6.1MM.




Past job losses weren’t as bad as we had thought. December was revised from     -150K to -109K and January was revised from -20 to -26K.  If you combine the past two months, we actually lost 35K fewer jobs than we had thought; when you combine those changes with the 36K jobs we lost in February, it basically nets out to zero!




The unemployment rate is not terrible for those with a college degree. For those with a college degree or higher, the unemployment rate was 5%.  One year ago, it was 4.2%.




We’re seeing fewer industries lose jobs. The diffusion index, which weights the number of industries increasing employment vs. decreasing employment, is 48.  It was 17.1 a year ago.  A reading of 50 indicates equal balance.




Bearish Arguments

We need 125K – 150K jobs to be created to satisfy new entrants each month. This is misleading right now (we don’t see “new entrants”) because people are leaving the labor force, but once we start creating jobs, we will return to this normal situation.  As a result, losing 36K jobs is not a great report.




In addition to the 125K – 150K jobs described above, we need to create significantly more jobs in order to reduce the unemployment rate. If we create an addition 150K jobs per month (bringing the total monthly jobs number to ~300K), it will take approximately 4.5 years to recover the 8.4MM jobs lost since December 2007!




If it weren’t for the civilian labor force shrinking, the unemployment rate would be approximately 11%. The civilian labor force has shrunk 900K in past year.  If you had the same participation rate (65.7% of the population participating in the labor force) as one year ago, that would mean that the unemployment rate would be approximately 11%.  (Here, I’m assuming that 65.7% of the population was part of the work force and the number of employed is “as stated”.)




Understand the craziness of the participation rate. During the year, the population grew by 2.085MM.  If ~65% of people are in the work force, we should have had 1.3MM more workers.  Instead, we had 900K fewer.  That means that the 2.085MM (of population growth) plus the 900K who left the work force increased the “not in the work force” category by 2.975MM.




The number of persons working part time for economic reasons increased from 8.3MM to 8.8MM. In January, this number had decreased, but it turned back up in February.  These are people who had their hours cut or who were unable to find a full-time job.  These people are considered employed, but many are dissatisfied with their situation.




Approximately 2.5MM people were marginally attached to the labor force. This is an increase of 476K in February.  These are people who are not in the labor force even though they wanted and were available work.  While these people had looked for work in the past year, they had not looked in the past month (and as a result, they are not considered to be part of the labor force – and are not counted as unemployed).

Among the marginally attached, there were 1.2MM discouraged workers in February (up from 473K last year).  Discouraged workers are not currently looking because they believe that no jobs are available to them.  The remaining 1.3MM marginally attached workers had not searched in the past four weeks because of school or family.




Certain industries might not see a return to their peak employment levels. Construction employment fell by 64K in February – similar to past six months.  Since December 2007, construction employment has fallen by 1.9MM.




While the number has decreased (from 6.3MM), there are still 6.1MM people who are considered “long-term unemployed” – jobless for 27 weeks or longer. The average time of unemployment is 29.7 weeks.  The median is 19.4 weeks.

For most people, this can decimate their savings and have long-term repercussions on spending.  This can also have an impact on family issues for some.

The increase in temporary jobs may show a new trend – to use temp workers rather than provide benefits or commit to full-time employees.   One example of temporary jobs that is skewing our data is the use of Census workers.  This month, we hired 15K temporary workers for the Census.  If it weren’t for the census workers, the report would have been a loss of 51K.




There are certain groups that are disproportionately impacted by the recession. The teenage unemployment rate was 25%!  This has long-term repercussions in their career.  Minorities are also suffering from high unemployment rates.  Blacks and Hispanics have very high unemployment rates – 15.8% and 12.4% respectively.




While almost as many industries are adding jobs compared to those that are losing jobs in the past month, we are far below our employment levels one year ago. Virtually every industry (Table A-14) has higher unemployment than one year earlier.




The more inclusive unemployment rate ticked up from 16.5% to 16.8%. This means that one in six Americans is either unemployed, underemployed (they’ve accepted part-time work when they want full-time work) or they are too discouraged to look for work.  (In the past year, approximately 500K people have become discouraged and have stopped looking for work.)




Conclusion

If the “weather blamers” are correct, the next payroll report could be a great report and could change consumer confidence.  If they’re wrong, pessimism will reign.  My gut feeling is that we’re going to see a good number next month, but we’re still in for a very long haul before we get back to 5% unemployment.




What do you think?  If you’re interested in sharing your thoughts, tell other readers your prediction for two questions: (1) what do you think next month’s job number will be; and (2) how long will it be before we get back to 5% unemployment?

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