Mixed Labor Data Messages Clarified
It Still Spells Trouble
Weekly Jobless Claims have produced an improving trend over the last month and continued telling that same story at latest check. However, the Labor Department's Employment Situation Report for November, published last week, still showed an increase in the unemployment rate and a moderated rate of net job addition. So what gives then? Well, keep reading...
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Mixed Labor Data Messages Clarified
Americans must be confused by the mixed messages offered by the Labor Department. While weekly jobless claims clearly seem to be moderating, the monthly unemployment rate just spiked again. Weekly Jobless Claims for the period ended December 4, fell 17K to 421K, down from 438K the week just prior. Still, the latest Labor Department data showed the unemployment rate increased to 9.8% in November, up from the 9.6% rate seen through the prior three months. We will clear up this inconsistency for you here so you can concentrate on logical consistencies of the day, like holiday parties and foreclosure notices.The first thing you must understand is that weekly jobless claims will occur even in the best of economic environments. There will always be a business failing, or downsizing or consolidating for whatever reason. In order to see the unemployment rate change for the better, we need a weekly flow of jobless claims somewhere short of 400K, or closer to 300K.
The size of the labor force is always increasing also, raising the bar so to speak as America's youths graduate into working age and begin seeking employment. Considering the tough environment, we also have pressure from retirees returning to work these days. When it comes down to it, we need economic growth to increase demand for employees. That can come from increased consumer spending, but also from the growth of business and industry where opportunity may lie untapped. This is why President Obama places so much hope in alternative energy. It can be a replacement industry for coal and pick up the slack from a mature US auto industry. Further, the auto industry, as well as all US manufacturing can benefit from a fairer international trade playing field, another of the administration's good goals (note South Korean trade deal and pressure on the Chinese with regard to their currency).
The four-week moving average of weekly initial jobless claims illustrates the favorable trend we outlined above. The claims average slipped another 4,000 this last week, to 427,500, the lowest it has been in two years. Furthermore, the seasonally adjusted insured unemployment rate improved anther two-tenths of a point, to 3.2% for the period ended November 27. This is the kind of data that gave economists the confidence they exhibited in setting their non-farm payroll forecasts for November at +168,000, based on Bloomberg's survey. This is precisely the reason why the market was so surprised on Friday when payrolls instead measured +39,000.
The good news relayed by the weekly claims data seems to be that companies are laying people off at a slower rate, but that message was absent in the latest monthly layoff data. Challenger, Gray & Christmas reported that announced corporate layoffs surged to an 8-month high in November, reaching 48,711. It was the highest announced job-cut total since March, when companies announced layoffs of 67,611. Seasonal influence to the November disaster may have played a role according to Challenger, but given that this year's period was just 3.3% short of the prior year count, we are not so sure. It is more likely that there is a cyclical factor at play, and the good news is that it's a lagging indicator.
Government and nonprofit employers were at the forefront of firing in November, announcing 10,761 layoffs through the month. In fact, while overall announced layoffs dropped 60% this year to date, the government and non-profit sector have led the full year's downsizing, cutting 138,979 jobs. Obviously, this is the direct result of heightened pressure on governments, municipal, state and federal, to cut costs to balance budgets or otherwise positively impact deficits.
Flying within radar, but not often spoken of is the decrease in charitable contributions that follows downturns in economic activity. Layoffs in this sector should lag general economic decline, and the same goes for government, which is reactionary. One step the government might take in providing stimulus is by instituting a firing freeze at all government levels. These can be controlled at the federal level, and subsidized otherwise. Keep people working, and you keep them sharp and spending at normal rates.
We could call the lag in government and charitable layoffs good news, if these same two factors played important roles in the increased unemployment rate in November. Indeed, government job decline of 11,000 affected November's data, but the reasons for the sharp miss were much broader. That said, Challenger noted a historical tendency for late-in-the-year cuts, and also said increased hiring announcements offered some offset. To me this sounds like the data-minder was simply molding its qualitative reporting to fit the positive consensus outlook for the Labor Department data, which was yet to be disproved (reported two days later).
Inspection of the Employment Situation Report showed big reductions in Retail Trade (-28.1K), Manufacturing (-13K), Financial Activities (-9K) and Construction (-5K), complementing the government (-11K) and other services (-8K) drops. The big retail industry shrinkage was a shocker to many, but understood within short time. Retailers had added to staff earlier this year, in order to best exploit the intensified deal-seeking community. There were earlier-than-Black Friday deals run, and extended hours offered on Black Friday and after, which needed to be staffed for. This reported decline might reflect a temporary lull in part-timers, who could be rehired before Christmas (heard first here). The moderation in manufacturing, at this point, has been well-documented here, and it goes on within ongoing catastrophic environments in the finance and construction fields. Look for increasing M&A activity to drive change for Wall Street in 2010, barring a problematic war with Iran.
We like to look into the bottom line numbers to get to the truth. When we do that for November's employment data, we discover that the unemployed count (numerator) increased by 276K, to 15,119,000. The Civilian Labor Force (denominator) also increased, as it should, but by only 103K, to 154,007,000. Oftentimes in the past, change in the unemployment rate has been impacted by suspect change in the size of the labor force.
Biased Data Producers Should Be Audited!
We find it funny that no matter what party controls the White House, economic data seems to favor its needs. You will recall how economic data (especially with regard to jobs), while bad, fell off a cliff almost immediately after George W. Bush lost the presidential election. We have to wonder if the data flow was held up in Atlas-like fashion by biased Bush-backers running these agencies. A lot of these jobs are filled by politicos, or active supporters of the candidates post election. This time around, just as President Obama needed populous support to get tax breaks cut off for the rich, and while the GOP held hostage unemployment insurance extensions, unemployment unexpectedly spiked sharply and nonfarm payrolls severely missed forecasts. The result was intensified pressure on the government to extend unemployment insurance further, which favored the President and the Democrats, considering the GOP's positioning. Hey this seems to happen on both sides, and I'm just saying… Someone needs to look into this.
Under-Employment
The underemployment rate offers a better forecasting tool than unemployment for the American economy, because it shows how stressed American consumers really are. The under-employment rate takes into account part-time workers, who would rather be working full-time (and oftentimes once were). These people are thus spending a lot less as they seek to sustain their old lifestyles, meaning homes they cannot really afford and cars that do not fit their current income. The part-timers count declined last month by 182K; the impact to the labor rates here depends on whether the part-timers replaced their hours with full-time work or hit the jobless line instead. Since unemployment increased, the latter seems to be the case this time around. Job losses may have been driven here by the declines in weak sectors this month. Companies fire part-timers first, just as they hire them first. Temporary workers increased in numbers in November though, by 40K.
The under-employment rate also adds back into the calculation the group of folks that the government deems removed from the labor force, simply due to long-term unemployment induced depression that leads them to stop job search activity over a short span of weeks. We think they still count, and we know they are impacting GDP.
Thus, if we add back the 2.531 million (previously 2.602 mln.) displaced workers to the labor market, and include the 8.972 million (previously 9.154 mln.) underemployed part-timers in the unemployed count, adjusted unemployment reaches ((15.119M + 2.531M + 8.972M) / (154.007M + 2.531M)) * 100 = 17.0 %. That's equal to October's rate, and compares to September's 17.1% rate, 16.7% in August; 16.5% in July and June; 16.6% in May; 17.1% in April; 16.9% in March; 16.8% in February; and 16.4% in January. You can see clearly here that the factors that impact underemployment but not unemployment shifted to the unemployed pool, which factors in both calculations. Thus underemployment held steady, while unemployment increased.
In conclusion, while some comfort can be taken from the fact that we seem to have stopped bleeding jobs, we remain at risk of reopening the wound. Furthermore, the burden of a large pool of long-term unemployed Americans acts as a major drag to economic growth. It thus becomes a leading factor, versus the lagging indicator it is often labeled. Thus, the mixed message provided by the two labor reports is consistent with reality. Neither data-point is reporting in error or misleading economic forecasters. Rather, both offer insight into a complex labor situation. To put it simply, we're still troubled.
FYI:
The highest insured unemployment rates in the week ending Nov. 20 were in Alaska (6.1 percent), Puerto Rico (5.5), Oregon (4.4), Nevada (3.9), Pennsylvania (3.9), California (3.7), Idaho (3.7), Montana (3.7), New Jersey (3.7), Arkansas (3.6), Wisconsin (3.6), and Connecticut (3.5).
The largest increases in initial claims for the week ending Nov. 27 were in Wisconsin (+7,545), Iowa (+2,789), Idaho (+1,810), Indiana (+1,667), and Washington (+1,260), while the largest decreases were in Texas (-8,742), California (-8,320), Florida (-7,027), Georgia (-5,823), and North Carolina (-4,171).
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