It’s another Jobless Recovery

June 11, 2010

The perennial bulls on Wall Street have been knocked off balance once again, not once
but twice in a matter of days. The soothsayers were busily ramping up their numbers for
first quarter economic growth, only for the Bureau of Economic Analysis to do the
unthinkable and revise their initial estimate lower. The pencils remained out however, as
the economist fraternity competed furiously to see who could produce the highest
estimate for job creation during the month of May. That accolade went to Goldman
Sachs who raised its number by 100,000 to 600,000 just hours before the official release,
though the rosy consensus was not far behind at 536,000.
Wall Street’s optimism fell flat on its face when the monthly employment report was
made public last Friday lunchtime. The report revealed that the U.S. economy added
431,000 jobs last month, of which roughly 95 per cent was attributable to temporary
hiring for the 2010 Census – jobs that are certain to disappear before the autumn leaves
fall. The private sector added just 41,000 jobs, and that number was offset by downward
revisions of 31,000 to private payrolls for March and April. The market response was
immediate, as stock prices sank and registered their first lower low for the current
cyclical bull cycle. The recession may well be over, but the labour market recovery
hardly resembles a bird or plane in take-off; the superheroes in Metropolis have failed to
show the Krypton Factor again.
It is important for investors to appreciate that the monthly employment report contains
surveys of both company establishments and households each month. The financial
markets typically focus on the payrolls number collected from the establishment survey,
as it tends to be less volatile on a month-to-month basis than the comparable number
derived from the alternative household survey, which includes the unemployment rate
data. However, the establishment survey has a large-company bias and typically fails to
capture labour market trends among small businesses, which are the engine of job
creation for the US economy. The household survey has a more expansive scope and
tends to be a leading indicator of payroll data at turning points. In this regard, the trend
apparent from the household survey is cause for concern.
The household survey suggested that the labour market had turned the corner earlier in
the year, but the downtrend resumed last month with a monthly loss of 322,000 jobs, and
a drop of 563,000 over the last twelve months. The unemployment rate, which comes
from the household survey, dropped last month and has only increased by 30 basis points
year-on-year, but only because of a mass exodus from the labour force, which has seen
the share of Americans either employed or actively looking for work, drop to the lowest
level since 1985.
The labour participation rate has dropped 0.8 percentage points over the last year to 65
per cent and is well below the last cycle peak of 66.4 per cent and the all-time high of
67.3 per cent registered a decade ago; as a result, the number of people classified as ‘not
in the labour force’ has jumped by more than 2 ½ million over the last year. The drop in
the participation rate has been particularly pronounced among individuals in the 16 to 24
age group, and suggests that the unemployment rate will remain elevated for an extended
period as the disillusioned return to the labour force.
Indeed, should the participation rate increase gradually to its pre-recession level of 66 per
cent by the end of 2012, the US economy would need to add roughly 225,000 jobs every
month simply for the unemployment rate to remain at current levels. In this context, it is
useful to note that the highest twelve-month average payroll gain during the previous
economic expansion were 239,000 net job additions per month registered during the
spring of 2006 , and the average monthly gain for the entire economic expansion was less
than 100,000 jobs per month.
Not only has the US unemployment rate risen faster than during earlier US recessions but
US workers unfortunate enough to lose their jobs are remaining unemployed for longer
periods of time during this downturn. The mean duration of unemployment has soared to
a record high of 34 weeks as against a previous high of 21 weeks in August 1983.
Furthermore, the long-term unemployment rate or the share of the unemployed who have
been out of work for more than 27 weeks has jumped to an unprecedented 46 per cent as
compared with a previous high of 26 per cent in 1983.
The economic downturn has not only resulted in massive job losses but has also reduced
hours worked for those who are fortunate enough to remain in employment. The average
workweek has registered a meaningful improvement from the all-time low registered last
summer, but is still 36 minutes below the last cycle high. That may not sound like much,
but businesses typically work their existing employees longer before they increase their
headcount, and each additional minute economy-wide is equivalent to about 60,000 jobs.
Unemployment is likely to remain elevated throughout the current economic recovery
and subsequent expansion. Indeed, even using optimistic labour market assumptions, the
unemployment rate is unlikely to drop below six per cent until 2015 – unless the mass
exodus from the labour force continues. The cumulative blow to workers’ income is set
to exceed $1 trillion within three years and ensures that the recovery will be decidedly
subpar. It is hardly a surprise in this context that the major stock market indices are
pricing out a V-shaped recovery.
www.charliefell.com

The views expressed are expressions of opinion only and should not be construed as
investment advice.
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