Fri, FEB 3rd, 2012
Friday’s January Employment Situation report showed strong gains. Across most measures the release told an encouraging story in U.S. labor. On the surface, 234,000 jobs were added last month with the prior two months [combined] enjoying a bonus of 60,000 more jobs than previous thought. We have been and continue to be sanguine on continued upward revisions as economic history tells us that they typically follow broad labor trends. Meanwhile, the unemployment figure dipped to 8.3%, the lowest in 3 years. The 234,000 net gain was the best addition since last April and marks the 16th straight month of job gains.
Beneath the surface, the report continued its cheerful tone. The gains were, for the most part, broad-based with manufacturing, construction, retail and service sectors all seeing gains [ex-financial at -5,000]. Indeed, 64 industries boasted new job adds verse 62 in the prior month [Dec.]. Too, hours worked held steady at 34.5 a week, which is at the high-end of the historical range and symbolic of solid stable output. At America’s factories this number rose to 41.9 per week – the highest since January 1998 – while simultaneously 50,000 jobs were added, the most in a year. Given that manufacturing [~12% of GDP] has been the recovery’s growth engine, it is a positive sign for momentum in this sector.
January’s report marked the fifth-straight drop in the unemployment rate. This is a nice trajectory, but it is important to understand the calculus behind the rate drop. As we’ve said before, when the rate declines it is not always due to more people finding jobs. The unemployment rate can change up or down even when no jobs are created or lost. This is due to how the unemployment rate is crunched. The math seems simple enough: number of unemployed over the total number of people in the labor force. The trick to determining whether a drop is “clean” – that is, positively affected by new jobs as opposed a decline in labor force participation – rests in analyzing these inputs. The Bureau of Labor Statistics [BLS] defines unemployed as those currently not working but are willing and able to work and have actively searched for work in the past four-weeks.
The last piece of this definition is key.
People start and stop looking for work for varying reasons. Some return to school, people retire or immigration can slow. In tough economies, however, people who were looking for work often become discouraged and quit [referred to as discouraged workers]. That is what happened during and after the Great Recession and in many before that. It is a natural occurrence. As this happens, these individuals are no longer considered unemployed as far as the BLS calculation is concerned. Taking nothing away from the nearly 3.8 million jobs created during this recovery to date, one cannot deny that this statistical subtly has been part of the reason the unemployment rate has dropped since the recession ended. It works the other way, too. When the economy expands and optimism springs anew, these once discouraged workers reenter the labor fold and can temporarily bring the rate up until sufficient job creation can absorb them.
The drop in the jobless rate in January reflected a 381,000 decrease in unemployment while at the same time 250,000 Americans entered the labor force. The labor force participation rate [employment-population ratio] decreased by 0.3%. But, digging deeper into the BLS report uncovers that without the recently updated census adjustment – which showed a marked increase in population of those 55 and older – it would have been flat. This is important because the non-institutional population data negatively impacted the participation rate, but in a less meaningful way than the raw number suggests as those over 55 naturally have lower participation rates than the general population. Regardless, while the actual participation rate might in fact be this new lower number, that would also suggest that prior numbers were lower. In other words, according to the Ross Kaminsky at the American Spectator, the top-line change – caused almost entirely by using new census population numbers – is an artifact of the new census data. It needs to be an apples-to-apples comparison.
Finally, the underemployment rate, which includes underutilized workers and people forced to work part-time because they can’t find full-time work, clocked in at 15.1 percent in January, down from 15.2 in December and 16.1 percent one year ago. This number encompasses a larger population base and is therefore often cited as a truer representation of labor market hardship.
All told, January’s report was rather unblemished. Nevertheless, financial markets – like many of life’s quizzes – care less about what you’ve done in the past favoring more focus toward what you’ll do in the future. We must keep adding jobs at the 200,000+ rate if we are to significantly bring down the unemployment rate and place the economic recovery on a more secure footing.
Indeed, improvement in the employment picture must continue.
Jason L. Ware, MBA
Market Strategist, Chief Analyst
Albion Financial Group
(801) 487-3700; (877) 487-6200