Economic Update—January 10, 2014

By Steve Scranton, SVP, CFA
Chief Investment Officer

Employment Report

After several months of positive surprises, the Bureau of Labor Statistics (BLS) delivered a negative surprise on the nation’s employment situation for the month of December.

The nation added 74,000 jobs in December, which was significantly lower than the consensus estimate of 197,000. The BLS made revisions to the previous two month’s data which resulted in a total net increase of 38,000 jobs compared to what was originally reported. For all of 2013, the nation averaged 182,000 new jobs per month compared to an average of 183,000 jobs per month in 2012.

Weather appears to have played a role in the lower than expected number of jobs created but it is difficult to assess the actual number of jobs impacted. Clearly the construction industry was impacted as evidenced by a decline in construction jobs but the “ripple effect” is difficult to measure. Needless to say, with the “Polar Vortex” that the Midwest and East Coast have suffered in January, weather will be a factor in January as well.

Even though the nation added fewer jobs than expected, the unemployment rate fell from 7.0% to 6.7%. This was primarily due to the fact that 347,00 people stopped looking for jobs and dropped out of the labor force. This resulted in the labor participation rate falling from 63.0% in November to 62.8% in December. For the year, the labor participation rate fell from 63.6% in December 2012 to 62.8% in December 2013.

From an educational attainment perspective, this month’s data showed that the high school education category was the only category that showed progress in finding jobs. All other categories showed a decline in their labor force and a decline in the number of people employed compared to November. The overall unemployment rate is still highly dependent on your level of educational attainment.

Educational Attainment Change in Labor Force Change in Employed Unemployment Rate
Less than High School (150,000) (42,000) 9.8%
High School Graduate +347,000 +400,000 7.1%
Some College or 2 Year Degree (223,000) (122,000) 6.1%
Bachelor’s Degree or Higher (170,000) (112,000) 3.3%

Looking at the unemployment rate by age group shows the continued challenges faced by the youth of America.

Age Group Unemployment Rate
16-19 years 20.2%
20-24 years 11.1%
25-34 years 6.9%
35-44 years 5.4%
45-54 years 5.1%
55 and over 5.1%

The alternative measures of unemployment all declined except for the broadest measure (U6). This is a reflection of the decline in the labor force and the decline in the labor participation rate.

November December
U3 (Official unemployment rate) 7.0% 6.7%
U4 (U3 plus discouraged workers) 7.4% 7.2%
U5( U4 plus marginally attached workers) 8.2% 8.1%
U6 (U5 plus involuntary part time workers) 13.1% 13.1%

The news has not changed for the long‐term unemployed. The median average duration for those unemployed remained unchanged at 37.1 weeks. The percent of unemployed who have been unemployed for more than 15 weeks rose from 53.5% to 53.7%. The percent of those unemployed for more than 27 weeks rose from 37.4% to 37.7%.

The news on the salary front was positive but slower than November. Thanks to the decline in the official inflation rate, workers were able to stay slightly ahead of the inflation rate in December.

  • Average hourly earnings rose .1% for the month compared to .2% in November.
  • Year‐over‐year hourly earnings rose 1.8% compared to and 2.0% in December.
  • Inflation rose at an annual rate of 1.2%.
  • Overtime rose from 3.4 hours to 3.5 hours.
  • Average work week fell from 34.5 hours in November to 34.4 hours.

Analyzing the data shows the following breakdown of where jobs were created:

Industry Sub-industry Industry Jobs
Sub-industry Jobs
Goods Producing (3,000)
Mining & Logging 4,000
Construction (16,000)
Manufacturing 9,000
Service Producing 90,000
Whoesale Trade 15,400
Retail Trade 55,300
Transportation & Warehouse (600)
Information (12,000)
Financial Services 4,000
Professional & Business Services 19,000
Education & Healthcare 0
Leisure & Hospitality 9,000
Other (100)
Government 7,000 (13,000)
Total 74,000 74,000

Today’s employment report will undoubtedly raise questions from some about the wisdom of the Federal Reserve reducing their level of Quantitative Easing before getting firm confirmation that the economy was on a consistent path of improvement. As discussed above, weather played a role in the sluggish jobs growth and the Federal Reserve cannot control the weather. Regardless, the employment report was still a positive number, though much slower than anticipated. Today’s employment report will not cause the Federal Reserve to reverse their decision regarding quantitative easing but it may well cause longer term interest rates (including mortgage rates) to decline from the peaks that have occurred recently.

Overall, today’s employment report continues to show an economy that is improving but in an uneven pattern. Even though weather played a role, the simple truth is that a job not created, for whatever reason, means less income available to spend. Even if jobs growth catches up later in the quarter, the spending that did not occur due to weather will not be replaced. So, anticipate a negative impact to economic growth in the first quarter and lots of debate over what is the true economic health of the economy.