Economic Update—February 7, 2014

By Steve Scranton, SVP, CFA
Chief Investment Officer

Employment Report

The Bureau of Labor Statistics (BLS) released details on the nation’s employment situation for January and the results showed a second consecutive month of disappointing results. The nation added 113,000 jobs in January compared to consensus expectations of 180,000. Revisions to the previous two months data resulted in a net positive revision of an additional 34,000 jobs being added compared to what was originally reported.

A lingering question regarding the sluggish employment growth is how much of a role did weather play in the lower than expected growth? Clearly, the East Coast has been hit with a severe winter. Unfortunately, there is no clear measure to quantify how that impacted jobs growth.

Even though the nation added fewer jobs than expected, the unemployment rate fell from 6.7% to 6.6%. This was not due to a drop in the labor force. After accounting for the annual revisions to the population data, the civilian labor force grew by 499,000 in January. The labor participation rate rose from 62.8% in December to 63.0% in January. The labor participation rate is still lower than the 63.6% reading in January 2013.

From an educational attainment perspective, this month’s data showed that the “less than high school education” and the “bachelor’s degree or higher” categories showed growth in their labor force while the “high school graduate” and “”some college or associate degree” categories showed declines.

Educational Attainment Change in Labor Force Change in Employed Unemployment Rate
Less than High School 256,000 254,000 9.6%
High School Graduate -318,000 -84,000 6.5%
Some College or 2 Year Degree -99,000 8,000 6.0%
Bachelor’s Degree or Higher 668,000 663,000 3.2%

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 20.7%
20-24 years 11.9%
25-34 years 6.8%
35-44 years 5.0%
45-54 years 5.1%
55 and over 4.5%

The alternative measures of unemployment all declined except for the U5 category, which was unchanged.

December January
U3 (Official unemployment rate) 6.7% 6.6%
U4 (U3 plus discouraged workers) 7.2% 7.1%
U5( U4 plus marginally attached workers) 8.1% 8.1%
U6 (U5 plus involuntary part time workers) 13.1% 12.7%

On the surface, it would appear that the news improved for the long‐term unemployed. The average duration for those unemployed fell from 37.1 weeks to 35.4 weeks. The story behind the headline is that Congress has not renewed the extended unemployment benefits. As a result many of the long‐term unemployed may have stopped looking for work since they no longer qualified for benefits. Remember, that in order to be counted as unemployed, you have to be actively looking for work during the four weeks leading up to each monthly survey.

The news on the salary front was positive as average hourly earnings rose by.2%. Average hourly wages rose 1.9% on a year‐over‐year basis. With the official inflation rate at 1.5%, workers were able to stay slightly ahead of the inflation rate. Overtime and the average hourly work week remained unchanged from December.

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

Industry Sub-industry Industry Jobs
Sub-industry Jobs
Goods Producing 76,000
Mining & Logging 7,000
Construction 48,000
Manufacturing 21,000
Service Producing 66,000
Whoesale Trade 13,900
Retail Trade (12,900)
Transportation & Warehouse 9,900
Information 0
Financial Services (2,000)
Professional & Business Services 36,000
Education & Healthcare (6,000)
Leisure & Hospitality 24,000
Other 3,100
Government (29,000) (29,000)
Total 113,000 113,000

Weather will continue to be the hot topic of conversation as it relates to the growth in jobs. The East Coast continues to be having a worse than normal winter so potential distortions in the jobs picture will probably continue in February. The true condition of the nation’s job market may not be known until winter is over.

Overall, there is nothing in today’s employment report that should cause the Federal Reserve to change its stance on quantitative easing and interest rates. For the near term, the Federal Reserve appears set to continue to reduce the amount of Treasury and Mortgage‐Backed securities that it has been buying while still holding short‐term interest rates near zero.