Economic Update—March 8, 2013

By Steve Scranton, SVP, CFA
Chief Investment Officer

Employment Report

The Bureau of Labor Statistics (BLS) provided a ray of sunshine as it relates to the employment situation in the United States. As always, we caution our readers to read past the headlines to understand the true picture. This month’s report provides a perfect example of that situation. The headline news looks extremely positive while the news beneath the headlines is a bit more of a mixed picture. The bottom line is that the nation continues to make progress on its unemployment situation with more work needed.

The BLS reported that the nation added 236,000 jobs in February. This is far more than the median forecast of 165,000 jobs. The BLS did make revisions to the past two months numbers which resulted in a net reduction of 15,000 jobs compared to the original numbers.

Separately, the BLS reported that the unemployment rate fell from 7.9% to 7.7%. Unfortunately, most of this decrease is due to a decrease in the labor force from unemployed workers giving up looking for work. There were 130,000 workers who dropped out of the labor force in January. As we have discussed in previous articles, all else being equal, a drop in the labor force will decrease the unemployment rate. The question remains as to how many of those workers will re‐enter the labor force if the news continues to show the unemployment rate falling.

Two of the broader measures of the employment situation did not reflect the positive news that the headline news portrayed. The labor participation rate (the share of the working age population that is actually in the labor force) fell from 63.6% to 63.5%. This is the lowest reading since September 1981. The employment‐population ratio remained unchanged at 58.6%. Examining the alternative measures of unemployment reveals improvement but not as strong as the official unemployment rate (U3).

January February
U3 (Official unemployment rate) 7.9% 7.7%
U4 (U3 plus discouraged workers) 8.4% 8.3%
U5 (U4 plus marginally employed workers) 9.3% 9.2%
U6 (U5 plus involuntary part time workers) 14.4% 14.3%

Unfortunately, the rosy headline news did not translate through to the youth of America. The unemployment rate for the youth of America broke down as follows:

Age Unemployment Rate
16-17 years 27.6%
18-19 years 23.0%
20-24 years 13.1%

The news beneath the headlines also revealed that the picture for those who are already unemployed has worsened. The percent of the unemployed population that has been unemployed for longer than 27 weeks rose from 38.1% to 40.2%. The average duration of the unemployed rose from 35.3 weeks to 36.9 weeks.

Education continues to play a critical role in people’s ability to find work with the unemployment rate decreasing as education level increases.

Education December January
Less than a high school education 12.0% 11.2%
High school, no college 8.1% 7.9%
Some college or associate degree 7.0% 6.7%
Bachelor’s degree or higher 3.7% 3.8%

Workers saw no change in the pace of their salary increases. Average hourly earnings rose .2% which is an annual rate of 2.1%. This is the same pace as last month and slightly above the rate of inflation (1.6%). Unfortunately gas and grocery prices have risen faster than the official inflation rate.

The three indicators that we watch as potential indicators of future increases in full time hiring were all positive.

  • Average work week rose 34.4 to 34.5 hours
  • Overtime was rose from 3.3 to 3.4 hours
  • Temporary help rose by 16,000

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

Industry Sub-industry Industry Jobs
Sub-industry Jobs
Goods Producing 67,000
Mining and Logging 5,000
Construction 48,000
Manufacturing 14,000
Service Producing 179,000
Whoesale Trade 5,900
Retail Trade 23,700
Transportation & Warehousing (1,300)
Information 20,000
Financial Services 7,000
Professional & Business Services 73,000
Education & Healthcare 24,000
Leisure & Hospitality 24,000
Other Services 2,700
Government (10,000) (10,000)
Total 236,000 236,000

Although much of the underlying news and trends in the employment report remain mixed, today’s report the media will clearly report this as a very strong report. From a political perspective, there is sufficient mixed information that both political parties will be able to use the news to try to spin their story.

From an economic perspective, this report is not strong enough to make the Federal Reserve stop purchasing securities (i.e. quantitative easing) or to make them raise interest rates. The bottom line is that although the economy has fully recovered growth lost since 2007 (as measured by GDP) and the stock market has now recovered all of the losses from 2007, the jobs market still has over 3,000,000 people who have not recovered the jobs that the lost since 2007. Progress is being made with further work needed.