Economic Update—April 4, 2013

By Steve Scranton, SVP, CFA
Chief Investment Officer

Employment Report

The Bureau of Labor Statistics reported on the nation’s employment situation and threw a cold dose of reality on all of the economic forecasters who have been predicting the start of a strong labor recovery. Perhaps the best description of how the economic forecasters are feeling after the report is to use part of the last line in the famous baseball poem by Ernest Thayer (Casey at the Bat): “…there is no joy in Mudville..”. The BLS reported that the nation added 88,000 jobs in April. This was positive jobs growth but it was far less than the median forecast from economists who had predicted an increase of 190,000 jobs. Even with the 61,000 net upward revision from the previous two months, this still falls below expectations and has created great disappointment.

Separately, the distortion/anomaly continues with the unemployment rate. Even with the weak jobs growth, the BLS reported that the unemployment rate fell from 7.7% to 7.6%. This was due to 496,000 people discontinuing their search for work and dropping out of the labor force.

Two of the broader measures of the employment situation did not support the drop in the unemployment rate. The labor participation rate (the share of the working age population that is actually in the labor force) fell from 63.5% to 63.3%. This is the lowest reading since May 1979. The employment‐population ratio fell from 58.6% to 58.5%. The claims by many who try to explain the drop in the labor force by stating that it is due to the baby boomers retiring and leaving the work force are not borne out by the data. Examining changes in employment of the age groups shows that the 55 and over age group only saw a reduction of 11,000 employed compared to February. Rather than the baby boomers retiring, the drop in the labor force appears to be the long‐term unemployed who have given up looking for work. This can be seen in the data that shows the percent of people unemployed longer than 27 weeks dropped from 40.2% to 39.6%. This could be a result of their extended unemployment insurance running out and thus the incentive for looking for work (i.e. to qualify to the unemployment insurance) has been removed. These are not people who have retired. They are people who want to work but have given up trying until the job market improves.

Examining the alternative measures of unemployment reveals the same anomaly of trend of a decreasing unemployment rate.

February March
U3 (Official unemployment rate) 7.7% 7.6%
U4 (U3 plus discouraged workers) 8.3% 8.1%
U5 (U4 plus marginally employed workers) 9.2% 8.9%
U6 (U5 plus involuntary part time workers) 14.3% 13.8%

The story remains downbeat for the youth of America as they continue to show the highest unemployment rates.

Age Unemployment Rate
16-17 years 27.1%
18-19 years 22.1%
20-24 years 13.3%

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

Education February March
Less than a high school education 11.2% 11.1%
High school, no college 7.9% 7.6%
Some college or associate degree 6.7% 6.4%
Bachelor’s degree or higher 3.8% 3.8%

The news beneath the headlines also revealed that the picture for those who are already unemployed has worsened. The average duration of the unemployed rose from 36.9 weeks to 37.1 weeks.

On the salary front, workers saw no pay increases in March as average hourly earnings were unchanged on a month‐over‐month basis. The annual rate fell from 2.0% in February to 1.8% in March. Given the fact that that the most recent inflation report (Consumer Price Index) showed a 2.0% increase, workers lost ground in maintaining their purchasing power.

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

  • Average work week rose from 34.5 to 34.6 hours
  • Overtime was remained at 3.4 hours
  • Temporary help rose by 20,300.

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

Industry Sub-industry Industry Jobs
Sub-industry Jobs
Goods Producing 16,000
Mining and Logging 1,000
Construction 18,000
Manufacturing (3,000)
Service Producing 79,000
Whoesale Trade (1,000)
Retail Trade (24,100)
Transportation & Warehousing (2,800)
Information 5,000
Financial Services (2,000)
Professional & Business Services 51,000
Education & Healthcare 44,000
Leisure & Hospitality 17,000
Other Services (8,100)
Government (7,000) (7,000)
Total 88,000 88,000

Clearly, the March employment report is a big disappointment compared to expectations. Lost in the headlines is the fact that 88,000 new jobs were created. Although weaker than expectations, it is still positive growth versus job losses. The news raises the suspicion that the stronger than expected growth in February and January may have been more related to onetime rebuilding efforts from Hurricane Sandy that are now dissipating. The lower than expected numbers in March do not appear to be related to the sequestration as most of those potential job cuts will not occur until April or later.