Economic Update—August 2, 2013

By Steve Scranton, SVP, CFA
Chief Investment Officer

Employment Report

The Bureau of Labor Statistics (BLS) released data on the nation’s employment situation and it was another report full of mixed results. From a jobs creation perspective, the nation added 162,000 job in July, which was fewer than expected. The median forecast was for an increase of 185,000. The BLS also revised lower the number of new jobs previously reported for May and June. The result was a net revision of 26,000 less jobs added compared to what was originally reported.

The composition of the jobs growth was disappointing from a wage and income standpoint. Almost half of the new jobs created were in the lower paying jobs sectors. Retail trade added 46,800 jobs, part time help accounted for 7,700 jobs and leisure and hospitality added 23,000 jobs. This continues a pattern that we have seen for much of the year.

From an unemployment rate perspective, the headline news will probably focus on the fact that the unemployment rate fell to 7.4%. Unfortunately, this was due to people dropping out of the labor force, as the civilian labor force fell by 37,000. When we examine the additional measures of employment, what we see is that the labor participation rate fell from 63.5% to 63.4%. This means that less people are participating in the labor market. The biggest drop occurred within the category of people who have some college education or an associate degree. Their labor participation rate fell from 68.1% to 67.3%.

The alternative measures of unemployment all showed declines due to the drop in the labor force.

June July
U3 (Official unemployment rate) 7.6% 7.4%
U4 (U3 plus discouraged workers) 8.2% 8.0%
U5 (U4 plus marginally employed workers) 9.1% 8.8%
U6 (U5 plus involuntary part time workers) 14.3% 14.0%

The youth of America continue to suffer with the 16‐17 year age bracket suffering the most.

Age June July
16-17 years 26.5% 29.1%
18-19 years 22.6% 19.9%
20-24 years 13.5% 12.6%

Education continues to be a major theme for people seeking work. The data continues to show that education plays a critical role in people’s ability to find work.

Education June July
Less than a high school education 10.7% 11.0%
High school, no college 7.6% 7.6%
Some college or associate degree 6.4% 6.0%
Bachelor’s degree or higher 3.9% 3.8%

The data on the long‐term unemployed deteriorated. The average duration for the unemployed rose from 35.6 to 36.6 weeks. The percentage of people unemployed for more than 27 weeks rose from 36.7% to 37.0%.

The news was also discouraging on the salary front. Average hourly earnings fell .1% in July compared to June. This translated into a 1.9% increase on a year‐over‐year basis. The average American is not seeing a true wage increase, once inflation and taxes are factored into the equation. If the economy is going to rely on the consumer to increase economic growth through higher spending, today’s salary data is not encouraging.

The three indicators that we watch as potential indicators of future increases in full time hiring showed poor results.

  • Average work week fell from 34.5 to 34.4 hours.
  • Overtime fell from 4.3 to 4.2 hours.
  • Temporary help increased 7,700 compared to 16,200 in June.

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

Industry Sub-industry Industry Jobs
Sub-industry Jobs
Goods Producing 4,000
Mining & Logging 4,000
Construction (6,000)
Manufacturing 6,000
Service Producing 157,000
Whoesale Trade 13,700
Retail Trade 46,800
Transportation & Warehousing 4,600
Information 9,000
Financial Services 15,000
Professional & Business Services 36,000
Education & Healthcare 13,000
Leisure & Hospitality 23,000
Other 14,300
Government 1,000 (4,100)
Total 162,000 162,000

Today’s employment report, along with the GDP report released earlier this week, continues to show an economy that is making slow and steady progress but remains at a sub‐par pace. One area that bears watching is the construction industry. Much has been made about how the recovery in housing is going to lead the economy to higher growth. Today’s employment report provided a cautionary note as the construction sector lost 6,000 jobs. This may well be a hint of what the rise in interest rates is doing to the housing and construction market.

The combination of today’s employment report, the sub‐par GDP report earlier in the week and inflation numbers that are below the Federal Reserve’s target range cast doubt on the market’s belief that the Federal Reserve will begin reducing their Quantitative Easing program in September. Unless the economic growth increases substantially in the second half of the year, a reduction in the Quantitative Easing program may well be pushed into 2014.