Economic Update—September 5, 2013

By Steve Scranton, SVP, CFA
Chief Investment Officer

Employment Report

Jobs growth in the U.S. continued at a slow but sub‐par pace. The Bureau of Labor Statistics (BLS) reported that the nation added 169,000 jobs in August. This was below the expected level of 183,000. The BLS also revised lower the jobs growth for the previous two months. The total revision between the two months resulted in 74,000 less jobs being created compared to what was originally reported.

Although jobs growth was below expectations, the unemployment rate was better than expected. The unemployment rate was expected to hold steady at 7.4% but it actually dropped to 7.3%. This was once again due to people giving up looking for work and dropping out of the labor force rather than due to strong jobs creation. The labor force fell by 312,000 people. Digging beneath the headlines shows that the people dropping out of the labor force are college grads who are unable to find work. This can be seen when we look at the labor participation rate. Overall, the labor participation rate fell from 63.4% in July to 63.2% in August. All of the decline came from two categories:

  • Some college or Associates degree: fell from 67.3% to 67.2%
  • Bachelors degree or higher: fell from 75.5% to 75.4%

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

July August
U3 (Official unemployment rate) 7.4% 7.3%
U4 (U3 plus discouraged workers) 8.0% 7.8%
U5 (U4 plus marginally employed workers) 8.8% 8.7%
U6 (U5 plus involuntary part time workers) 14.0% 13.7%

The youth unemployment rate showed deterioration except for the 16‐17 age bracket. The 16‐ 17 age bracket appears to be a reversal of the jump that occurred in July.

Age July August
16-17 years 29.1% 26.3%
18-19 years 19.9% 21.7%
20-24 years 12.6% 13.0%

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 11.0% 11.3%
High school, no college 7.4% 7.3%
Some college or associate degree 6.0% 6.1%
Bachelor’s degree or higher 3.8% 3.7%

There was positive news on the salary front. It appears that since businesses remain cautious about new hires, they are working their existing employees longer. This resulted in salary increases for August. This can be seen in examining the following data:

  • Average work week rose from 34.4 hours to 34.5 hours
  • Overtime rose from 3.2 hours to 3.4 hours
  • Average hourly earnings rose.2% for the month and 2.2% year over year

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

Industry Sub-industry Industry Jobs
Sub-industry Jobs
Goods Producing 8,000
Mining & Logging 4,000
Construction 0
Manufacturing 4,000
Service Producing 134,000
Whoesale Trade 8,000
Retail Trade 44,000
Transportation & Warehousing 12,000
Information (18,000)
Financial Services (5,000)
Professional & Business Services 23,000
Education & Healthcare 43,000
Leisure & Hospitality 27,000
Other 0
Government 17,000 17,000
Total 169,000 169,000

Today’s employment report and the revision to 2nd quarter GDP continue to paint a picture of an economy that is growing steadily but slowly. Although today’s employment report and the upward revision to 2nd quarter GDP do not meet the Fed’s forecast levels, it does not appear that they are weak enough to stop the Fed from beginning to reduce the amount of money that they are pumping into the economy (via bond purchases). What the data appears to put Into question is the size of the reduction. Originally, the number being discussed was a reduction from $85 billion per month to $65 billion. Now, forecasters are reducing their estimates and calling for a smaller reduction; possibly from $85 billion to $75 billion. The Fed does not meet until later this month, so they will continue to closely monitor all of the economic data coming out.