Kristina Hooper, CFP®, CIMA® is head of investment and client strategies for Allianz Global Investors Distributors LLC. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
The US labor market is making strides, but sometimes the math can be a little fuzzy.
On Friday, investors got some surprisingly good news on the economy. The Bureau of Labor Statistics released its November employment report, showing 146,000 non-farm payroll jobs were created, all coming from the private sector. While that’s a drop from the 171,000 non-farm payroll jobs originally reported for October, it came in well ahead of estimates. Indeed, many economists and strategists believed November would show less than 100,000 new jobs. Separately, the unemployment rate fell to 7.7%, another positive surprise.
Under the Hood
A closer look tells a different story, however. First, the payroll numbers for the previous two months were revised downward: from 148,000 to 132,000 in September and from 171,000 to 138,000 in October. The October revision is a significant drop—more than 19%—and should not go unnoticed. Looking at the last three months, the average number of jobs created has been a tepid 138,000. Second, while November non-farm payrolls dramatically exceeded expectations, they’re still well below the number of jobs needed to stimulate growth. Real and sustainable economic improvement, historically, has required adding 250,000 to 300,000 jobs per month.
But perhaps the most startling statistic comes from the household survey. While it is generally considered less reliable than the business poll, household data helps put unemployment in perspective. Despite improvement in unemployment overall, the percentage of unemployed people that are without jobs for 27 weeks or more remains persistently high at 40.1%. That is lower than a year ago, when the percentage of people out of work for 27 weeks or more stood at 43.1% of all unemployed. But it is still well above normal. Consider that in 2005, a time the economy was on stronger footing, we saw those unemployed 27 weeks or more comprising only 21.5% of all unemployed.
This is troubling for a variety of reasons. We know that typically the longer workers are unemployed, the harder it is for them to get a job. And we also know that the cessation of unemployment benefits is closer at hand for those unemployed 27 weeks or longer. If the long-term unemployed—currently more than 4.7 million people—are unable to find work and “time out” of the system, losing their unemployment benefits, then they will become a significant drag on the economy. Specifically, you would see a spike in home foreclosures, greater use of public-welfare benefits and a reduction in consumer spending.
Another point to note is that the number of “job leavers”—those who voluntarily leave their job—has actually decreased since November 2011. This suggests that more workers believe the job market has gotten worse in the past year. It’s also worth noting that people without a high school degree have the greatest level of unemployment at 12.2%, which compares unfavorably with those with at least a bachelor’s degree who have 3.8% unemployment.
What it tells us is that there could be some structural changes going on in the economy that are unlikely to be resolved in the shorter term and could extend the period of longer-term unemployment for a portion of the workforce. For example, advances in technology are eliminating unskilled jobs. Think newspaper delivery via iPad and automated check-out counters at the supermarket.
Of course, the employment situation is not all bad. November’s non-farm payrolls still bested year-ago levels, when 120,000 net new jobs were created. And we continue to see the private sector drive job gains while government jobs have shown net losses. This continued trend is encouraging given the current fiscal-cliff debate and the need for a reduction in government spending. Despite uncertainty over the pending expiration of tax breaks and automatic spending cuts, business sentiment—at least with regard to hiring—remains positive. The one-month employment diffusion index, which records the percentage of industries that have increased their payrolls in the past month, is at 59%. While it is down from October, it does give a helpful snapshot of current hiring.
The key takeaway from the latest employment report is that we need to carefully analyze all the data rather than just the headline number. Looking under the hood reveals cause for concern about longer-term employment trends and gives us a more complete picture of the job market. All in all, the employment situation is improving and the US economy continues to recover—albeit at a very slow and sometimes bumpy pace.
The Upshot is available as a subscription for financial professionals only. New issues will be delivered via email every Monday. Your email address must be in our records for your subscription to take effect.