Bulls left winded by US employment report


SERIOUS MONEY:WALL STREET’S perennial bulls have been knocked off balance, not once but twice in a matter of days. The soothsayers were busily ramping up their numbers for first-quarter economic growth only for the Bureau of Economic Analysis to do the unthinkable and revise its initial estimate lower.

The pencils remained out, however, as the economist fraternity competed furiously to see who could produce the highest estimate for job-creation during May.

That accolade went to Goldman Sachs, who raised its number by 100,000 to 600,000 just hours before the official release, though the consensus was not far behind at 536,000.

When the monthly employment report was made public last Friday lunchtime, revealing that the US economy added 431,000 jobs last month – roughly 95 per cent of them attributable to temporary hiring for the 2010 census – that optimism fell flat. The private sector added just 41,000 jobs and that number was offset by downward revisions of 31,000 to private payrolls for March and April.

The market response was immediate. Stock prices sank. The bulls have demonstrated once again that they are not supermen.

It is important for investors to appreciate that the monthly employment report contains surveys of both company establishments and households.

The financial markets typically focus on the payrolls number collected from the establishment survey as it tends to be less volatile on a month-to-month basis than the comparable number from the alternative household survey, which includes the unemployment rate data. However, the establishment survey has a large-company bias and typically fails to capture labour market trends among small businesses.

The household survey is more expansive and tends to be a leading indicator of payroll data at turning points. In this regard, the trend apparent from the household survey is cause for concern.

It suggested earlier this year that the labour market had turned the corner but the down trend resumed last month with a monthly loss of 322,000 jobs and a drop of 563,000 over the last 12 months.

The unemployment rate, which comes from the household survey, dropped last month and has only increased by 30 basis points (0.3 of a percentage point) year-on-year, but only because a mass exodus from the labour force has seen the share of Americans either employed or actively looking for work drop to the lowest level since 1985.

The labour participation rate has dropped 0.8 percentage points over the last year to 65 per cent – well below the last cycle peak of 66.4 per cent and the all-time high of 67.3 per cent registered a decade ago.

As a result, the number of people classified as “not in the labour force” has jumped by more than 2.5 million over the last year.

The drop in the participation rate has been particularly pronounced among individuals in the 16 to 24 age group and suggests that the unemployment rate will remain elevated for an extended period as the disillusioned return to the labour force.

Indeed, should the participation rate increase gradually to its pre-recession level of 66 per cent by the end of 2012, the US economy would need to add 225,000 jobs every month simply for the unemployment rate to remain at current levels.

In this context it is useful to note that the highest 12-month average payroll gain during the previous economic expansion were 239,000 net job additions a month registered during the spring of 2006. The average monthly gain for the entire economic expansion was less than 100,000 jobs a month.

Not only has the US unemployment rate risen faster than during earlier US recessions, but US workers unfortunate enough to lose their jobs are remaining unemployed for longer periods during this downturn.

The mean duration of unemployment has soared to a record high of 34 weeks as against a previous high of 21 weeks in August 1983.

The economic downturn has not only resulted in massive job losses but has also reduced hours worked for those who are fortunate enough to remain in employment.

The average working week has registered a meaningful improvement from the all-time low registered last summer, but is still 36 minutes below the last cycle high. That may not sound like much, but businesses typically work their existing employees longer before they increase their headcount and each additional minute economy-wide is equivalent to about 60,000 jobs.

Unemployment is likely to remain elevated throughout the current economic recovery and subsequent expansion. Indeed, even using optimistic labour market assumptions, the unemployment rate is unlikely to drop below 6 per cent until 2015 – unless the mass exodus from the labour force continues.

The cumulative blow to workers’ income is set to exceed $1 trillion within three years and ensures that the recovery will be decidedly subpar. It is hardly a surprise in this context that the major stock market indices are pricing out a V-shaped recovery.