Friday, January 07, 2011

Jobs Report

Once again ADP proves to be wildly off base with their report. Last night one bank was out with an estimate that the jobs report would post over 400k new jobs. Ooops. The total add of 103k was again well below estimates and concentrated in leisure and hospitality and temporary help.

The good news was the sharp drop in the unemployment rate but I suspect that this is tied to the plummeting participation rate which is at multi-year lows. The participation rate measures the number of people in the economy that are working age that are employed or unemployed and looking for work.

I think I ran through this exercise before but it's worth reviewing. If you had a country of 100 working age people and 10 are unemployed, your unemployment rate would be 10%. If in the following month one of the unemployed just stops looking for work your numbers change to 99 people and 9 unemployed and your unemployment rate tumbles 9.1% (9 divided by 99).

This is probably how the unemployment rate dipped so sharply despite a modest increase in jobs.

Despite the fairly weak jobs report the stock market appears to be heading up right now. While the consensus among the talking heads will be "Markets are up because the unemployment rate went down" don't believe that hype. If the markets go up today it's based on the expectation that the Fed will continue to keep the economy going on life support. More money from the Fed, weakens the US dollar and props up commodities including stocks.

I'll follow up after I read through the complete report.

Sorry for the late update. It appears that roughly half of the drop in the unemployment rate was due to people dropping out of the workforce.

In summary this was a mixed view of the labor market:

The Good:

* The unemployment rate fell to 9.4% (but as I said about half of that is due to less people looking for work).
* October's jobs # was revised up by 38k.
* November's jobs # was revised up by 32k.
* Avg earnings ticked up 3 cents/hour.

The Bad:

* The declining participation rate is disturbing and at it's lowest level in 20+ years.
* The 103k jobs created was sharply below expectations.
* Long-term unemployed and part-time for economic reasons continue to climb.

These are the two most troubling stats in my opinion -

* Among the unemployed, 44.3 percent had been jobless for 27 weeks or more in December, up from 40.1 percent a year earlier.

* The unemployment rate has now been above 9% since May 2009, or 20 months. That is the longest stretch at such an elevated level since the Second World War.

I'd also note that the seasonal adjustment was unusually large this year - this is a stat geek item, but it really causes havoc when the seasonal adjustments are have tripled or quadrupled in a 20 years without a corresponding change in population levels.

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