In the latest Employment Report, on March 8, 2013, the media was focusing on how wonderful it was that the payroll employment had risen by 236,000 and how the unemployment rate fell by two-tenths of a percentage point. On the surface those numbers sound very good, but all you need to do is scratch the surface and you’ll find that February wasn’t a good month at all for the U.S. Labor Market.
According to the BLS, “Total nonfarm payroll employment increased by 236,000 in February, and the unemployment rate edged down to 7.7 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in professional and business services, construction, and health care.”
Now, delving a bit deeper into the numbers reported in the employment report, we want to shift our focus to the Household Data Summary Table A. Household Data, seasonally adjusted. The table is typically a few pages into the report (page 4 of the February 2013 report).
WHAT DOES ALL OF THIS MEAN?
1) The Civilian Noninstitutional Population grew by 165,000 — a bit low, but relatively normal growth range (Civilian Noninstitutional Population includes those 16 years of age and older who are not counted in institutions)
2) Not in the Labor Force grew by 296,000. This represents the portion of the Civilian Noninstitutional Population that: moved from the ranks of the Employed and Unemployed (Labor Force) into the not in the Labor Force component of the Civilian Noninstitutional Population or entered the Civilian Noninstitutional Population (new entrants by virtue of age, or leaving institutions like the military or prison), but didn’t go into the Labor Force.
3) The (Civilian) Labor Force dropped by 130,000. This includes those that moved from the ranks of the Employed and Unemployed to the ‘not in the Labor Force’ portion of the Civilian Noninstitutional Population: this equated to a change in the marginal Labor Force Participation Rate (LFPR) of -78.8% for the month of February.
4) Employed grew by 170,000. This means that the newly employed were drawn from the ranks of the unemployed and the ‘not in the Labor Force’ portion of the Civilian Noninstitutional Population (including drawing from some of those new entrants added into the Civilian Noninstitutional Population).
5) Unemployed dropped by 300,000. The unemployed were absorbed into the employed or moved into ranks of the ‘not in the Labor Force‘ part of the Civilian Noninstitutional Population, which again would also include a portion of those recent adds to the Civilian Noninstitutional Population.
So how can growing the employment by 170,000 and reducing unemployment by 300,000 not be such a great thing? First, adding 170,000 to the employed is a good thing. This represents people moving from the ranks of the unemployed, new additions to the Civilian Noninstitutional Population, and people moving directly from the ‘not in the Labor Force’ component of the Civilian Noninstitutional Population. The unemployed fall-off can be attributed to [at least some of the] 170,000 moving from that category into the ranks of the employed, and an additional 130,000 moving out of the labor force entirely. Seeing 130,000 either giving up on seeking employment, or leaving the labor force for other reasons is not a good thing, especially in light of the fact that this is being viewed as such a good month for the labor markets.
In looking at the 296,000 increase in the ‘not in the Labor Force’ component of the Civilian Noninstitutional Population, the 130,000 drop outs from the Labor Force are easy to conceptualize, but what about the remaining 166,000 that were added to the number? To arrive at the ‘not in the Labor Force’ component of the Civilian Noninstitutional Population, you simply add the monthly change from the Labor Force of -130,000 to the change in the Civilian Noninstitutional Population of -165,000 to arrive at the change in the ‘not in the Labor Force’ component of the Civilian Noninstitutional Population (296,000 due to rounding).
These higher numbers in the ‘not in the Labor Force’ component of the Civilian Noninstitutional Population are very troubling, especially in light of the double whammy underscored by a fall off in the Labor Force and what amounts to the effective movement of all new entrants into Civilian Noninstitutional Population directly to the sidelines. This is not to say that some of the new entrants didn’t find employment, but on a net basis, since the labor force shed 130,000 participants, then the other 165,000 additions to the Civilian Noninstitutional Population had to go somewhere – hence, the expansion of the ‘not in the Labor Force’ component of the Civilian Noninstitutional Population.
THE BIGGER PICTURE (Current Population Survey)
One month of reporting, does not a trend make…
Looking back to the beginning of 2008, it should be noted that the past five years have not been good at all:
1) While Civilian Noninstitutional Population was growing at a fairly healthy rate of around 200,000 per month, the Labor Force (those employed or those unemployed seeking employment) was only growing at around 24,000 per month (with it falling by 130,000 in February 2013 alone) clip.
2) The Labor Force Participation rate, the ratio measured by the Labor Force divided by the Civilian Noninstitutional Population moved from a respectable 66.2% in January 2008 to 63.5% in February 2013, levels we haven’t witnessed since the recession in 1981. The Labor Force Participation Rate for the month of February registered a horrible –78.8% (yes, that’s a negative rate) resulting from a change of (130,000) in the Labor Force / 165,000 change in the Civilian Noninstitutional Population.
3) From January 2008 to February 2013 employment has fallen by 2,886,000. When you couple this with a Civilian Noninstitutional Population growth of 12,212,000, this spells disaster for the Employment-Population Ratio (Employed / Civilian Noninstitutional Population), which came in at a crushing -23.6%. This fall-off drove the Employment-Population Ratio from 62.9% in January 2008 to 58.6% in February 2013.
For all, for you investors out there, keep in mind that the Federal Reserve System (the FED) watches this metric very closely in helping it to guide policy decisions regarding raising the targeted Fed Funds rate. When the employment markets really do start bouncing back, you will hear rumblings from the FED. If and when they take restrictive action interest rates will rise and its negative impact will be felt in both the debt market and the stock market.
Keep in mind the inverse relationship of interest rates and asset prices such as stocks and bonds and even real estate: as interest rates rise, the prices of assets fall and vice-versa.
Why so, you ask? The price of an asset, whether it be a financial or real asset, is the discounted present value of the net cash flow it spins off. The relevant interest rates are the rates used to discount the cash flows in this calculation. As the interest rates (discount rates) rise, the discounted present values of the cash flows fall, resulting in capital losses to owners of these assets.
It should also be understood that if interest rates rise, the burden of the debt service on the U.S. Government debt (our National debt) would rise significantly. In the latest Monthly Treasury Report, U.S. Treasury Department, Financial Management Service, the first item under Highlight: “The interest on Treasury debt securities is $16.9 billion, which is 5 percent of the total current month Federal Outlays.” The current average interest on the U.S. debt is under 2.0% (http://www.treasurydirect.gov/govt/rates/pd/avg/2013/2013_02.htm). If rates were to double from the current 1.99% on marketable debt (even 5% is below average), the portion of the Federal Budget dedicated to payment of interest on the debt will certainly double. Again, if interest rates were to rise in the near future the interest payment on the debt would rise accordingly.
Contrary to what the president is saying, the ratio of our national debt to our GDP is steadily rising and given the puny rate of growth in our GDP, it will not take long for sovereign risk to become a financial nightmare. One only needs to look to our seeming role model, the European Union, for an example of what lies ahead.
4) The unemployment picture: while the unemployment rate appeared to have improved, moving from 7.9% in January 2013 to 7.7% in February 2013, it is still far above the 5.0% rate in January 2008.
5) The last topic we cover regarding the Current Population Survey is the ‘not in the Labor Force’ component of the Civilian Noninstitutional Population. Since Jan 2008, this segment has expanded by 10,750,000, and by 296,000 in February 2013 alone. While this number should and will continue grow based on a growing population, retirements, permanent disability claims, discouraged workers, etc., it is the stunning rate and persistence of growth in this segment that is so alarming. While a growing Civilian Noninstitutional Population is (and should be) a good thing, since it offsets those people moving into retirement and those permanently disabled, this can only be the case when sufficient numbers of those additions can find employment.
When you couple the difficulties those people have in finding employment (as illustrated by the very low Labor Force Participation Rate) with: growing numbers of retirees – owed in part but not entirely to the aging population (baby boomers…born 1946-1964), but further exacerbated by the horrible job market; an enormous uptick in permanent disability claims; and very long duration of unemployment, it’s not hard to understand why the ‘not in the Labor Force’ component of the Civilian Noninstitutional Population has grown so much.
According to a February 28, 2013 article published by Mort Zuckerman (The Jobs Picture Is Far Worse Than It Looks, US News and World Reports):
“Twenty years ago, one person was on disability for every 35 workers; today, the ratio is one for every 16. Such an increase is simply impossible to explain by disability experienced during employment, for it is inconceivable that work in America has become so much more dangerous. For many, this program is another unemployment program, only this time it is without end.”
Despite the numbers and analysis, perhaps the present reality of labor markets is best described by 59 year-old David Waldrop, who has struggled to find employment and is presently unemployed. (http://www.businessweek.com/news/2012-03-18/bernanke-seen-not-knowing-jobless-rate-less-than-fed-predictions):
“There was certainly nothing in my area at my level,” he said. While the right opening might pull him back to employment, for now he sees his exit from the U.S. labor force as permanent. “I don’t see it happening,” he said. “I don’t see anything offering opportunities.”
Waldrop is one of millions who have dropped out of the labor market in the aftermath of the deepest recession since the Great Depression, causing the employment-to-population ratio to fall to 58.6 percent from 62.7 percent at the end of 2007. Federal Reserve Chairman Ben S. Bernanke says the decline reflects weakness in the economy that’s causing discouraged Americans to leave the workforce, bolstering his decision to add to his record monetary stimulus in January.
With this knowledge of the FED’s (Federal Reserve System) concerns regarding the labor markets, it’s pretty clear that – at least from this standpoint, the FED won’t be talking about higher interest rates in terms of raising the targeted Fed Funds Rate any time soon.