Unemployment has been the devil in the economy: its persistence at a high level belies the argument that the US economy is in recovery. If the economy were recovering we should see steady increases in employment that indicate businesses feel confident enough to take on full-time workers. Demand for labor would first occur in manufacturing and then spread to the rest of the economy until it reached the consumer level of the economy.
The question is whether this indicates a trend and a recovery or is it a mirage of monetary and fiscal stimulus.
The BLS announced last Friday that 200,000 new jobs were created in December, but 212,000 jobs were created in the private sector. The headline number subtracts government employment losses (12,000) from the total. I think a shrinking government is a positive, not a negative, so I pay attention only to the private numbers. Here are some excerpts from the BLS report:
Both the number of unemployed persons (13.1 million) and the unemployment rate (8.5 percent) continued to trend down in December. The unemployment rate has declined by 0.6 percentage point since August.
Total nonfarm payroll employment increased by 200,000 in December. Over the past 12 months, nonfarm payroll employment has risen by 1.6 million. Employment in the private sector rose by 212,000 in December and by 1.9 million over the year. Government employment changed little over the month but fell by 280,000 over the year.
The number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 5.6 million and accounted for 42.5 percent of the unemployed.
The civilian labor force participation rate (64.0 percent) and the employment-population ratio (58.5 percent) were both unchanged over the month.
The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) declined by 371,000 to 8.1 million in December.
About 2.5 million persons were marginally attached to the labor force in December, little different from a year earlier. (The data are not seasonally adjusted.)
Among the marginally attached, there were 945,000 discouraged workers in December, a decrease of 373,000 from a year earlier.
Employment in transportation and warehousing rose sharply in December (+50,000). Almost all of the gain occurred in the couriers and messengers industry (+42,000); seasonal hiring was particularly strong in December.
Retail trade continued to add jobs in December, with a gain of 28,000. Employment in the industry has increased by 240,000 over the past 12 months.
Within leisure and hospitality, employment in food services and drinking places continued to trend up in December (+24,000). Over the year, food services and drinking places has added 230,000 jobs.
In December, manufacturing employment expanded by 23,000, following 4 months of little change. Employment increased in December in transportation equipment (+9,000), fabricated metals (+6,000), and machinery (+5,000). Mining employment rose by 7,000 over the month. Over the year, mining added 89,000 jobs.
Health care continued to add jobs in December (+23,000); employment in hospitals increased by 10,000. Over the year, health care employment has risen by 315,000.
Construction employment changed little in December. Within the industry, nonresidential specialty trade contractors added 20,000 jobs over the month, mostly offsetting losses over the prior 2 months.
Employment in professional and business services changed little in December for the second month in a row. The industry added 42,000 jobs per month, on average, during the first 10 months of 2011.
The average workweek … increased by 0.1 hour to 34.4 hours in December. The manufacturing workweek increased by 0.1 hour to 40.5 hours. Factory overtime decreased by 0.1 hour to 3.2 hours.
In December, average hourly earnings for all employees on private nonfarm payrolls rose by 4 cents, or 0.2 percent, to $23.24. Over the past 12 months, average hourly earnings have increased by 2.1 percent.
For those of you looking for the U-6 data, go here.
There are several things to think about when looking at these data.
First, some major gains were seasonal, even though these data are seasonally adjusted. Two major components (messenger/couriers and retail) added big numbers in December accounting for 70,000 of the 212,000 civilian jobs added. Add to that 24,000 waiters and bartenders. Now you have 94,000 low paying jobs of which some part is seasonal. So, if you deduct those from the total, add back in some normal growth for retailing and food (messengers were entirely seasonal), you get about +185,000 jobs. I understand this isn’t “scientific” but let’s call it a “heuristic” calculation.
Then there are the 20,000 jobs added in “nonresidential specialty trade contractors.” What they are talking about are subs in projects that are most likely related to the Administration’s fiscal stimulus “shovel ready” projects it funds with funds essentially created by the Fed. This is a tough number to chase down, but my brief research for the latest Recovery.gov data (Q3) showed that 9,700 jobs were “created” by contracts awarded by these stimulus programs. (Another 350,000 were allegedly created from grants.) Almost all of the contracts are for construction related to federal buildings. It is my belief that these jobs will disappear once the federal money runs out. Also, ditto for the so-called jobs created by grants. So, lets say 10,000 of those construction jobs will disappear. By the way, almost all of the Recovery Act funds have been paid out ( $738 billion).
Now you are getting down to about 175,000 jobs, good-but-just-better-than-average numbers.
There were several other things of note.
For example, the all-important manufacturing sector did not show growth in December, which has been the trend for most of 2011.
While manufacturing employment has been in a long-term declining trend, it is about 2.5 million jobs below its pre-Crash level. Nevertheless, as the chart to the left shows, there has been very little job growth in this sector. Consider the fact that manufacturing for the export market has benefited tremendously from the devalued dollar. While manufacturing is a capital intensive sector, the current level is still well below the level where we would expect it to be in a healthy economy.
Next, health care workers added another 23,000 jobs. Growth in health care reflects demographic trends: as Baby Boomers age, their need for health care goes up. Nothing wrong with these services, but one must consider the source of revenue for quite a bit of these expenses, which is MediCare, which is largely funded from tax revenues taken from younger workers. While no one questions the need for medical care for the aged, the lack of efficiency of government run health care systems is well known. When you have a third-party payer, few limitations put on those demanding such services, there are few market disciplines to rein in costs. And, many of these are low paying jobs. Let’s say one-half of these are low-paying.
Thus, of the total, at least 105,000 are low paying jobs. Recall that the financial service jobs they are replacing were relatively high-paying jobs. Which gets us to the conclusion that just because employment is increasing doesn’t mean we are in a strong recovery.
Now look at the negatives. Long-term unemployment remains stuck at 5.6 million and accounted for 42.5 percent of the unemployed, down only 1.8 percentage points for the last year. Also, the labor participation rate, that portion of the labor force actually working, declined only by 0.3% during the last 12 months (at 64.0%). Also, the employment:population ratio was unchanged for the year, at 58.5% (up only 0.2%).
Zero Hedge does an interesting calculation on labor participation rate. Since the average rate from 1988 to 2009 was 65.8% (see chart at right), if you use that number instead of the 64.0% rate, you get to an unemployment rate of 11%+. What they are saying is that the BLS underestimates the number of people looking for jobs by saying more people have dropped out of the labor force which reduces the unemployment rate. Experience would say that these dropouts probably want to work. Otherwise, it is difficult to explain the drop from 65.8% to the present 64.0% per the above chart.
The mainstream media are hailing these numbers as a turnaround point in the economy (e.g., “Hiring Shows Recovery Gaining Traction“). To some extent they are correct, and this is where it gets tricky. Despite all of the negative impacts to the economy as a result of the Crash and post-Crash government policies, there is still an ongoing organic recovery as private businesses struggle to stay in business and expand. The problem is that it has not been enough to really push employment.
I believe much of what we are presently seeing is mostly growth related to monetary and fiscal stimulus which is counterproductive to a real recovery. With such stimulus, the effect will fade when the money runs out and we will be left with the negative effects: price distortions, capital consumption, and more malinvestment. Also, we have the impacts of much of the world heading into recession.
Q1 2012 will be interesting to watch in a political year.