(VZ) Ugly U.S. Jobs Report in Depth Part 1

The total number of people employed was unchanged in August, not a single job gained or lost. That is much worse than consensus expectations for a gain of 75,000.

This report was also worse than the ADP report on Wednesday. That report showed 91,000 private sector jobs created, and the expectations were for the BLS to show 111,000 new private sector jobs.

The “actual” BLS number of private sector jobs was just 17,000. Government payrolls declined by 17,000. The Federal Government employment fell by 2,000 jobs. The State level added 5,000 but the Local levels laid off 20,000. The pace of government layoffs slowed sharply from last month when a total of 71,000 were laid off (revised from a loss of 37,000).

The unemployment rate, which is derived from a separate survey was also unchanged at 9.1%. That was in line with what the consensus was looking for. The Household survey was noticeably more upbeat than the establishment survey. pointing to a gain of 331,000 jobs.

The Civilian Participation rate rose to 64.0% from 63.9%, but is down from 64.7% a year ago. In other words, the unemployment rate was unchanged even though people were coming back into the labor force.

The percentage of people over the age of 16 who actually have jobs rose ever so slightly to 58.2% from 58.1% (employment to population ratio, or the employment rate). However, last month’s levels of both the participation rate and the employment rate were the lowest since 1983, so the small increases hardly mean that happy days are here again.

More Downward Revisions

The already weak numbers for June and July were revised lower. In June we “actually” gained 20,000 jobs, not the 46,000 reported last month, but still slightly higher than the first read of just 18,000 jobs gained. In July, we gained 85,000 jobs, well below the 117,000 reported last month.

The revisions have now been negative in three out of the last four months. The downward revisions came mostly from even more public sector jobs being lost than was originally thought. The private sector revisions were up slightly for July, with a total of 156,000, not 154,000 jobs gained. That was more than offset though by June adding 75,000, not 80,000 private sector jobs.

Still, the June number is better than the 57,000 private sector jobs gained when first reported. The government actually dropped 71,000 workers in July, not the 37,000 reported last month, and in June government payrolls were actually down by 55,000, not 34,000.

Unemployment Rate

The unemployment rate is derived from a separate (household) survey from the total number of jobs (establishment) survey. The household survey was much more upbeat than the establishment survey, as it has been for most of the year so far. In August, it showed a gain of 331,000 jobs. However, it was more downbeat in July, and showed a drop of 38,000 jobs.

The number of people unemployed according to the household survey, on the other hand, rose by 36,000 in August after falling 156,000 July. However, generally the numbers from the household survey are considered less reliable than are the numbers from the establishment survey. That does not mean they should be disregarded entirely, and the divergences between the two series are often the biggest near turning points in the economy.

The household survey does a much better job of picking up people who are self-employed, and of very small start-up businesses, than does the establishment survey. The rise in both the number of employed and the number of unemployed means that the civilian labor force increased. Some of that is simply due to a growing population. However, it also indicates that some discouraged workers have reentered the workforce and are actively looking for work now, rather than seeing the situation as being so hopeless that it is not worth the gas money to drive to an interview.

The unemployment rate remained at 9.1%; it was at 9.8% as recently as November. A year ago the unemployment rate was 9.6%. The civilian participation rate, or the percentage of people in the labor force, both employed and unemployed, rose to 64.0 from 63.9%.

That is good news, but hardly cause for celebration as the July number was the lowest since May 1983. We were also coming out of a nasty recession at that point, and women were still far less involved in the workforce than they are today. It is down from 64.7% a year ago.

The employment-to-population ratio, or the employment rate, also rebounded slightly, after fell for two months to 58.2% from 58.1%. It was at 58.5% a year ago. Normally at this point in the cycle, it should be the participation rate that is rising, and the employment rate rising, or at least staying unchanged.

The unchanged unemployment rate in the face of the rise in the participation rate is one of the few silver linings in this report. However, it is also true that the drop in the unemployment rate from 9.6% to the current 9.1% is essentially an illusion caused by the fall in the participation rate from 64.7% to the current 64.0%. A fall in the unemployment rate from a falling participation rate is not really such great news.

Average Workweek

For all employees, the length of the average workweek fell to 34.2 hours from 34.3 hours, in both June and July, but matching the hours a year ago. For production and non-supervisory employees, the length of the average workweek also ticked down to 33.5 hours from 33.6 hours in both June and July but matched the year-ago level.

While a drop of an average of 6 minutes per week might not sound like a big deal, multiply it by the 131.132 million workers in the economy, and yes it is a big deal (to the extent it was really a six minute drop, and not smaller due to rounding. It is just more bad news in the report.

Average hourly earnings for all employees fell to $23.09 from $23.12 and are up 2.0% from $22.67 a year ago. Average hourly earnings for production employees fell $0.02 to $19.47 for the month, and is up 1.8% from $19.13 a year ago. The year over year changes are not great, but then again, inflation is pretty low as well.

Income growth in the middle and lower half of the income distribution has been sorely lacking, not just recently, but for over a decade. Well actually, it has been pretty bad for the bottom 90% of people, but particularly anemic for the lower half of the income distribution. Higher incomes for those who are working means higher sales and more quickly repaired household balance sheets. Slow growth or actual declines mean lower sales and less progress on balance sheet repair.

The anemic growth in average hourly earnings is not a good thing for the economy, although it is good news for corporate profits, and hence the stock market, at least in the short term. It also means that it will be tough for a generalized increase in overall prices (aka inflation) to occur, as opposed to increases of relative prices of highly visible items such as food and gasoline.

While the unemployment rate is better a year ago, most of that is a mirage due to falling participation rates. A falling participation rate is not exactly a new development, it has been in a downtrend for a decade now, but the decline has been very steep in the Great Recession and has yet to really turn around.

Participation Rates

While the unemployment rate gets the headlines, it is worth digging just a little bit deeper into the number. The unemployment rate is really the civilian participation rate divided by the employment rate, also known as the employment population ratio. The total population (over 15 years old) is divided into three groups, the employed, the unemployed and those not in the workforce.

The participation rate (blue line in the graph below) is the percentage that are either employed or unemployed. It will never reach 100%. For that to happen, the social security retirement age would have to be raised not to 67 or 68, but to 167.

The highest the participation rate ever reached was 67.3% in April of 2000. The participation rate will normally slump during a recession and its aftermath.

However as the first graph below shows, the participation rate was in a huge secular increase from the mid-1960’s until the end of the 20th century. Yes, it would flatten out and decline slightly during recessions, but it would always return to a higher high, and the low during the next recession was always much higher than the previous low. That did not happen in the last expansion.

The highest the participation rate hit during the last expansion was 65.8% in January 2005. In July, the participation rate fell to 63.9% from 64.1%. This month we got half of that back. It had been at 64.2%, since the start of the year, but generally has been trending downward. It was 64.7% a year ago.

The employment rate fell to 58.1% in July from 58.2% in June, and we have now returned to the June level, and down from the 58.5% rate of a year ago. The July numbers were the lowest since 1983 for both the participation rate and the employment rate. The employment rate is a very underappreciated economic statistic, and really should be much more widely reported.

The Historical Context

The secular rise in the participation rate was due to two huge demographic trends. First was the entry of the baby boomers into the workforce. Remember, you are neither employed nor unemployed when you are a kid. The baby boom started in 1946, so by the mid-1960’s they were reaching the age when they were either employed or unemployed (or out of the country getting shot at in Vietnam). That was a major force lifting the participation rate until the early 1980’s.

The second major demographic force that started just a bit later (in force) but continued longer was the increased participation of women in the labor force. Back in the mid-1960’s if a magazine article mentioned the words “women” and “labor” in the same paragraph, the odds were that the article was about childbirth. That clearly is no longer the case today. In July, there were 63.300 million women working (over age 20), not that much behind the 72.015 million men with jobs (per household survey).

The front end of the baby boom is just now hitting retirement age, and that will put continuing downward secular pressure on the participation rate for years to come. The participation rate took a big dive during the early part of the recession, started to rebound early in 2010 this year, but then trended back down again in the second half. It had been steady at 64.2% in 2011.

A rising participation rate will put upward pressure on the unemployment rate, but should nevertheless be considered good news. A falling participation rate will lower the unemployment rate, but is bad news for the economy. We should be seeing the participation rate rise, not fall, two years after the official end of the recession. Over the longer term, though, the rebound in the participation rate is likely to be limited by the baby boom retirement wave.

Employment Rate

The other side of the decomposition of the unemployment rate is the employment to population ratio, or the employment rate (black line). That is the percentage of the population that actually has a job. One way or another, these are the people that have to support the rest of the population.

This is a hugely under-reported number, and one that deserves a lot more attention than it gets. Like the participation rate, it had been in a secular upward trend from the mid-1960’s through the end of the century. It is, however, much more volatile than the participation rate (it has to be, if it always moved in tandem with the participation rate, the unemployment rate (red line, right hand scale) would never change). Its high-water mark was 64.7% in April 2000.

Unlike previous recoveries, it never came close to hitting a new high after the 2001 recession was over, only getting back to 63.7% in March of 2007 before starting to fall again. During the Great Recession it really fell off a cliff, hitting 58.2% early in 2010. It erratically pushed its way higher through the middle of 2010, but then collapsed back to 58.2% in November.

July set a new low that has not been equaled since November of 1983. It is hard to be all that upbeat about an employment report which shows generational lows in both the participation and employment rates. (Graph from this source.)

Better Than the Last Two Times

Note that in the 1991 and 2001 recessions, the employment rate (employment population ratio on the graph) continued to decline for a very long time after the recession ended. The NBER declared the Great Recession officially over as of June 2009. You would never know it from listening to the press or the pundits, but this recovery has been better on the jobs front than the two recessions that preceded it, particularly when it comes to private sector employment. However, both of those recoveries were far slower than all of the post-war recoveries that preceded them.

The employment rate should get more attention than it does, and the unemployment rate less, although clearly the two numbers are related. The unemployment rate, though, can be more subject to distortions than can be the employment rate. Over the last year, most of the decline from 9.6% unemployment to 9.1% has been due to the drop in the participation rate, and was thus an illusion.

Duration Measures Mixed

There was mixed news on the duration of unemployment front. Over time, the number of short-term unemployed really does not vary that much. People are always losing jobs, or in boom times quitting jobs. Next week we should get the Job Openings and Labor Turnover Survey (JOLTS), which will tell how many people are getting laid off versus quitting and the actual number of new jobs created.

The numbers today simply show the net difference between jobs lost and jobs gained, rather than the totals for each side, which are FAR larger. Unfortunately, the JOLTS data will be for July, not August. The story from the JOLTS data over the last year is not that a huge number of people were getting fired, but an extreme dearth of people were getting hired.

It is the number of long-term unemployed that really make the difference between boom and bust. The extraordinarily long time that people have been out of work after they lose their jobs is what has really set this recession apart from all the previous post-war recessions.

The average duration of unemployment (red line) dipped ever so slightly to 40.3 weeks from 40.4 weeks in June; a year ago it was at 33.5 weeks. The year-over-year change, however, is exaggerated. The definition was changed in January, so the historical comparison for the average is now meaningless, or at least has to be taken with a big grain of salt.

Previously, if someone reported being out of work for more than 2 years, the BLS would enter them in the database for being out of work for 2 years. The maximum was changed to five years. While an interesting statistic, and relevant in the face of the “99ers,” or those who have been out of work so long that they have exhausted even their extended unemployment benefits. The month-to-month change is still for real, but the change in the definition makes the longer term historical comparisons less relevant.

For what it’s worth, given the change in the definition, July a new record high for the average duration of unemployment. Prior to the Great Recession the previous all-time record high was set in June of 1983 at 20.8 weeks, but that too was under the old definition. Still, a near doubling from the previous record (prior to this cycle) is very noteworthy.

The median (blue line, half above, half below) duration will always be lower than the average duration since it is impossible to be unemployed for less than zero weeks. It is also not distorted by the change in “top coding” of the data. Its history is not quite as long as the average, but is at least consistent in definition for the whole history.

There the news was bad. It rose to 21.8 weeks from 21.2 weeks in July, but still below the 22.5 weeks in June. A year ago it was at 20.6 weeks. Given the change in the definition for the average, the median is the more reliable statistic right now, but both are telling pretty much the same story. If you are out of work, you are having a very hard time finding a new job.

Prior to this downturn, the highest the median duration had ever hit was 12.3 weeks in May of 1983.  Note that it is normally the case that the duration of unemployment continues to rise even after the recession ends. This happened not just in the last two recoveries, but in all post-war recoveries.

However, following the 1991 and 2001 downturns the persistency of high and rising unemployment duration was much more pronounced than in the earlier downturns. This time, the peak was a Mount Everest relative to any previous experience (except perhaps for the Great Depression, but that data is not available).

Very Ugly Report

Overall, this was a very ugly report. It came in far below expectations, and unlike in the Paul Newman movie, in this case nothing is not a very cool hand. The household survey was stronger than the establishment survey, but it didn’t exactly paint a picture of a boom, and it simply reversed last month, where it painted a much bleaker picture than did the establishment survey.

There were a few special factors in this report, most notably a strike at Verizon (VZ), which probably accounted for a drop of about 45,000 jobs. That should be reversed next month. The loss of public sector jobs this month was less than I expected, but if you factor in the revisions to last month the totals are still horrific.

All told, over the last year, the government has dropped 450,000 employees. Some of those losses are simply temporary census jobs. However, the states and localities did not employ any census workers and over the last year they have dropped 345,000 workers. That is a lot of cops, firefighters, teachers and social workers who are now out of work. The private sector has done much better, adding over 1.7 million workers in the last 12 months.

Later today I will post part two of my analysis of the employment report, where I will focus on the demographics of joblessness, and on where in the economy jobs are being created or lost. I will also give more of my thoughts about what we should be doing about the employment situation, and the significance of this report in a larger historical context.

Part 2 of this report

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