Parsing the Dismal October Employment Report

Written by Dirk van Dijk: On Friday, the BLS released the employment report for October. The text of the release is below, with my comments interspersed.

Nonfarm payroll employment fell by 240,000 in October, and the unemployment rate rose from 6.1 to 6.5 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. October's drop in payroll employment followed declines of 127,000 in August and 284,000 in September, as revised.

Employment has fallen by 1.2 million in the first 10 months of 2008; over half of the decrease has occurred in the past 3 months. In October, job losses continued in manufacturing, construction and several service-providing industries. Health care and mining continued to add jobs.

The job losses for August were originally reported as 73,000 and the losses for September were originally thought to be 159,000, so in addition to the nearly a quarter million jobs lost in October, revisions added 176,000 more to the jobless rolls that was initially estimated. These are huge revisions.

Unemployment (Household Survey Data)

The unemployment rate rose by 0.4 percentage point to 6.5 percent in October, and the number of unemployed persons increased by 603,000 to 10.1 million. Over the past 12 months, the number of unemployed persons has increased by 2.8 million, and the unemployment rate has risen by 1.7 percentage points.

The unemployment rate has now exceeded the highs of the last recession, and the National Bureau of Economic Research [NBER], the official arbiter of when we are in a recession, has not yet decided we are in one, although what they are waiting for is beyond me. I suspect that they tried to avoid making a call just before the election to avoid the appearance of partisanship, but even that excuse is now moot.

Historically, unemployment keeps rising until the end of the recession, although in the last two recessions it continued to rise for about a year after the official end of the recession. While there are very significant demographic reasons to suspect that the unemployment rate will remain below the levels seen in the worst two recessions of the post war era ('74-75 and '82-83), it is pretty clear that this is going to be a very nasty recession. We will be lucky if the unemployment rate tops out below 8.0%, but we will not know how high the peak is for at least another year.

The unemployment rates for adult men (6.3 percent), adult women (5.3 percent), whites (5.9 percent) and Hispanics (8.8 percent) rose in October. The jobless rates for teenagers (20.6 percent) and blacks (11.1 percent) were little changed. The unemployment rate for Asians in October was 3.8 percent, not seasonally adjusted. Rising unemployment seems widespread across demographic groups.

Among the unemployed, the number of persons who lost their job and did not expect to be recalled to work rose by 615,000 to 4.4 million in October. Over the past 12 months, the size of this group has increased by 1.7 million.

This is a reflection of the change in the economy over time; back in the 50's, 60's and 70's unemployment was more of a furlough system. Business would slow down and people would be laid off. However, they would still keep their identity -- an Autoworker would become an unemployed Autoworker, but could fully expect to return to their old job at the same firm, doing the same work as soon as things picked up again.

Now lay-offs are more permanent. A 63% rise in such permanent job losses in a single year, and a 16% rise in a single month, is disturbing. However, relative to history, a larger percentage of job losses will be in this category.

In October, the number of long-term unemployed (those jobless for 27 weeks or more) rose by 249,000 to 2.3 million. The long-term unemployed accounted for 22.3 percent of total unemployment. The newly unemployed -- those who were jobless fewer than 5 weeks -- increased by 212,000 to 3.1 million in October.

A rapid rise in the number of long-term unemployed is one of the clearest markers of a recession, and will typically at least double over the course of a recession. Also, it will never rise by more than 20% if we are not in a recession. With the latest data, long-term unemployment is now 75% higher than it was a year ago. In absolute numbers, this is the highest level of long-term unemployed since September of 1983.

Typically unemployment benefits run out after 27 weeks (although they are sometimes extended during a recession). Thus there is sort of a two-step process where people reduce their spending, first when they are originally laid off, and then further spending cuts after the unemployment checks stop coming in.

The very high level of long-term unemployed is one of the reasons that I think that Christmas will be cancelled this year (the Santa part, not the religious part).

Total Employment and the Labor Force (Household Survey Data)

The civilian labor force participation rate (66.1 percent) and the employment-population ratio (61.8 percent) were little changed in October. Since a recent high in December 2006, the employment-population ratio has declined by 1.6 percentage points.

This is a little bit disingenuous to say that the employment-population ratio was little changed, it dropped from 62.0% to 61.8%. As it did so, if fell below the lows of the last recession to a level not seen since October of 1993. The labor force participation rate is still, however in line with what we have been seeing in recent months.

The economy is in bad shape, and things are likely to get much worse before they get better. People will respond to rising unemployment by cutting back on spending, even if they are still employed.

Discretionary spending goes first, so stay away from that sector. Both businesses and consumers will cut back on travel which will hurt the Hotel firms like Marriott International, Inc. (MAR) and Starwood Hotels & Resorts Worldwide, Inc. (HOT).

Few people will want to buy a new car, even if they can find a car loan, further hurting General Motors Corporation (GM) and Ford Motor Company (F) as well as suppliers like TRW Automotive Holdings Corp. (TRW) and Lear Corporation (LEA).

Retailers typically make all their money for the year during the holidays, but this year they will not be making much at Christmas, so stay away from stocks like Kohl's Corporation (KSS) and Macy's, Inc. (M). Earnings estimates for 2009 and too high across the board, but not all estimates will come down by equal amounts.

Look for areas where earnings will not fall apart during a long and nasty recession. Health Care names like Johnson & Johnson (JNJ) and Bristol Myers Squibb Co. (BMY) fit the bill nicely.

Comments

[Walt17:]

"the National Bureau of Economic Research [NBER], the official arbiter of when we are in a recession, has not yet decided we are in one, although what they are waiting for is beyond me"

Recession is a technical term based on past data. In my opinion, it is only useful in a historical perspective. When looking at the present economic condition, there are many, and much more relevant, factors that help paint a realistic picture. Whether or not we are in a "recession" doesn't really matter to the person who has lost a job, or the company who is seeing sales go south.

2008 Nov 10 07:17 AM

[Jason Rines...:]

In a deflation, there is no "safe" sector. For example, a survey on Rx usage fell 22% in Q3. Some of the big pharma names I work with are now quantifying those numbers.

There were those here up to a year ago that discussed a large transitional phase for the U.S. workforce. How insightful those articles were.

Ultimately, a company or individual will trade comfort to take risks to to go where the money is, whether learning online skills or physically traveling to serve business.

Yes, healthcare is a better hedge then retail. But the dollar stores and Wal Mart will continue to perform. The investor has choices where to put money, much of driven by common sense at this point. What is a necessity and what isn't?

An individual may do better in healthcare doing private duty which gives more cash per hour but no health benefits.

Executives may need to jump on planes to a different region of the country or to far off lands like Chindia or Dubai to raise money.

An entrepenuar with a great business idea may need to live in a dingy one roomer or live with parents to get a small or home based business off the ground.

Pain creates necessity and necessity is the mother of all invention.

2008 Nov 10 12:27 PM