What Analysts Aren't Saying About Friday's Employment Report

by: Market Analyst

The February jobs data came out on Friday, and in terms of reported data, it was good news all around. The 236K new jobs reported was substantially ahead of expectations for about 165K. This included a 48K jump in construction employment, which despite the recent upturn in housing had been lagging. The unemployment rate fell to 7.7% from 7.9% (vs expectations of 7.8%). Unemployment has now dropped by 2.3 percentage points from a revised peak of 10.0% in October of 2009. This represents a recovery of about 40% of the job losses (in percentage terms) from May '07, when unemployment was at a low of 4.4%.

Unemployment Rate Recovery is an Illusion

Taken as a whole, this is by far the slowest recovery in the post-war era… but if we look deeper, the word 'recovery' may be a bit of a misnomer. As it turns out, the bulk of the drop in the unemployment rate since October '09 has been driven by people dropping out of the labor force. The participation rate (the proportion of the population that is either employed or looking for work) peaked in 2000 and again in Jan '07 and has declined fairly steadily since mid '08. As the unemployed go longer and longer without work, some of them just stop looking. When that happens, they are not counted as unemployed, as they are no longer part of the labor force. So the unemployment rate goes down, even though the proportion of the population that is not working did not.

Employment Tells the Real Story

One of the clearest ways to see this disparity in how we measure the employment situation is by comparing the Unemployment Rate with another measure called the Employment-Population Ratio, or Employment Rate. The chart below looks at Unemployment vs an inverted Employment Rate. As we can see, the two generally move very closely together, but since late 2009, there has been a large divergence. Unemployment has declined substantially, while Employment has hardly improved at all. It fell from a high of over 63% of the population working in '06-'07 to 58.5% working in October 2010 (when unemployment peaked). Since that time, while Unemployment has improved steadily (albeit slowly), the Employment Ratio has remained between 58.2 and 58.7%. At present, 58.6% of the population is employed, just 0.1% better than when Unemployment hit its worst levels a few months after the recession ended.

At the end of the day, what it comes down to is the American consumer. People cannot sustainably spend more than they make. So while it's certainly positive that the economy is continuing to add jobs, the fact is since the end of the recession, those jobs have only served to keep pace with population growth--the real employment picture has not improved. With a smaller proportion of the population working, the burden of producing the income to fuel the spending of the American consumer falls to those few. And with real wage growth stagnant at best, there is little hope of sustaining any significant growth without continued government assistance.

Source for Data: Bureau of Labor Statistics

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.