The Good, The Bad And The Ugly Of The U.S. Job Market

Includes: GLD, SPY
by: Disruptive Investor

If investors and readers just look at the headline unemployment numbers, the unemployment scenario in the United States seems to have improved meaningfully. The devil however is in the details. This article looks into the good, the bad and the really ugly aspects of U.S. employment.

The Good

As mentioned before, the headline unemployment numbers have improved to 7.5% in April 2013 from a high of 10% in September 2009. This is encouraging and there is no doubt that the private sector has created jobs after the economic slump between October 2008 and March 2009.

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According to the April 2013 U.S. payroll employment data, it is also encouraging to witness a broad based job growth across industries. More specifically, job growth in the mining sector and the manufacturing sector is encouraging. Going forward, the U.S. needs to create a finer balance between the production and the consumption oriented growth. As the chart below shows, only the government sector witnessed a decline in job growth as compared to the prior year. This is another positive sign as a stronger private sector and a relatively smaller government sector is always good for the economy. Having said that, this trend need to sustain over the long-term to indicate that jobs growth and economic growth is robust without significant government support.

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The Bad

The headline unemployment rate might not reveal the actual employment scenario based on the current economic activity. A better indicator is the U6 rate, which takes into consideration the marginally attached workers and the workers employed part-time due to economic reasons. The U6 rate for April 2013 was 13.9%, which is still high indicating weak real economic activity. The U6 rate has improved from a high of 17.1% in October 2009. However, the last reading witnessed an uptick in the U6 rate and it needs to be closely monitored as any sustainable improvement is still not on the cards.

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I discussed the April 2013 payroll unemployment numbers earlier. If the same data is viewed compared to the job scenario during the December 2007 peak, the picture is still gloomy. As the chart below shows, sectors contributing to 41.8% of jobs in the United States have witnessed positive job growth since December 2007. Some very important sectors such as retail trade, wholesale trade, transportation and manufacturing are still significantly below the peak employment in December 2007. Except for the natural resource and mining sector, the job growth has primarily been driven by the services sector. Again, there needs to be broad based employment growth as the one witnessed in the month of April 2013. If the one month trend fails to sustain, the employment concerns will remain at large.

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The Ugly

A higher percentage of the working population is always good as a lower dependence ratio can boost growth in several sectors of the economy. This is one of the biggest concerns for the United States and is one of the ugliest aspects of the current employment scenario.

The chart below gives the number of people not in the labor force. The number of people not in the labor force is at a record high and has increased by nearly 13 million since the beginning of the crisis. As more people opt out of the labor force, the headline unemployment number shows a positive picture. The real scenario is however gloomy as a percentage of dependent increase in a weak economic environment. As salary growth might not be robust, supporting a higher number of dependents can impact the consumption factors of growth.

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The point of an increasing number of dependents is evident from the chart below, which gives the civilian employment-population ratio. The ratio, currently at 58.6%, is the lowest in over three decades. Going by the demographic situation in the U.S., the ratio is likely to remain at stressed levels or deteriorate further in the foreseeable future. This is clearly negative for a consumption driven economy. Also, it is a negative factor as it increases the government debt burden on working individuals. Going forward, further tax increases can also dent private sector growth.

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Another serious aspect of unemployment is the rate of unemployment among the youth. As of April 2013, the unemployment rate for the age group 16-19 years was 24.1% and the unemployment rate for the age group 20-24 years was 13.1%. This is negative for economic sentiment and also for consumption. The $1 trillion student loan also deserves a mention here. If the unemployment rate among youths remains high, an increasing student loan default can trigger the next crisis for the banking system.

Another rather serious aspect of unemployment is the unemployment duration, which is currently at 36.5 weeks. The unemployment duration has declined from a peak of 40 weeks.

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However, the duration still remains at uncomfortably high levels. Prolonged periods of unemployment can depress consumption as increasing caution creeps into the households. At the same time, consumer credit growth is impacted, which has a meaningful impact on real economic activity.


Overall, significant concerns remain related to employment and the sustainability of economic growth in the current job scenario. The employment data discussed also raises a big question on government efforts to prop up economic growth. I had discussed the futile attempt by the government to benefit the real economy through current policies in one of my earlier articles. Amidst all this, the S&P 500 (NYSEARCA:SPY) is trading at all time highs. As discussed in several of my earlier articles, the asset markets will continue to do well in the long-term due to continued expansionary monetary policies. Therefore, from an investment perspective, investors can buy into risky asset classes on any correction. As a part of portfolio diversification, gold (NYSEARCA:GLD) can be considered at current levels.

Finally, the private sector has a major role to play in boosting economic growth and improving the unemployment scenario. The real fear is related to the government sector spending and its impact on the private sector. If excessive government spending results in crowing out of private sector investment, the economy might be headed for a far serious downturn. For now, the private sector seems to be doing well.

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.