An In-Depth Analysis of the Employment Report

by: Markos Kaminis

The Employment Report for July came in short of expectations, and a steep revision lower to June's result piled on weight against stocks Friday.

Employment Situation

The Department of Labor released its Employment Situation Report for July before the open of trading Friday morning. A slew of mixed data leading into the release, including weekly jobless claims, ADP's Private Employment Report, Challenger's Job-Cuts Report and the Monster Employment Index had investors off-balance heading into the DOL release. The news ahead of the data was neither terrible nor upbeat, but more of the same sick state is just unbearable for the bulls now. Investors were rooting for a V-shaped economic recovery, and the latest signs of a materializing stagnant stale state are just depressing.

Nonfarm Payrolls were reported down 131K in July, as they bore the weight of heavy public job losses. The nonfarm payroll result fell short of economists' consensus forecast for a 70K job decrease. Public sector losses were of course greatly impacted by the conclusion of work for temporary census workers and their subsequent layoffs. Some 143K census workers were let go in July.

The overall public sector change was recorded down 202K though, and that's quite a bit more than the temporary worker impact could be blamed for. This marks an important change in employment, as until recently, public sector jobs had been a net contributor to the labor force. It looks like tough budget decisions being made on the state and local level are finally bearing through and affecting employment. This is what governors across the country worried about when they sought stimulus funds from the federal government a couple years ago. What's to help them now?

Excluding public sector jobs, private nonfarm payrolls increased by 71,000, which was still short of the economists' consensus forecast for an increase of 100K. So, we can say then that generally speaking, the economy is underperforming economists' views. Those same economists are responsible for guiding strategists at their firms, who in turn affect the analysis of analysts and portfolio managers on the buy side and analysts and brokers on the sell-side. The message will be the same all along the tree line though; a less robust economic recovery means tempered growth forecasts, reductions to EPS estimates and finally lowered price targets. What that spawns is stock sales gentlemen. The market knows this old Wall Street tale, and so stocks moved lower in the morn.

Payroll Details

The payroll details within the employment report for July offer a long-term positive treat. Private nonfarm payrolls have increased 630K this year, but two-thirds of that growth came in the March-April period. So what's happened since? A revaluation of the situation folks, as economic data has backed off the positive bounce reflected earlier this year. Employment is a lagging indicator, lest I remind you.

A warning for August came in the fact that seasonal Motor Vehicle industry layoffs failed to materialize fully in July. The industry provided a seasonally adjusted increase of 21K in July. Take note of the fact that the industry's layoffs are not precisely timed, and could occur in some part in August.

Good news, manufacturing added jobs in July, keeping the trend of growth rolling on the assembly line. Some 36K jobs were added, contributing to the 183K added in total this year. The manufacturing workweek also gained a tenth of an hour in July, as did the overall workforce workweek. Health care also continues to benefit from demographic trends and the work of the industry to meet the needs of a growing senior population.

Bad news continued for Wall Streeters and Main Street business folk alike, with professional and business services shedding 13K jobs in July. Financial businesses cut down another 17K employees through the month. The average monthly shedding has been cut in half, but that is not good enough.

Transportation and warehousing added 12K jobs in July. This is good news, because if shipping is occurring, then sales of some sort are rising (export beneficiary). This sector hit an employment low in February, not too long ago, and has not added too many jobs since (+56K). Meanwhile China is preparing for a real estate collapse and Europe is strangling to death. Construction still stinks, and that's all I have to say about that (-11K).

June's Revisions Hurt

A troubling adjustment to June's Nonfarm Payroll count keyed a good part of the day's trade. Nonfarm payrolls were adjusted down to -221K, from the initially reported -125K. That first report was right in line with economists' expectations, so imagine how the truth might have hurt trade that day. Private nonfarm payrolls, excluding the public sector and census hiring, added only 31K jobs in June, versus the reported +83K. The market's response to this report might have been, "The truth hurts."

Unemployment Rate Shenanigans

Every month we tie the loose ends together and right the wrongs of the government data to give you the real underemployment rate. We also like to point out illogical changes to the labor force that impact the published rate, and basically bring you the truth. So the government reported the unemployment rate at 9.5% again in July. Economists were looking for the rate to move back up to 9.6%, and we said it could rise to as high as 9.7%.

You see, there are a bunch of us (me included) who are not counted in the labor force. Some of us have gone back to school to wait out the storm, and others have gone on year long adventures. Others have played around with contract or freelance work, while a few hopefuls have toyed with small business endeavors. Some of us are even in jail being beaten up by thugs, and others in the mental hospital beating up ourselves. Most of us are not included in the workforce though, as if we do not want to work. This provides illusion, and one that makes the state of affairs look better than reality. It's just not the case.

The long-term unemployed, or those out of work for 27 weeks or more, now amount to 6.6 million Americans. Astoundingly, that's 44.9% of the total unemployment pool. That's a lot of depressed people Mr. President. These Americans need hope restored, and the "Yes we can" mantra revived.

Then there's another 8.5 million Americans who used to work full-time jobs, want to work full-time jobs, but instead are working part-time jobs. They're not happy either Mr. President and Congressional representatives. What are we going to do for these people? This group lost 623K from its ranks since April. Where have those people gone, to the full-time labor force, or to the mental ward? The answer is probably a little of both we assume.

The saddest group, though, are the 2.6 million Americans who have been labeled "marginally attached" to the labor force. Their ranks increased by 346K since last year, and we are losing them. These are your friends in need, and please do not forget them in your prayers and when you visit the ATM too. These folks consider themselves ready for work, but work not ready for them, except a group of 1.4 million who have not looked for work due to school or family issues. 1.2 million of these people believe there are simply no jobs for them, and they are listed as "discouraged workers." Help them first.

So we do a little magic math thing here that brings this all into some sense. Here's how it goes: Our figure includes part-timers who once worked full-time, in the count. This adjustment also adds back "discouraged" and marginally attached workers, who are not counted as part of the workforce or unemployed. If we add back the 2.6 million displaced workers to the labor market, and include the 8.5 million underemployed part-timers in the unemployed count, adjusted unemployment reaches ((14.599M + 2.622M + 8.529M) / (153.560M + 2.622M)) * 100 = 16.5%. That's equal to the 16.5% recorded in June and compares to 16.6% in May; 17.1% in April; 16.9% in March; 16.8% in February; and 16.4% in January. There's not much improvement indicated via the study of this metric's trend line.

While there are signs that offer hope for the hopeful, with private nonfarm payrolls edging higher generally month-to-month, what must be considered is how will economic activity over the next six months impact employment. Employment is a lagging indicator after all. We must expand on a tangent from here, as unemployment is a leading indicator or a drag on the economy in this cycle. It is anchored and many jobs have been shed that were not needed in the first place, supported instead by bubbles in some sectors. Unemployment at 4.5% it seems was unfounded.

We agree here with PIMCO's Bill Gross. The federal government must drive employment through civil works projects. The President has his pet project, alternative energy, so why not work toward building a supportive infrastructure and generation plants? Why not bear some cost now for our future energy independence? I think this is something we must do, versus might do. Let's teach them how to fish, instead of sending them a $300 fish in the mail that some of them will never eat and others will devour in seconds.

Disclosure: No positions