The May 2014 Jobs Report - Back To The Starting Line - However, The Blocks Have Been Moved

by: Steve Picarillo

Summary

Employers hired 217,000 workers in May 2014, effectively lifting the job numbers to where they were before the financial crisis and recession.

However, since 2008, the US population grew by almost 15 million. As such, an additional 8+ million jobs must be created to be truly at par with pre-recession levels.

While jobs were created, the quality of these jobs has diminished. Yet the job numbers will allow the Fed to continue its current trajectory of gradually reducing monthly bond purchases.

Given the weakness in GDP since the beginning of 2014, it is unlikely that the job situation will get materially better in the coming months. Good news for Fed watchers!

According to the US Bureau of Labor Statistics, employers hired 217,000 workers in May 2014. While on the surface this effectively lifted the job numbers to where they were before the financial collapse nearly six years ago, it is important to recognize that the US population grew by some 15 million since 2008.

So in terms of numbers, the job market has not recovered to the same level based on today's population. Further, the new jobs added are concentrated in lower skilled/lower paid service jobs which, in large, were not the jobs lost in the crisis.

So, with the population increase and the quality decrease, the US economy and the job market continues to fall short of returning to the pre-financial crisis levels.

True, the US economy added over 200,000 jobs in each of the four past months, a nice headline number indeed. However, the commonly used "standard benchmark" for status quo, i.e., having job growth equal to population growth, is approximately 250,000 monthly jobs added monthly. Given the growth in population since 2008, the US economy needs to create over 8 million additional jobs to effectively reach the same level prior to the recession. With only 200,000 jobs created monthly, the US economy needs to increase significantly to fully and truly recover. This leaves the open question of can the US economy produce the requisite numbers of quality jobs? A question that will ring on for sometime to come, and will be a topic of another posting.

To opine on the recovery and the jobs market, one needs to look beyond the headlines. To this end, while the unemployment rate remained at the lowest level since 2008 at 6.3 percent, the portion of the population in the workforce did not improve. Indeed, it remained at a depressed 62.8 percent, a level last seen in the late 1970s. While retiring baby boomers are responsible for some of the decline in participation, a substantial amount of the change in the participation rate is the result of people giving up their job search altogether, or those accepting a part-time job due to the lack of full-time opportunities, thereby dropping out of the work force. Accordingly, these individuals are not included in the "headline" unemployment numbers. Not to be political, however, the level of entitlements also comes into the equation, as some people choose not to work, thereby reducing participation rate even further. A change in participation rate is needed to show an actual improvement in the job situation in the US.

The real measure of unemployment was 12.2%. While this is down from the peak of over 17%, it remains high by historical standards. Similarly, the duration of unemployment fell to 14.6 weeks, however, remains more than double its previous session average.

The US economy is not creating enough jobs to bring people back in to the work force.

Moreover, as noted, the quality of jobs created is different than those which were lost. Low income, lower skilled jobs in the services area are replacing high skilled, higher paid, financial and "goods" producing jobs. According to the BLS, during the month of May, health care and social assistance added 55,000 jobs. The health care industry alone added 34,000 jobs over the month, twice its average monthly gain for the prior 12 months. Within health care, employment rose in May by 23,000 in ambulatory health care services and by 7,000 in hospitals. Employment rose by 21,000 in social assistance, compared with an average gain of 7,000 per month over the prior 12 months. The aging population and the overall impact of "Obama care" are likely driving these gains. It is unlikely that this sector can continue to create this level of jobs for a prolonged period, and again, quality is an issue.

Employment in food services and drinking places continued to grow, increasing by 32,000 in May and by 311,000 over the past year. The improved weather has likely driven demand for food services workers and bar staff. Although job gains in the services sector may reduce the overall unemployment rate, any resulting change in consumer consumption of those employed in these sectors add little to GDP growth. Moreover, sustainability, once again, remains in question given the finite nature of these jobs.

Notably absent from jobs growth were gains in manufacturing employment, which changed very little over the month and has only added 105,000 jobs over the past year. Moreover, employment in other major industries, including mining and logging, construction, wholesale trade, retail trade, information, and financial activities, the typically higher paid and GDP growth related segments showed little change over the month. Given the importance of these sectors to the overall US economy, the job market will not markedly improve without significant strength in these sectors.

Notwithstanding, the headlines in the May jobs report will likely prove sufficient to keep the Fed on its current trajectory of gradually reducing monthly bond purchases aimed at stimulating the economy, while avoiding the danger that an improving labor market will create upward pressure on inflation. To this end, average hourly earnings, which are up 2.1 percent in the last 12 months, remain quite close to the underlying rate of inflation, as such, there should be no change in short-term Fed policy.

Looking ahead, given the weakness in GDP growth evidenced in the Q1 and April numbers, the lack of growth in government jobs, (which are down about 1 million since last year), the increase of service and healthcare related jobs, and the lack of increase in higher-paying "GDP additive" jobs, it is unlikely that job growth in the private sector will be sufficient to keep up with population growth.

Jobs in the US economy will continue to fall short of the pre-recession levels. Indeed, given the aforementioned, jobs created in June may very likely be lower than the recent trend of c. 200,000 jobs. After all, with an increase of population of 15 million and an employment-population ratio of 58.9 percent, the economy needs to add 8.8 million jobs just to reach "status quo," a tall order given the current pace. So if the best-case scenario is a "tall order," the likely scenario may just be virtually impossible.

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