December Employment Report: A Tale of Two Surveys

by: The Fundamental Analyst

[click to enlarge charts]

Non-farm payrolls rose a seasonally adjusted 103,000 in December according to the BLS, well below market expectations of a rise of approximately 175k. However, if you add in the revisions to prior months, an upward revision of 38k for October and 32k November, the overall level of employment was close to expectations.

Of course the headline grabber was the plunge in the unemployment rate from 9.8% to 9.4%. How does the unemployment rate fall with only a modest rise in non-farm payroll employment? The answer is that the unemployment rate is calculated from a different survey (the Household survey) than the non-farm payroll report. The household survey showed a net 297K jobs were added in December, right in line with the ADP report.

However that only explains half the fall in the unemployment rate. The other factor is that a further 260K people are estimated to have dropped out of the workforce in December sending the participation rate to a new cyclical low of 64.3%.

We are now exactly 3 years past the employment peak of December 2007 and are still more than 5% below that peak. After the 2001 recession it took 4 years to reclaim the previous peak in employment. This time around I don’t think it’s a stretch to say it is going to take much longer.

Those working part-time for economic reasons remains stubbornly high at around 9 million. The unemployment rate that takes into account these workers, U-6, remains high at 16.7% in the latest month.

Another grim statistic is the number of people unemployed for 6 months or more, that also remains extremely high at over 6.4 million and has been rising slowly for the last 3 months.

In summary, the non-farm payroll number was better than the headline 103K suggested when taking into account the revisions to prior months however the unemployment rate was overstated due to the drop in the participation rate. The message remains the same: The US labor market is slowly getting better but in all likelihood the unemployment rate will correct higher in the next few months before gradually moving down over the course of the year.