One of Investors Business Daily’s headlines on Monday, May 9, 2011, was, “Private Hiring Best in Five Years, But Jobless Rate Rises.” With respect to the former, non-farm employment increased by 244,000 jobs in April of 2011, according to the Bureau of Labor & Statistics, beating Moody’s Consensus Estimate of 185,000 jobs. Interestingly, the private sector led the way this time around, adding 268,000 jobs while net increases in the public sector were actually slightly negative. Some investors seized on the news, potentially believing that the data results provide evidence that the economic recovery is transitioning from the days of Government led economic stimulus to a self-sustaining economy driven by the private sector.
However, we, at Hennion & Walsh, believe that a large part of the market reaction on Friday had to do with a pre-market belief that the jobs report may disappoint following the concerning initial jobless claims report that was released earlier in the week. We also believe that it is too early to believe that this represents the start of a strong net uptrend in private job creation. It remains our contention that the United States economy is now more service oriented than manufacturing driven and service oriented economies, which thrive on technological innovation, do not tend to have the capacity to produce large numbers of new jobs. Further, it remains to be seen if any new job creations will go to existing displaced U.S. workers.
The number of displaced U.S. workers is far greater than the much reported U-3 unemployment rate as the U-3 unemployment rate only measures people without jobs who have actively looked for work within the past four weeks. We believe that a more reasonable barometer is the U-6 unemployment rate which measures those people included in the U-3 figure in addition to discouraged workers, marginally attached workers, and part-time workers who want to work full time but cannot for economic reasons. As a point of reference, the current U-6 unemployment rate is 15.9%.
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NOTE: Persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for work. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. Updated population controls are introduced annually with the release of January data.
Source: United States Department of Labor, Bureau of Labor Statistics, Economic News Release, May 6, 2011.
The fact that the private sector was hiring again in April may explain why the U-3 unemployment rate simultaneously increased to 9.0% from 8.8%. Hence, some have concluded that the U-3 unemployment rate increase was also a positive indication as well. While this conclusion may have some merit, it seems to us that job market improvement will continue to be gradual, with intermittent starts and stops along the way given the large inventory of available labor supply to work through within and environment of low Gross Domestic Product (GDP) growth and high commodity prices.
Nonetheless, the recent jobs data was an overall positive report that came as a relief to many investors in the midst of a short-term pullback in the stock and commodity markets.