Don't Believe The Jobs Recovery Narrative

by: Power Hedge

Summary

The recent jobs report was widely reported as "stellar" and a sign of a great economy. Don't believe it.

The labor force participation rate among individuals in their prime working age is lower than it was at any point during the recession, including the mass layoff period.

The median household income is also lower than during the recession and has declined, impacting the ability of households to engage in discretionary spending.

Despite the decline in the unemployment rate, the number of unemployed individuals has been flat over the past year.

There's no evidence of any improvement in employment over the past year, especially when population growth is considered.

For quite some time now, the Federal government, assisted by various media outlets, has been stating that the economy, and in particular the employment situation, has improved greatly over the past few years and continues to improve. While it is true that the economy is stronger today than it was during the worst stages of the 2008-2009 recession, it is not true that the economy has recovered to a position of "normalcy." In fact, by many measures, the economy not only never fully recovered from the previous recession, but may be heading into a new one.

The primary reason that many people believe that the economy is strengthening is that there are more jobs available now than there were a few years ago. However, this is somewhat misleading. The first reason for this is that while the official numbers may show job growth, they fail to consider population growth. On average, the U.S. population increases by approximately 0.80% per year, or roughly 2.58 million people per year. This is approximately 215,000 people per month.

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Source: Multpl.com

While it is true that not all of these new people are of working age, it is somewhat fair to assume that at least some are and children born in previous years will ultimately come of age and require jobs. So ultimately, the question that we must ask is whether or not the economy is creating enough jobs to provide for all of these people as well as those who were laid off back in the Great Recession. The short answer is that it has not. We can see evidence of this by looking at a metric known as the labor force participation rate. Investopedia defines the labor force participation rate as:

"The participation rate is a measure of the active portion of an economy's labor force. The participation rate refers to the number of people who are either employed or actively looking for work. The number of people who are no longer actively searching for work would not be included in the participation rate. During an economic recession, many workers often get discouraged and stop looking for employment, as a result, the participation rate decreases."

This chart shows the labor force participation rate for those civilians aged 25-54 years. I specifically chose this age range as it is likely to exclude those currently in school or those individuals that retire early.

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Source: US Bureau of Labor Statistics, Federal Reserve Bank of St. Louis

As this chart shows, despite some strength in the labor market in 2015, the broad trend has been a decreasing labor force participation rate over the past eight years. In fact, the participation rate among those aged 25-54 is currently lower than during the much publicized period of mass layoffs during the last recession. Thus, there are currently fewer members of the workforce employed as a percentage of the population than during the Great Recession. Therefore, there does not appear to have been a "jobs recovery," as many claim.

Another metric that we can look at to analyze the jobs recovery is the civilian employment-to-population ratio. This ratio is simply the number of people over age 16 who have some sort of employment divided by the total number of people over age 16. Here is the civilian employment-to-population ratio over the past ten years:

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Source: US Bureau of Labor Statistics, Federal Reserve Bank of St. Louis

Here, we see many of the same trends as with the labor force participation rate. Over the past ten years, the civilian employment-to-population ratio has steadily declined and currently rests at levels significantly below the levels that it had during the last recession. In this case, however, part of the decline can be attributed to the fact that the baby boomer generation has begun to reach retirement age and the stock market strength over the past several years has induced many of them to retire. For the most part, there have been more baby boomers retiring than new entrants into the workforce so this has accelerated the decline in this ratio. With that said though, we cannot ignore the decline in the labor force participation as a sign that the jobs market is not as healthy as the narrative would lead one to believe.

Another problem with the official employment data is that all jobs are considered equivalent. This means, for example, that a part-time minimum wage job is reflected in the official statistics as being the same as a full-time executive position even though the two positions are clearly not equivalent. Unfortunately, most of the new jobs that have been created since the recession ended have been low-paying positions, in stark contrast to the relatively high-paying positions that they replaced. I have pointed this out in a few articles in the past. Zero Hedge has also repeatedly driven home this fact over the past several years. For example, in March of 2016, the site published this chart comparing the number of manufacturing jobs created in 2015 to the number of jobs created waiting tables or tending bars:

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Source: Bureau of Labor Statistics, Zero Hedge

As this chart shows, the nation's business added a total of 360,000 waiters and bartenders in 2015. In general, these are typically relatively low-paying jobs as many individuals in these professions are paid a rate significantly below the federal minimum wage of $7.50 per hour and depend almost entirely on tips. Meanwhile, manufacturing jobs tend to be relatively high-paying jobs, the sort that can easily support a middle-class family in most areas of the country. Unfortunately, the nation only added 12,000 new manufacturing jobs in 2015.

The picture becomes even bleaker if we look at it over a longer time period. This chart compares the number of new waiter and bartender jobs to the number of new manufacturing jobs over the December 2007 to February 2016 period:

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Source: Bureau of Labor Statistics, Zero Hedge

As this chart shows, over the December 2007 to February 2016 period, the nation's economy created a total of 1.6 million new jobs as either a waiter or a bartender. Over the same time period, the nation lost 1.4 million high-paid manufacturing jobs.

At this point, some readers may argue with my point that high-paying jobs have been getting replaced by lower paid due to the fact that the median household income has been increasing in the years since the end of the recession. Indeed, this is true, as shown here:

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Source: US Census Bureau, Federal Reserve Bank of St. Louis

However, this chart does not tell the whole story. This is because these figures do not account for the gradual decrease in purchasing power (inflation) over time. Accounting for this will provide a better overview of the true economic situation in the United States, particularly when we consider that consumer spending accounts for the majority of economic activity in the United States. In order to account for this, we need to use another metric known as the real median income. This chart shows how the real median income has evolved in the years since the beginning of the last recession:

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Source: US Census Bureau, Federal Reserve Bank of St. Louis

As this chart shows, despite a sharp increase in the real median income in 2013, the overall trend has been negative. In fact, the real median income is currently lower than it was during the last recession. This means that the median household in the United States today is less able to cover their needs and discretionary expenses than they were at any point during the financial collapse and the resulting recession. This is quite clearly a very different narrative than the one that we have been told.

Earlier this month, the US Department of Labor released its July 2016 jobs report, widely considered to be a very strong one. In this report, the United States Department of Labor reported that the nation's economy added 255,000 jobs in July, a number which significantly beat the expectations of economists. In addition, the report suggested that both average hourly earnings and average hours worked increased month-over-month. The official report also states that the unemployment rate remained steady at 4.9%, although the number was 5.1% compared to 5.6% last year once seasonal adjustments are removed. However, even this report was not as good as the media reports claimed.

One reason is the way that unemployment is defined for the purposes of the jobs report. In short, only those individuals that do not have jobs but have looked for a job in the preceding ninety days are considered to be "in the labor force" and therefore unemployed. Once we look at the actual number of people who did not hold jobs in each of the months over the past year, we get this:

Source: Zero Hedge

As this chart shows, despite the official unemployment rate decreasing over the past twelve months, the actual number of unemployed people in the United States remained relatively constant, at approximately eight million. In fact, there were several months over the past year that had a lower number of unemployed persons.

As I mentioned earlier in this article, another way to put jobs in growth into perspective is to look at it in comparison to population growth. In April 2010, one of the worst months for employment data in recent memory, the United States had a population of approximately 308.76 million. On August 9, 2016 at 3:16 p.m. EST, that figure was 324,197,552. Therefore, the United States' population increased by approximately 15.4 million over this time period. In April 2010, non-farm payrolls stood at 130.1 million. In the most recent "stellar" report, there were 144.4 million non-farm payrolls. In other words, 14.3 million more jobs for 15.4 million more people. Once again, this casts doubt onto the much hyped "jobs recovery."

Once again, we may argue that the decrease in jobs relative to the population is due to the baby boomer generation retiring en masse. However, please refer to the discussion above to clearly see that the evidence does not point to this conclusion. In effect, investors should take any statement about a "jobs recovery" with a grain of salt until the numbers improve greatly over even what we saw in the July 2016 jobs report.

Disclosure: I/we 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.