Ugly Underlying Trend Developing In Labor

by: Markos Kaminis

The Department of Labor (DOL) hardly reported any change in the job market today when it issued its Employment Situation Report for the month of June. Still, the data fell short of economists' expectations and was a letdown after ADP's Private Employment Report offered some hope Thursday. As a result, the broader stock indexes were lower through midday trade Friday, with the SPDR S&P 500 (NYSE: SPY) down 1.3% and the PowerShares QQQ (NASDAQ: QQQ) off 1.7%. My analysis shows that the market's discounting reflects an accurate assessment of an employment environment that is in fact already deteriorating. So, while some are concerned about a possible storm forming, I feel the wind already picking up.

The Labor Department's Employment Report showed the unemployment rate held at approximately 8.2% for the third straight month, meeting economists' expectations for the same malaise. The worst thing about this data point is that a trend of improvement existed but has now come to a halt. The civilian labor force grew by 0.1%, but as the number of employed rose 0.09%, the number of unemployed Americans increased by 0.2%. It wasn't enough of a change to reflect deterioration in the unemployment rate, but it is moving in the wrong direction now. The employment-population ratio stuck at 58.6%, so it was hard to see the minute change for the worse. Further along this report, I offer more evidence of a deteriorating trend.

What bothers me most is that the lagging unemployment rate may today reflect corporate managers' concern about developments in Europe, China and here at home. Europe is in recession; the data that would have confirmed that was only fractionally short of showing two quarters of eurozone economic contraction. Data since the last quarter GDP report for the eurozone has only deteriorated amongst the PIIGS while infecting the previously healthy cornerstones of the EU, France and Germany. Chinese data after data point supports the case for a serious slowdown in the economic growth of the important global player. China has offered a sort of nitrogen boost to the global economy, keeping the crisis in the U.S. from driving a global recession and depression for some. My feeling now is that the globally interconnected economy, with China still too dependent on its western business partners, is headed for a simultaneous hit.

Managers may not be laying off many more employees than they had been when the Weekly Jobless Claims flow was flirting with 350K, but they do appear to be laying off more folks. Hiring, likewise, is restrained, even as workers complain of being overburdened, though economists mostly consider slave-workloads as part of worker productivity. The truth is, we've been squeezing the last drops of juice out of our labor force for too long and people are probably burning out. The average workweek edged higher again in June, yet employment hardly changed.

The truth remains that our unemployment rate understates the true depth of decline in the labor market. In the latest reported period, the situation deteriorated if we include the underemployed and the so-called "marginal" into the count. In June, Americans working part-time for economic reasons, or those people who would rather be working full-time jobs than part-time hours at McDonald's (NYSE: MCD) or Wal-Mart (NYSE: WMT), increased 1.4%, to 8.2 million. Those Americans who are considered only marginally attached to the labor market, because they have not sought work for more than 4 weeks, increased 2.5% to 2.48 million. In calculating "underemployment," if we add back the excluded 2.483 million displaced workers to the labor market, and include the 8.21 million underemployed part-timers in the unemployed count, adjusted unemployment reaches ((12.749M + 2.483M + 8.21M) / (155.163M + 2.483M)) * 100 = 14.9%. Last month, the rate was ((12.720M + 2.423M + 8.098M) / (155.007M + 2.423M)) * 100 = 14.8%. This confirms that the situation is deteriorating, and not stagnant. Therefore, stocks were correct in their reconsideration of what was painted as mixed news by the popular press and talking heads with stakes in the game.

Establishment Data

Total non-farm payrolls increased by 80,000 in June, up from the revised 77,000 increase seen in May. The DOL reports that the average monthly net job addition of the second quarter was 75,000; that's not hot. As a matter of fact, it compares pretty poorly to the average monthly gain of 226K seen in the first quarter of 2012.

The public sector bleed of the last few months eased in June, as government jobs declined by only 4,000, versus 28,000 in May. The private sector should better reflect the economy and it disappointed. Private non-farm payrolls increased by 84K, down from the 105K increase in May. Take note of that point, as it reflects what I believe is a young trend's start. Private Services Industries, a critical driver of the economy, reported a 71K job increase in June, versus the larger 126K increase in May. A 47K increase in Professional and Business Services jobs outweighed declines in Retail Trade, Information and Transportation and Warehousing.

Here's my problem with the gain in Professional and Business Services: it was greatly driven by a 25K position increase in Temporary Help Services. Some pointed to this data as a positive, but I see it differently. While I agree that temporary help additions are a positive sign when the economy is exiting recession, I believe that while we are in a more stable environment, a hiring surge in temporary help is a bad sign. I believe it shows employer unwillingness to hire full-timers. In other words, that conservatism only reflects the caution of employers, which could be the forerunner of a layoff surge. Ironically, temporary help provider Kelly Services' (NASDAQ: KELYA) shares are down 2.1% at this hour. Other employment services firms like Robert Half International (NYSE: RHI), Korn Ferry International (NYSE: KFY) and Manpower (NYSE: MAN) are all lower 2% or more Friday.

The Manufacturing Sector added 11,000 positions in June, driven by the support of the automakers (+6.7K) Ford (NYSE: F), GM (NYSE: GM), Toyota (NYSE: TM) and others producing in the U.S. Durable Goods makers added 14K jobs in June, so I suppose give thanks to Boeing (NYSE: BA), which had twice as many orders as expected recently, and maybe producers like Northrop Grumman (NYSE: NOC), Lockheed Martin (NYSE: LMT), General Electric (NYSE: GE) and Deere (NYSE: DE). Though, I have my doubts about industrial sector shares, given the latest ISM Manufacturing data and peripheral indications from regional Fed districts. I do not expect the same result for manufacturing in coming months, including basic materials producers of industrial commodities like Alcoa (NYSE: AA).

In conclusion, I believe the market is correct to discount stocks today. I believe I've shown that a new trend of deterioration seems to be developing, and it would more likely gain steam than subside given the decline of our interconnected trading partners. Without a doubt, we also stand on unsteady ground, where any system shock would easily drive us into recession. Those risks loom; one of which is hinged to the risk of some sort of escalation of issue with Iran. Today, the noose is tightening on Iran, as sanctions against its oil trade hit home. The Iranian regime is cornered, and a cornered dog is a desperate one. Europe has not mitigated its crisis as yet, as yields remain elevated for Spain and Italy and as the German economy shows small cracks. Fiat currency continues to flow as freely as central banks can pour, so that even while deflation weighs, inflation may loom - or even worse, stagflation. So, as you can tell, I'm anxious about our future and your money.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.