Employment Report Disaster

by: Ken Bell, CFA

A loss of 49,000 jobs. If only it were so benign. On Friday we added to the heaping pile of rotting economic indicators the latest monthly employment report from the Bureau of (lack of) Labor Statistics. At least this time the headlines don't appear to be shading the report, but they're not fully capturing just how ugly it is.

Let's start with the nonfarm payroll numbers. This showed a loss of 49,000 jobs in the month. Nothing too surprising in the breakdown -- construction and manufacturing down, service-providing up modestly, professional and business services down, education and health services continued their strong steady climb, and our "less is more" Republican-led government continues to grow. The only somewhat surprising number was that leisure and hospitality employment continued to grow despite an obviously stressful time for the consumer.

Now let's turn to the unemployment rate, which is the number we'll be hearing about in the news today. Its one month increase of .5% is the highest monthly jump in over 20 years! In layman's terms, that's bad. How did this happen? Double-whammy. The number of employed persons fell by 285,000 last month while the number of unemployed rose by 861,000! There are now 8.5 million people counted as unemployed, a level 30% higher than a year ago. And, yet, we're not in a recession?

What's also interesting is that the increase in the unemployment rate hit everyone. Men, women, teens, hermaphrodites, loan originators, and people of every color. Teens in particular took a hard hit with their rate climbing from 15.4% to 18.7%. Good luck getting your teens out of the house this summer. Even the professions that they're overqualified for (like investment banker, mortgage broker, home appraiser) aren't hiring.

Well, if you've made it this far you're in for a real treat -- the birth/death model. If you're not familiar with this, go back and read my post on April's employment report. Incredibly, this latest employment report includes an assumed 217,000 jobs created! If you back that out, then this month's nonfarm payroll figure would be registering a loss of 266,000 jobs! This birth/death model is assuming that 42,000 CONSTRUCTION jobs were added last month. That's just insane. Foreclosures are skyrocketing, builders are struggling, home sales are plummeting, prices are collapsing, but 42,000 construction jobs were added. I hope the folks at the BLS are at least a little embarrassed about putting out such a number. Just as ridiculous, the model assumes that 77,000 new leisure and hospitality jobs were created. Apparently, the 2 million additional unemployed people we have this year are all spending their last dimes at the beach resort getting cucumber mud facials in the spa. Come on. Even Starbucks is retrenching, and people are addicted to coffee.

So what does all of this mean for investors? Bernanke and other Fed member have been recently trying to talk up the dollar and have been hinting that the rate cuts are behind us. Given the data we've seen of late and the continued weakness in the economy, I can't imagine the Fed is suddenly going to develop a spine and actually start fighting inflation and the falling dollar by raising rates any time soon. They wouldn't have cut rates so far and so fast if this was their real concern (If you want to see a real Central Bank, check out the ECB). Bernanke always appears calm and collected in public, as he should, but I've got to believe he's spending a lot of time in his office mumbling to himself, violently brushing nonexistent bugs off of his pants, and dreaming of the day he can charge ridiculously high speaking fees to tell everyone that it wasn't his fault.

This report should put a nice headwind in front of the recent dollar mini-rally which also might provide a further boost for gold and commodities. It certainly isn't stock market positive as even further interest rate cuts would have limited, if any, positive impact, but it is clearly supportive of bonds. (The markets just opened, and not surprisingly, this is the initial reaction.). Of course, this all holds true only until the next bit of bogus manipulated data comes out and the traders and spinners tee it up all over again.

In the meantime, it will be interesting to see how the bulls try and spin this one. I imagine it will go something like this:

 

Well, the loss of jobs wasn't as bad as expected so that's outstanding and super bullish. Besides, that's old data. The month of May was over, like a whole week ago. The market looks forward, and I'm sure June will look even better. Heck, I just replaced two of my overpaid cabana boys with 4 illegals. That's a doubling of employment! The fact that the unemployment rate climbed a touch is simply testament to the fact that we Americans are a hard-working lot, and more of us are eager to get back into the labor force and do our part for the economy. As for the birth/death model you mention, I've never heard of that, but I can assure you it's bullish for tech stocks.

 

 

Disclosure: The author is short perma-bulls, the birth/death model, and cabana boys.