Employment Report: Positives And Concerns

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 |  Includes: SPY
by: Disruptive Investor

The much awaited jobs report before the presidential election was released and market participants' reaction suggests that no major positive or negative surprise was in store. Looking into the details, there are some optimistic signs along with some areas of concern. This article discusses these factors and its near-term implications for asset markets.

The civilian unemployment rate for October 2012 was essentially unchanged at 7.9%. I see some sparks of positivity in the U6, which can be considered as a real measure of unemployment. The U6 rate declined marginally from 14.7% in September 2012 to 14.6% in October 2012. I would keep a close watch on the U6, especially after the festive season gets over. Several part-time jobs created in the festive season by retail companies can make the employment scenario look relatively rosier.

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Three more relatively optimistic employment measures for the month were the people not in the labor force, the civilian labor force participation rate and the employment to population ratio. The number of people not in the labor force has declined in the last two months and can be considered positive as it impacts civilian labor force participation rate and the employment-population ratio. The civilian labor force participation rate has increased to 63.8% from a low of 63.5% in August 2012. The employment to population ratio has also stabilized at lower levels in my opinion and should not trend lower in the foreseeable future.

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On the negative side, the average (mean) duration of unemployment surged to a record high of 40.2 weeks. If the mean duration of unemployment remains high or trends higher, it can negatively impact consumer sentiment and consumption.

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The employment growth in 2012 has been no more robust than in 2011 and can be considered to be a matter of concern with the manufacturing sector in a recession. Employment growth has averaged 157,000 per month thus far in 2012, about the same as the average monthly gain of 153,000 in 2011. As mentioned earlier, it would be critical to see the employment growth after the festive season is over. Also, one should not forget a flurry of job cuts announced by the corporate sector along with the release of relatively dismal third quarter results. Therefore, cautious optimism is the way going forward.

The kind of industries creating jobs also concerns me when I look at things from a long-term perspective. According to the BLS -

Professional and business services added 51,000 jobs in October, with gains in services to buildings and dwellings (+13,000) and in computer systems design (+7,000)... Health care added 31,000 jobs in October. Job gains continued in ambulatory health care services (+25,000) and hospitals (+6,000). Over the past year, employment in health care has risen by 296,000... Retail trade added 36,000 jobs in October, with gains in motor vehicles and parts dealers (+7,000), and in furniture and home furnishings stores (+4,000)...Manufacturing employment changed little in October. On net, manufacturing employment has shown little change since April....Mining lost 9,000 jobs in October, with most of the decline occurring in support activities for mining. Since May of this year, employment in mining has decreased by 17,000.

I have added emphasis on manufacturing jobs as it is concerning to see no job growth in the sector amidst continued deficits of over USD1 trillion. Also, the job growth in the health care sector is more reflective of demographic changes and government spending than healthy economic growth. I had discussed this aspect in one of my earlier articles, which showed that consumption growth since 2009 has been largely due to medical services growth. Therefore, I would be more positive on the economy and jobs growth sustainability when robust manufacturing, construction, mining and related industries growth is witnessed. For now, the stance is cautiously optimistic and post election job numbers would be the key. Also, the impact of hurricane sandy will be discounted in next month's job report.

From an investment perspective, I would avoid fresh exposure to equities at these levels considering the near-term rally, the nearing of fiscal cliff, the nearing of debt ceiling issue and the uncertain trend of consumers in the festive month due to the recent damages caused by the hurricane. I do expect markets to correct over the next 2-3 months and investors can consider going long on the S&P 500 index post any meaningful correction. Index investing can be considered through the SPDR S&P 500 ETF (NYSEARCA:SPY). The ETF provides investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index.

Disclosure: I 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.