Reconsidering The So-Called Positive Employment Report

by: Markos Kaminis

The stock market gapped open higher Friday, reportedly on the monthly Employment Situation Report. Reaching the wire before the bell, the news of the addition of 103K net jobs in September was certainly relieving. But by midday, and likely on the understanding of the details of report, stocks were in the red.

The outlook was dim heading into Friday’s reporting of the jobs data. Economists forecast the unemployment rate would deteriorate to 9.2%, from the 9.1% rate reported in August, according to Bloomberg’s survey. The August data, showing no change in employment, had most market watchers on edge ahead of the reporting for the final month of the third quarter. The economic data flow since has been bad to mildly morose. Consumer sentiment has been the most concerning, and the mood of manufacturing purchasing managers has neither proven optimistic of late. Thus, there was little reason to expect good news out of the Labor Department, and neither did we receive any. However, the data we did find was better than August, and that was enough to quell recession drum beaters at least through the morning hours.

The government reported the net addition of 103K nonfarm payrolls in September, but 45K of those were on the return of Verizon (NYSE:VZ) workers from strike. Still, economists knew about those, and so the result still effectively surpassed their consensus expectation for the addition of 65K payrolls this month. Before you break out the champagne, let me remind the reader that in absolute terms, the month’s job growth was still lackluster. Indeed, given population growth, we can go so far as to say this was disappointing news, and the unemployment rate verified that.

Yet, the government gave us a little medicine for last month’s headache, which seemed to help some Friday morning. The August tally for payrolls, which initially recorded no change in the job market, was revised higher to +57K. Likewise, July was ratcheted up to +127K, from the initially reported +85K. As the result for August was initially traumatizing, the change to something somewhat digestible soothed the market a bit. Again, though, temper your enthusiasm, because these figures still stink; they simply stink a little less putridly. Indeed, the Weekly Jobless Claims results continue to stick in troubled territory above 400K.

The driving segments of growth were found in the private sector, where 137K net new jobs were created last month. The public sector, the current focus of financial distress, dropped 34K jobs. Municipalities seem to still be doing the most damage, despite U.S. Treasury Secretary Timothy Geithner’s now well-aged forecast that the worst was over for states and cities long ago (yeah, we were listening and we remember). Local governments dropped 35K hard working Americans last month, and municipalities have cut 535K jobs since September 2008. Meanwhile, the Postal Service shed another 5K last month. Certainly, the federal government is not through acting counterproductively just yet either, and now that we don’t even fight wars to keep people working, there’s another outflow of jobs. Challenger Gray & Christmas reported the U.S. Army announced troop reductions of 50K servicemen last month.

Within the private sector, the origins of growth were somewhat perplexing. One regular economic support continued to hold weight, with the health care sector adding 44K jobs through September. Professional and Business Services rallied 48K net new payrolls somehow, with 19.4K of those coming through the temporary workforce. In times of uncertainty, corporations will often look toward temporary help before investing in full-time employees. This bit of activity probably supported buying Friday morning as much as anything. It didn’t help the shares of employment services firms much though through the close, as outside of Robert Half’s (NYSE:RHI) 0.9% increase, others like Korn Ferry (NYSE:KFY), Manpower (NYSE:MAN) and Monster World Wide (NYSE:MWW) declined.

Then it just gets weird. With little sign of a housing recovery, the construction sector added 26K jobs. The report indicates, though, that these jobs came in the non-residential segment of construction, in heavy and civil work. Still, the president’s jobs bill is not even being considered by Congress yet, so it’s hard to pinpoint where these construction laborers are working. Retail Trade somehow found room for another 13.6K jobs in the dead zone between back-to-school and holiday seasons.

Where construction and retail supported enthusiasm, the manufacturing sector acted as expected in my view. Some 13,000 jobs were shed in the recently wavering goods producing segment of the economy. Finally, financial services shed 8,000 jobs, in what I expect is the beginning of renewed difficulty for the sector. Certainly, there’s evidence of it in layoffs at HSBC (HBC), Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS) and others.

The government reported the national unemployment rate stuck at 9.1% in September, which while beating economists’ forecasts, continues to reflect a depressed state of labor. Things remain worse for minorities, with unemployment at 16% among African-Americans and 11.3% among Hispanics. The percentage of unemployed Americans who have been that way for an extended period (27 weeks or more) continues to be elevated. The 6.2 million Americans that fit this description make up 44.6% of the unemployed pool. The number of Americans working part-time, who would rather be in full-time jobs, increased by 444K in September, to number 9.27 million Americans. 130K of the involuntary part-timers had their hours reduced due to slack work conditions. The number of Americans “marginally attached to the workforce,” which means they have not looked for work for at least four weeks, improved some toward 2.511 million Americans. Unfortunately, those workers who are “discouraged,” or believe there are no jobs for them any longer, increased a bit to 1.037 million.

In calculating “underemployment,” if we add back the excluded 2.511 million displaced workers to the labor market, and include the 9.27 million underemployed part-timers in the unemployed count, adjusted unemployment reaches ((13.992M + 2.511M + 9.27M) / (154.017M + 2.511M)) * 100 = 16.5%. For months, we tracked this data point which better reflects the harsh reality of our nation, though we stopped producing this article regularly over recent months. Still, I can say that in the spring of this year (March), this rate had improved to as far as 15.7%. Today, though, it is moving backward to where it was in the summer of 2010, and that’s the wrong direction. Therefore, stocks were correct in their reconsideration of what was painted by the popular press and talking heads with stakes in the game as good news.

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