The market and the financial media ate up the November jobs report, which found the unemployment rate falling an incredible .4%. However, as my Seeking Alpha colleague Felix Salmon noted, the majority of “job gains” were actually Americans exiting the work force. Labor force participation, on the other hand, moved sideways and remains stubbornly stuck at its 30-year low. However, the participation rate is even worse than it appears: single-earner households were much more common 30 years ago.
Since the Great Depression, there has only been one holiday quarter which saw a drop in aggregate labor force participation: Q4 2008. Even the bitter early ’80’s double-dip recession saw a nominal uptick in participation around the holidays. But not during the middle of the financial crisis, and not as we stand on the cusp of a European equivalent.
The sideways move in labor force participation tells me two things. First, there are likely a great many more “discouraged” unemployed than the BLS reports. Given that 125,000 people enter the work force each month, it’s mathematically improbable to have flat participation and a falling unemployment rate...unless the discouraged unemployed are falling off the radar. Given the BLS’s questionable survey methodology, it’s probable that more and more unemployed are being omitted from survey data as their benefits expire. That’s terrible news for the economy.
Secondly, the sideways move in labor force participation tells me that the quality of jobs created this holiday season has been lower than in the previous two post-crisis years. Indeed, of the 120,000 net jobs created in November, 50,000 came from the retail sector, and another 15,000 were temp jobs. These seasonal, menial jobs were not enough to draw many of the discouraged unemployed back into the labor pool. It’s important to note that Q4 2009 and 2010 saw an increase in labor participation as employers offered small numbers of secure, well-paying jobs in addition to the usual temporary holiday gigs. Such does not appear to be the case this year.
The labor force participation rate suggests that large numbers of uncounted, discouraged unemployed are sitting out of the work force this holiday season. I would therefore expect the unemployment rate to climb as better jobs become available after the fallout from Europe. Until then, keep in mind that the November jobs report was unreasonably positive and seasonally-driven. And market reaction, led by large percentage gains by Western Digital Corp. (NYSE:WDC), Morgan Stanley (NYSE:MS), and JPMorgan Chase (NYSE:JPM), was unduly optimistic.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.