February Jobs Report: 20K New Jobs, Major Disappointment

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by: Doug Short
Summary

Unemployment is usually a lagging indicator that moves inversely with equity prices.

Following the end of the last recession, the employment-population has been range bound between 58.2% and 60.6%.

The employment-population ratio and participation rate will be interesting to watch going forward.

By Jill Mislinski

This morning's employment report for February showed a 20K increase in total nonfarm payrolls, which was much worse forecasts. The unemployment rate fell to 3.8%. The Investing.com consensus was for 181K new jobs and the unemployment rate to drop to 3.9%.

Here is an excerpt from the Employment Situation Summary released this morning by the Bureau of Labor Statistics:

Total nonfarm payroll employment changed little in February (+20,000), and the unemployment rate declined to 3.8 percent, the U.S. Bureau of Labor Statistics reported today. Employment in professional and business services, health care, and wholesale trade continued to trend up, while construction employment decreased.

Here is a snapshot of the monthly percent change in Nonfarm Employment since 2000. We've added a 12-month moving average to highlight the long-term trend.

PAYEMS Monthly Change

The unemployment peak for the current cycle was 10.0% in October 2009. The chart here shows the pattern of unemployment, recessions, and the S&P Composite since 1948. Unemployment is usually a lagging indicator that moves inversely with equity prices (top series in the chart). Note the increasing peaks in unemployment in 1971, 1975, and 1982. The mirror relationship appears to be repeating itself with the most recent and previous bear markets.

Unemployment and the Market

Now let's take a look at the unemployment rate as a recession indicator or more specifically the cyclical troughs in the UR as a recession indicator. The next chart features a 12-month moving average of the UR with the troughs highlighted. As the inset table shows, the correlation between the MA troughs and recession starts is remarkably close.

Unemployment and Recessions

We've added another chart to illustrate the reality of the unemployment rate - the unemployment rate divided by the labor force participation rate.

The next chart shows the unemployment rate for the civilian population unemployed 27 weeks and over. This rate has fallen significantly since its 4.4% all-time peak in April 2010. It is now at 0.8%, unchanged from the previous month.

Unemployed 27+ Weeks

The next chart is an overlay of the unemployment rate and the employment-population ratio. This is the ratio of the number of employed people to the total civilian population age 16 and over.

Employment Population Ratio

The inverse correlation between the two series is obvious. We can also see the accelerating growth of women in the workforce and two-income households in the early 1980s. Following the end of the last recession, the employment-population has been range bound between 58.2% and 60.6% - the lower end of which that harkens back to the 58.1% ratio of March 1953 when Eisenhower was president of a country of one-income households, the Korean War was still underway, and rumors were circulating that soft drinks would soon be sold in cans.

The latest ratio of 60.7% is at its post-recession high.

For a confirming view of the secular change the US is experiencing on the employment front, the next chart illustrates the labor force participation rate. We're at 63.2%, unchanged from last month.

Labor Force Participation Rate

The employment-population ratio and participation rate will be interesting to watch going forward. The first wave of Boomers will continue to be a downward force on this ratio. The oldest of them were eligible for early retirement when the Great Recession began, and the transition of the Boomer cohort to full retirement age won't end until 2030.

What is the average length of unemployment? As the next chart illustrates, we are perhaps seeing a paradigm shift - the result of global outsourcing and efficiencies of technology. The post-recession duration of unemployment is at 21.7 weeks, well off the 40.7-week all-time high in late 2011.

Duration of Unemployment

The Bureau of Labor Statistics' broadest measure of unemployment is the U6 series, which includes the total unemployed, plus all marginally attached workers plus total employed part-time for economic reasons. This series dates from 1994.

U6 Unemployment

The U6 series is currently at 7.3%.

Notes: The start date of 1948 in the charts above was determined by the earliest monthly employment data collected by the Bureau of Labor Statistics. The best source for the historical data is the Federal Reserve Bank of St. Louis.

The S&P Composite is a splice of the S&P 500, which started in 1957, with the S&P 90, which preceded it.

Original post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.