Latest Jobs Report Shows That Economy Has Not Recovered From the Great Recession

by The Curmudgeon

Analysis of the Labor Report:

The BLS reported Friday that the US added 169,000 jobs in August, which was slightly below consensus expectations of 180,000.  However, the rest of the report was terrible, which will surely complicate the Fed’s decision this month on whether to reduce its massive QE-bond buying program.

Among the many negatives:

·         The June and July non-farm payroll estimates were revised down by a total of 74,000.  The downward revision for July was to 104,000 from 162,000 jobs added, which was the smallest gain since June 2012. The June figure was also trimmed from 188,000 jobs "created" down to 172,000.

·         With the sharp downward revisions for June and July, the average non-farm payrolls growth over the past six months was down to 160,000.  That compared with 141,000 in the six months leading up to the launch of the Fed’s third round of quantitative easing in September last year.   And you ask if the latest round of QE is working?

·         The percentage of the population in the labor force (the labor participation rate) fell to its lowest level since August 1978, at 63.2%.  Had the 300,000 or so who left the job market been factored in, the unemployment rate would actually have increased to 7.5%.

·         The smaller number of Americans looking for work drove the jobless rate down from 7.4 per cent to 7.3 per cent.  Joshua Shapiro, chief United States economist at MFR. “It’s been a real struggle here in the labor market.”  Unemployment, however, fell for the “wrong reasons,” Mr. Shapiro said.  "It's because people dropped out of the labor force and so were no longer counted as unemployed, and not because more unemployed people found jobs," he added.

·         At the end of August, there were 7.9 million Americans who wanted to work full time but could find only part-time work. When these workers and people who want a job but have stopped looking are included, the total underemployment rate rises to 13.7%.  We've pounded the table for some time, saying the headline unemployment rate is very misleading, because it doesn’t include discouraged workers who have given up looking for work.

·         Younger Americans are finding it especially hard to find work. Floyd Norris wrote in the NY Times: "The proportion of people under 30 with jobs, while up from the recession lows, remains far below what it was before the Great Recession."

·         Hiring over the summer months was largely driven by low-wage sectors like retail, food services and health care.  Those industries are more likely to hire part-time workers and operate on just-in-time schedules, making it difficult for employees to predict how many hours they will have from week to week.

Charts Don't Lie: It's a Jobless "Recovery"

The chart above is a very clear picture of a jobless recovery: the recession ended at the end of the last light-blue column, but the labor participation rate just kept on falling, while the overall employment-to-population ratio stubbornly refuses to rise from its current miserable levels. Both of them are lower than at any point before women had finished their big move into the jobs market.


The three charts below show declining non-farm payroll growth, declining unemployment (due to fewer workers in the labor force) and rising 10 Year Treasury Yields.  The bond market is convinced that Fed tapering will start very soon and have pushed up long term interest rates in anticipation of that.


Charts Courtesy: Financial Times and Thomson Reuters Datastream


The final chart below shows the current non-farm payroll growth trajectory bounded by higher and lower projections on top and bottom.  As you can see, it will take till sometime in 2014 or 2015 for the U.S. to regain jobs it lost during the "great recession."  That's much, much longer than any of the previous post WWII recoveries shown in the chart. 

We conclude that this is either the slowest recovery since 1948 or it's NOT really a recovery at all!


Implications for Fed Tapering:

With the Fed’s broad tapering strategy already priced into the bond market, the dismal jobs report is likely to precipitate an open debate within the Federal Open Market Committee about whether September is the right month to start the taper, how much and how fast. A rise in uncertainty about Syria or lack of congressional action on fiscal policy (there still is no U.S. federal budget for the coming fiscal year) could lead to a delay in tapering.

The Financial Times wrote:  "Given a strong desire among Fed officials to make sure markets do not misinterpret tapering, however, a likely option is a small reduction in asset purchases combined with a new effort to strengthen the Fed’s interest rate guidance." 

“For me, to start the wind-down, it will be best to have confidence that the incoming data show that economic growth gained traction during the third quarter of this year and that the transitory factors that we think have held down inflation really do turn out to be transitory,” said Charles Evans, president of the Chicago Fed, told the Financial Times. 

Mr. Evans, a voting member of the FOMC, is regarded as a monetary policy dove. He said the Fed should buy at least $1.25T in assets between January 2013 and the end of its third round of quantitative easing.

Kansas City Fed President Esther George said it would make sense to taper purchases from $85bn to $70bn in September and split buying evenly between Treasury and mortgage-backed securities. It currently buys $45B of Treasuries and $40B of MBS each month. 

The Fed is not likely to raise short term rates until the headline inflation rate (which we maintain is significantly higher than reported), rises well above

2%.  The Financial Times writes that some Fed economists think that rates may not get back to their long-run equilibrium of around 4% until as late as 2018 or 2019.

Closing Comment:

The CURMUDGEON still believes that all of the Fed's monetary stimulus programs since at least 2010 have hurt and not helped the U.S. economy.  At some point in time, we are expecting the U.S. dollar to collapse, interest rates and inflation to rise sharply as a result of these misguided Fed policies.  

Till next time.....................


Addendum by Victor Sperandeo:

Excellent case made for the "jobless recovery."  An additional point of order:


About 55,000 jobs are estimated to have been added each month by BLS, but were not actually counted in the payroll survey. This BLS "Birth Death model" estimates the numbers of new jobs created from new business formations vs closing of doors. The Birth-Death numbers are not seasonally adjusted, while the reported headline number is. ... It is a flawed model that was used in better economic times (i.e. pre-Obama). No one knows if businesses are not being formed vs. going out of business and how many people are really being hired.  The upshot is that approximately 600,000 people per year that BLS reports to be working may be a mirage???


The Curmudgeon

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.