Labor supply/demand imbalance in the United States

The number of US job openings is now running materially above the pre-recession levels. One would think the nation's unemployment rates should be at pre-2008 levels as well.

But the decline in unemployment has significantly lagged job openings in recent years. The mismatch between all those new positions and all those people without work (including those who had left the labor force altogether) persists. Here is the updated Beveridge curve.

The US clearly has the jobs but not the people to fill them. Part of the reason is that a good proportion of those unemployed and marginally employed are not the people companies want. The skills gap continues to plague US labor markets.

Another way to look at the US Beveridge Curve is to plot job openings vs. the duration of unemployment. The logic here is that as job opportunities improve, the average time spent between jobs for those who have been laid off should shorten. But with US job openings now at highest level in 13 years, the average duration of unemployment is still higher than in any post-WWII period prior to the Great Recession (see chart). This disconnect is staggering.

After speaking with some folks who currently don't have work (and not much in terms of skills), it seems that prior to the housing crisis, many of those who got laid off, quickly found temporary work in construction or other housing related areas. A great number of those jobs are gone and with them went some of the safety net - dramatically lengthening the duration of unemployment. That's why it's so troubling to see growth in construction spending slowing this year (see chart). At the same, increasing numbers of job openings now remain unfilled while over 9 million people live on unemployment benefits.

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US labor markets Q&A

The media is generating a great deal of noise around the US labor markets and it's worth going through some key facts, issues and trends. Let's do it in a Q&A format for clarity.

Q: What's the deal with Friday's unexpectedly poor payrolls report?

A: Friday’s payrolls report was clearly a disappointment - far below expectations. However some have attributed the weakness (at least in part) to notoriously unreliable August seasonal adjustments as well as to the New England’s Market Basket labor mess. If that’s indeed the case, we should see this reverse in September.

WSJ: - A management fight and worker revolt at a New England grocery store chain helped drag down U.S. payrolls during the month of August, the Labor Department said Friday.

Though it’s not named in the closely watched jobs report, the company almost certainly is Tewksbury, Mass.-based Market Basket, a family-owned chain that operates 71 stores across Massachusetts and New Hampshire.

The June dismissal of popular chief executive Arthur T. Demoulas, amid a long-running battle with his cousin Arthur S. Demoulas, led to weeks of turmoil as workers demanded his return, a battle covered in detail by the Boston Globe. At one point in August, thousands of part-time workers had their hours cut, some to zero.

Source: abqjournal.com

Q: How is the jobs recovery going on a longer time scale?

A: The current labor market recovery is the longest on record but clearly not the strongest. Given the latest trends in job openings (see chart), the labor markets improvements are likely to continue, albeit slower than in past recoveries. Under the circumstances that's a good outcome.

Source: @NickTimiraos @EricMorath

Q. What's going on with falling labor force participation?

A: US labor force participation for ages 25-54 has leveled off. This is the key index to watch for signs of stabilization in participation instead of the overall working-age population measure.

Q: Isn't long-term unemployment another major problem for US labor markets?

A: The number of US long-term unemployed is falling quickly but is still higher than at any time prior to the Great Recession. This tells us that the healing process has ways to go.

Q: Are wages stagnating in the US?

A: US wage growth remains anchored at 2% per year - with remarkable stability. Of course as discussed before, wages for many skilled workers are rising much faster than 2% while pay for unskilled labor continues to stagnate or is even declining.

Q: Where are the jobs coming from?

A: Here are the latest job creation numbers by sector.

Source: RBS

One final note. Comparing current labor markets to 2006 or similar periods (such as this chart on temp labor) is not always a productive exercise. It assumes that in 2006 things were somehow “normal” and the period can be used as a benchmark for the current situation. It could however be argued that the current environment is closer to “normal” because 2006 was an aberration driven by the credit/real-estate bubble. As much as some miss those good old days, we are unlikely to see such an environment return in the near future.

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From our sponsor:

The skills mismatch remains a fixture in US labor markets

The Beveridge Curve, a scatter plot of job openings vs. the unemployment rate, continues to show a structural shift in US job markets.

See this for the definition of the U-5 unemployment rate 

A large part of this shift is the skills mismatch. Companies are increasingly looking for skilled and experienced workers and are having a tough time filling those openings. If you are in retail for example, you will have no problems getting part and full time workers to stock the shelves in your store or run the cash register. On the other hand finding someone with the skills to run a store, even a really small one, is becoming more of a challenge. You'll get dozens of resumes to be sure, but very few with the right qualifications.

One can see this effect in the small business survey data, as more firms are having a tough time filling openings. The US has millions of unemployed or "marginally attached" workers, yet these are not the workers companies want.

Some would say that the reason firms are not getting the workers they want is poor pay. But if you are unemployed - and those of us who have been there know - low pay generally beats the unemployment benefits. Furthermore, at least across small businesses, pay is on the rise. No, it's nothing like it was before the recession, but those days are long gone.

Source: NFIB

Another sign of the American skills mismatch is small business consistently complaining about the quality of labor - something that was much less of an issue a year ago.

Source: NFIB

We can see other examples of this broadening skills gap here and here.

Wages for skilled workers will rise faster than the national average as demand grows. Unfortunately those with limited skills will continue to struggle with stagnant wages and limited opportunities. The days when unskilled workers could easily get a well-paying job in construction are not coming back for some time. Welcome to the New Normal.

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Sign up for our daily newsletter called the Daily Shot. It's a quick graphical summary of topics covered here and on Twitter (see overview). Emails are distributed via Freelists.org and are NEVER sold or otherwise shared with anyone.


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Media pundits, meet the labor market inflection point

The mass media, bloggers, and various pundits remain quite negative on US labor markets. It's the easy road to take - just repeating the story of the last five years like the constant hum of the Cosmic Background Radiation left over from the Big Bang. You see it even from some of the more economically savvy reporters. Here is a typical reaction to yesterday's initial jobless claims report.

The Motley Fool: - After edging up a revised 1% the previous week following a 9% drop the week before, this latest report deals a blow to April's employment improvements. Analysts had expected an initial-claims increase, but their 313,000 prediction proved overly optimistic.

A "blow"? Not quite. As discussed before, the seasonally adjusted initial claims numbers are often meaningless, particularly around key holidays. The reality is that without the seasonal adjustments, initial jobless claims are now around the level they were at this time in 2006 - and moving lower. April's employment improvement remains intact.

The US job market is firming up, and in the coming months will result in some upside surprises to the official payrolls figures. With all the negative press out there it is often easy to miss the inflection point until we are long past it, sitting with the wrong portfolio on the other side. Well, the inflection point is here.

Gallup Job Creation Index

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From our sponsor:

US job market healing

We are seeing signs of significant improvements in US labor markets. The ADP report today was certainly an indication of recovery from the winter slowdown.

ADP: - Mark Zandi, chief economist of Moody’s Analytics, said, "The job market is coming out from its deep winter slumber. Job gains are consistent with the pace prior to the brutal winter. The gains are broad based across industries and business size classes. Even better numbers are likely in coming months as the weather warms.”

One area to watch in the ADP report is construction (see post), as construction payrolls have consistently increased each month over the past year. With demand for rental units remaining high, this sector could pick up quickly.

But signs of improvement go beyond the ADP measures. Gallup's Job Creation Index for example rose to the highest level since 2008.

Source: Gallup

Gallup: - U.S. workers in the private sector are reporting a more positive jobs situation where they work than at any point in the past six years. Combine this with state workers' record-high job creation reports and the year-over-year improvement from federal workers, and March's promising Job Creation Index reading would appear to be a positive sign in the long recovery from the 2007-2009 economic recession.

Furthermore, the ISI's survey of permanent placement (recruiting) firms shows a surprisingly robust improvement in activity recently.

Source: ISI Group

Companies are paying more to find employees, which is consistent with the recent report showing that small businesses are complaining about labor quality - something they weren't doing much a year ago.

Source: Source: nfib.com/sbet

The markets are starting to recognize this change in labor markets, with the 10-year treasury yield rising nearly 12bp from a week ago. Another market example of this improvement is the recent spectacular rally in the shares of a large recruiting firm, Korn Ferry (KFY).

blue = Korn Ferry shares, orange = S&P500 (source: Ycharts)

Clearly we will see some volatility in the official payrolls numbers going forward, but the signs of US labor markets firming are unmistakable.

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From our sponsor:

Today's jobs report: a wake-up call or an aberration?

Today's payrolls shocker (see story) sent treasury yields sharply lower. As discussed last month (see post), speculative investors have piled into the market and were forced to cover their shorts after the jobs report. Going forward, until there is more visibility on the labor markets, investors will be more cautious shorting treasuries.

The shape of the treasury curve move has become fairly predictable, with the "belly" experiencing the largest moves (see post).

Now comes the debate on whether this jobs report was a fluke.

LA Times: - Analysts were shocked by Friday's Labor Department report that the economy added just 74,000 net new jobs in December, about one-third what many had forecast. The bad weather in parts of the country last month apparently played a role, and there were unusually big payroll drops in the movie industry and at accounting firms.

Still, that doesn't fully explain why the hiring was so weak. The healthcare sector was flat, as was transportation and warehousing, for example. On the whole, job growth was not only the lowest in almost three years, it was incongruous with the latest string of positive economic data -- on exports, homebuilding, consumer spending -- indicating an economy and job market gathering steam.

Is this a wake-up call on more weakness in the US labor markets or simply an aberration? Thoughts, comments?

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From our sponsor:

Jobless claims back to reality

As discussed before (see post), "something is rotten" in the the world of unemployment claims statistics. The data has simply been wrong - though it wasn't clear where it went wrong. As many pointed out, the issue has likely been at the state level, particularly in California, where computer system changes created a backlog of claims to be reported. So California chose to send in numbers that didn't include all the claims. And the US Department of Labor chose to publish them - knowing they were wrong. At the same time economists just accepted these numbers as real, some pointing to amazing improvements in US labor markets. And now as California caught up with its "booking" of claims into their "upgraded" system, the claims spiked.

Econoday: - A giant spike in weekly jobless is mostly tied to continued counting problems in California and is only partially the result of the government shutdown. About 1/2 of a gigantic 66,000 increase in initial claims in the October 5 week reflects backlog issues in California from a computer changeover last month, while about 15,000 of the increase reflects claims from non-Federal workers including contractors who have been hit by the government shutdown. Federal employees are not included in headline claims with the latest data for this category available only for the September 21 week which was of course before the shutdown hit.

The spike is not real and neither was the earlier decline. We just got back to the original trend - plus some laid-off federal government contractors.

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From our sponsor:

Seasonality adjustment magic aside, private payrolls are growing in a linear fashion

The media is making a great deal of July's non-farm payroll numbers in the US. The situation is quite simple actually - we are seeing the same level of growth we've seen in the past couple of years - no more, no less. Part of the issue here is the noise related to seasonal adjustments. As the US job market composition changes, so do some seasonal patterns - which is what the Labor Department is having a bit of trouble with.

Analysts in the highly seasonal energy industry often don't bother with seasonal adjustments. They simply compare each data point to the range for the same month during previous years. Focusing just on the private sector payrolls without the seasonal adjustments, here is what we get. No surprises, no seasonal adjustment magic.

Source: U.S. Bureau of Labor Statistics

And this is what the July payroll number looks like through time. The post-2009 growth is nearly linear, adding on average 2.25 million private jobs per year.

Source: U.S. Bureau of Labor Statistics

Similarly, some are pointing out that there is a higher than expected number of temporary jobs in the July report. Once again, it's the issue of seasonal adjustments. The percentage of temporary workers is actually right where it has been for the past several years in July - just over 20%.

Source: U.S. Bureau of Labor Statistics (NSA)

While this employment situation report surprised many analysts, it's actually quite ordinary once you remove the seasonal adjustment magic. Employment growth is following the same slow trend it has for some time.

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From our sponsor:

Labor market stabilization lacks one crucial ingredient: hiring

We are clearly seeing signs of stabilization in the US labor markets as new unemployment claims march toward pre-recession levels (though obviously not there yet). Also as we saw today, small businesses have been increasing the numbers of employees (see Twitter link). However, the nation's labor market is still suffering form weak overall hiring. The pattern of hiring in the US has dislocated in late 2008 and has remained virtually unchanged since the recession (chart below). This relative weakness in hiring is consistent across most industries. Thus far the pace of hiring in 2013 has not been significantly different from other post-recession years.

Source: US Department of Labor (unit = thousands of workers)

How is it possible that other labor market metrics are showing stabilization while hiring has not materially improved? The answer has to do with declining numbers of layoffs. According to the Bureau of Labor Statistics, the number of layoffs in the US has been at or below pre-recession levels since 2010.

While lower layoffs is a positive sign, a healthy economy is usually driven by improvements in hiring rates. So far however that hasn't been the case in the US. Going forward, the number of hires will be an important metric to track in order to determine if the labor markets are indeed healing.

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From our sponsor:

Where are the jobs coming from?

The January employment report showed that improvements in the U.S. labor markets are continuing at a moderate pace, as private payrolls added some 166 thousand jobs during the month. The headline numbers from the Bureau of Labor Statistics however mask the underlying dynamics of job growth. A report from ADP provides a breakdown of jobs created by companies of various sizes (as measured by the number of employees.) It's easy to see where the new jobs are coming from.

Jan-2013 Change in Nonfarm Private Employment by Company Size (source: ADP)

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From our sponsor:

Residential construction jobs hit new lows in November

November saw a decline in US construction jobs. In particular, the number of residential construction jobs hit a new multi-year low.

AGC: - Construction employment declined by 20,000 jobs in November while the industry’s unemployment rate hit 12.2 percent, according to an analysis of new federal data released today by the Associated General Contractors of America. The construction employment figures likely reflect the fact many contractors have already cut staff and delayed hiring new employees because of the threat of the “fiscal cliff,” according to results of a survey of member firms the association also released today.

“It is discouraging that construction employment is still struggling after more three years of expansion in the overall economy,” said Ken Simonson, the association’s chief economist. “As disappointing as these numbers are, they will only get worse if Congress and the White House allow huge tax increases and spending cuts to occur on January 1.”
...
Construction firms employed 5.514 million people in November, down from 5.534 in October, Simonson noted-a decrease of 0.4 percent. The sector’s overall employment in November is 6,000, or 0.1 percent, lower than one year earlier when firms employed 5.520 million workers. Both residential and nonresidential construction lost jobs in November, with nonresidential construction suffering significantly more job losses than residential construction for the month.

Residential contractors lost 3,600 jobs in November, as residential building contractors lost 6,800 employees while residential specialty contractors added 3,200 new workers.

Resi housing construction jobs (THOUSANDS, SA, Source: U.S. Bureau of Labor Statistics)

At least through October, housing starts were on the rise. Single unit permits were also at recent highs. But so far this has not translated into more construction jobs.

Source: The U.S. Census Bureau and the Department of Housing and Urban Development

Once again, some blame it on Sandy. Perhaps. Over the next few months the "Sandy effect" should be a positive, as reconstruction goes into full swing. For now however, the situation in Washington is not helping matters.

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From our sponsor:

The latest jobs number - a deeper dive

Guest post by Lee Adler (The Wall Street Examiner)


The BLS today reported a gain of 171,00 in nonfarm payrolls. The actual, not seasonally adjusted (NSA) number was a gain of 911,000. In the actual (NSA) data, October is always an up month. Last year the October NSA gain was 895,000. In 2010, it was 978,000. The 10 year average gain for October for 2002 to 2011 was 737,000. This month’s report was a good one, consistent with the trend.

There’s a problem with the seasonally adjusted number. The SA number for this month will subsequently be revised in each of the next 5 years as the BLS attempts to fit the SA number to the actual change. It will also have a major benchmark revision in February, when the annual benchmarking process is finalized.

The BLS headline number is really lousy data, but the market pays attention to it. In September, the August SA headline number was revised up by 46,000 and July was revised up by 40,000. Then this month both August and September were revised up, August by 50,000 and September by 34,000. The BLS will revise this month’s number, not only next month and the month after, but every year for the next 5 years as they hone the SA number to include a look back to pinpoint where this month’s number actually should have been. The truth is that the current SA number is a wild guess and a fraud. The BLS statisticians know it and have publicized that fact, but the mainstream media has ignored the warnings for years.

We need to look at the best data we can find to know the truth about what’s going on. That’s the NSA data. The withholding tax collections are actual and real time, but from time to time may be skewed by factors other than the number of employed persons, so we need to be alert for anomalies in that data.

The monthly employment numbers reported above come from the BLS the Current Employment Statistics Survey or CES, a survey of business establishments. The BLS also does a survey of households. To further complicate matters, the household survey or CPS — Current Population Survey– often tells a different story from the establishment survey. This month the two were consistent.

As with the CES, in the CPS October is a month in which the actual NSA number always increases. This year the number of persons reported as employed in October rose by 706,000 from September (Actual NSA). That compares with a gain of 485,000 in October 2011 and 34,000 in 2010. The average gain in October for the previous 10 years was 480,000. By this standard this was a very good month. The year over year gain was 2.2%.

Full time, as opposed to total employment, is a key measure. Part time jobs are nice, and for many that hold them, they are a lifeline, but the important metric here is full time jobs. Without those, we’re dead.

Full time employment in the CPS rose by 367,000. Part time jobs increased by 339,000. Last year full time jobs increased by 476,000 in October, but in 2010 they dropped by 43,000. The 10 year average gain in full time jobs for October was 81,000. This year’s performance wasn’t as good as last year, but it was significantly better than average.

The chart below shows the year to year trend line connecting the October data in full time and total employment along with the raw NSA data and the SA fiction. The seasonally finagled data shows the trend nearly catching up in both series due to the big upward revisions to the July through September data. Prior to this, from March through August the SA line had been diverging from the actual trend, particularly in full time employment.

Full Time Employment Short Term View – Click to enlarge

June or July is usually the peak month for both total and full time employment. This year the numbers broke last July’s level in April. The economy was a couple months ahead of schedule in affirming the uptrend in jobs. That uptrend is still firmly entrenched. The gains have accelerated in 2012 versus 2011. With QE3, the Fed is adding more fuel to a fire that was already beginning to burn hot.

Full Time Employment, Stocks, and The Fed – Click to enlarge

Stock market performance is at the mercy of the Fed (or over the past 12 months the ECB, not shown), and employment typically reflects them both. Over the past year, the SOMA has not reflected the impact of the Fed’s MBS purchases from the Primary Dealers, a subject which I cover in depth weekly in the Fed Reports. While SOMA has stayed flat pending the first settlements of the QE3 purchases on November 13, the graph of Fed purchases from the Primary Dealers (not shown) has been rising steadily since last September. By cashing out the dealers via these MBS buys, the Fed enables the dealers to buy more Treasuries. The next week, the Treasury spends that cash. That’s how Treasury debt is immediately transformed into economic activity and slow and steady job creation. With new QE, the Fed will be adding even more cash to power that trend.

The chart below shows that while the number of jobs is growing, the employment to population ratio has barely gained since the recovery began in 2009. The economy seems only to be keeping pace with population growth. Top line growth may satisfy the markets, but it is doing next to nothing to help the millions of people who remain unemployed. Their numbers are growing right along with the number of people who do have jobs. It is a sad state of affairs for the US, but markets don’t care about that.

Full Time Employment to Population Ratio – Click to enlarge

Many of the unemployed do not possess the skills that are in demand in the market. Mortgage application takers and processors, and construction laborers generally do not make good computer game programmers. Economic pundits must face the fact that the 10 million fake jobs spawned by the bubble are not coming back. The 7.9% unemployment rate is probably “normal.” The bubble unemployment rate of 5.5% was abnormal

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Did the bump in birth rates 6 years ago cause increased demand for teachers this year?

One of the readers (screen name "John A") had an interesting hypothesis to explain the spike in government employees at the state and local levels (see discussion). The chart below shows the number of births in the US over time. About six years ago there was a small spike in births, causing a temporary increase in the number of children who are now entering kindergarten in the public school system. That created demand for teachers this year (and possibly next year) - above the usual seasonal increase in Q3. Of course this is a temporary adjustment in employment, as birth rates began to decline fairly sharply after that (see ABC News story). It means that going forward public jobs will likely detract from non-farm payrolls growth.

Source: CDC

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The latest pickup in state and local government jobs is not sustainable

As economists focus closely on the US jobs data from recent months to gauge the state of the labor markets, one unusual trend emerges. After years of declines, the number of government employees has increased steadily during the third quarter. This was a surprise.

Government jobs in the US (Source: Bureau of Labor Statistics; SA, thousands)

It turns out that most of these new hires were at the state and local level. It's difficult to see what's driving this trend, though signs point to increased hiring in education.

Washington Post (Suzy Khimm): - This month’s jobs report showed a few notable upticks in hiring, including for governments at the state level. State governments added 13,000 jobs in September, marking their third straight month of public gains. It’s been a slow recovery for state employees, but the numbers have generally been creeping upwards since December 2011, when state government employment was at its lowest level since the beginning of the recession.

The gains were concentrated in education, which one would expect employment to increase as we head towards the beginning of the school year. But the numbers are seasonally adjusted, meaning they take that annual bump into account.

Is this the beginning of a recovery in public employment? After all the WP article was entitled "Government jobs are finally starting to come back". Unlikely. According to BNP Paribas, state and local governments are still running near record deficits (chart below), which makes this recent hiring trend unsustainable. Unlike the federal government, municipalities have a tougher time growing their debt indefinitely, which forces them to cut expenses and reduce hiring.

Furthermore we may be reading into these numbers too much because the employment data from municipalities may simply be flawed.

BNP Paribas: - ... the caution to this interpretation is that the data on government hiring rely on self-reports, response rates are low and the data are, therefore, of relatively poor quality. More than likely this is simply a reflection of statistical noise in the data that we expect to be reversed in coming months.

QoQ % changes in state and local government jobs on the right-hand side (green),
Deficit in bn on the left hand side (blue)
(Source: BNP Paribas)

This means that going forward, government jobs will once again create a drag on employment growth in the US, as the recent hiring (real or imaginary) is reversed.

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Fantastic jobless claims number from the Labor Department, but many remain skeptical

We are seeing more seasonality adjustments fun and games from the US Department of Labor. The drop in the initial jobless claims was so large, it looks suspicious. Lee Adler has a detailed write-up (here) on seasonality adjustments following last Friday's employment report (discussed here - and yes, the post contains all sorts of Bloomberg charts). The premise is that this drop actually happened earlier (which explains the sharp decline in the unemployment rate last week) and is only now showing up in the numbers. Either way, it is certainly a welcome development for the US economy.

US DoL Initial Jobless Claims

Nevertheless there is considerable confusion and a healthy dose of skepticism in the investment community around this claims number. Is it possible that claims from a large state were misreported or not included altogether?

Michael Block (Phoenix Partners) : All of these Illinois jokes aside, given the size of the drop in claims, the thought is that California was omitted from the data.

A Reuters story hints at something similar as well.

Reuters: - A Labor Department analyst said seasonal factors had predicted a very large increase in claims last week, which he said would be typical for the first week of the quarter. Unadjusted claims did rise, but far less than expected, resulting in the sharp drop in the seasonally adjusted figure.

He noted that one state reported a decline in claims last week when a rise had been expected. No states had been estimated for the report, he said.

"We will likely see some payback in the claims data reported next week. But through this potential volatility, it does look like the trend in the claims is improving somewhat," said Daniel Silver, an economist at JPMorgan.

California, given its large population and past "massive swings" in its claims data, was probably the state that caused the sharp drop in the seasonally adjusted figure, Silver said.

Later in the day the Labor Department attempted to clear some of this confusion:

FoxBusiness: - Later Thursday, another Labor Department spokesman issued a statement in effort to clarify what the agency described as “confusion” over the data. The latter statement seemed to refute the department’s earlier explanation.

“The decline in claims this week was driven by smaller than expected increases in most states and because of drops in claims in a number of states where we were expecting an increase,” the statement said. “No single state was responsible for the majority of the decline in initial unemployment insurance claims.”

Of course rumors of a conspiracy to cook the numbers continue to persist, particularly as we near the VP debate (tonight). It's not clear however how that would help the Obama camp, given more presidential debates coming in weeks that follow. Surely any improper adjustments will reverse themselves over the next month.

KPCC (Southern California): - The most recent government jobs report, for September, saw the national unemployment rate fall to 7.8 percent, setting off a flurry of conspiracy tinged speculation that the Obama administration had somehow cooked the numbers, after the President fared poorly in his first debate with GOP challenger Mitt Romney.

The claims number, coming on the same day as the Vice-Pesidential debate, will probably get the same treatment.

And then there is anecdotal evidence that some large US farms, who have been unusually busy with an early harvest due to the summer drought, have picked up extra help - reducing jobless claims in the process.

Whatever the case, if this decline is indeed real and permanent, it could signal a turning point in the US recovery. It's amazing how the Fed can fix the US employment situation in a month with the magic wand of QE (which is of course what they will ultimately claim). Many economists however remain skeptical.

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The employment report is weaker than it appears

The US employment numbers this morning generated a sharp rally in risk assets, with crude oil rising 3.5%, S&P500 up 1.8%, copper up 1.6%, and Brazilian Real up 90bp. It's worth taking a quick look at what in this employment report is causing such euphoria and whether it is justified.

The markets have focused on the private payrolls increase, which was 62K higher than the forecast. In particular it was the pickup in manufacturing payrolls of 25K vs 10K expected.

Private payrolls (in thousands, MoM)

This is certainly great news, but unfortunately this report is not as strong as the markets' reaction indicates. Here are the reasons:

1. The prior month in private payrolls was revised down by 11K. That's not an insignificant revision.

2. The unemployment rate actually went up from 8.2% to 8.3% and underemployment (U6) went up from 14.9% to 15%.  In fact, this is a third month in a row that saw an increase in U6.

3. Hourly earnings were lower than expected (0.1% vs 0.2%). The YoY growth in hourly earnings is 1.7%, the lowest since 2010. This is not positive for consumer spending.

4. Growth in temp payrolls continues to be significantly stronger than in permanent jobs. It tends to indicate lack of confidence among employers.

Temps payrolls (white) vs. total payrolls (yellow)
 (source: Bloomberg)

5. Manufacturing payrolls increase was driven to a large extent by fewer auto plants being idled for retooling than is usual for this time of the year. It's basically a seasonal glitch that may end up being reversed in August.

Bloomberg: - Factory payrolls increased by 25,000, more than twice the survey forecast of a 10,000 increase and boosted by a 12,800 pickup in employment at makers of motor vehicles and parts.

The figures may have reflected fewer shutdowns at automakers for annual retooling related to the new model year, indicating the jump will be reversed this month. Chrysler Group LLC and Ford Motor Co. (F) are among companies that said they would idle fewer plants.

6. Another survey of employment also conducted by the government called Household Employment Survey seems to contradict the headline number.

Stateseman.com: - [in the Household Survey the] government workers ask whether the adults in a household have a job. Those who don't are asked whether they're looking for one. If they are, they're considered unemployed. If they aren't, they're not considered part of the work force and aren't counted as unemployed. The household survey produces each month's unemployment rate.

This other survey indicates a 195K loss of payrolls. To be fair, the household survey at times also showed higher job growth than the more commonly used number. Nevertheless this discrepancy is large enough to question the veracity of the headline number.

The Telegraph: - Stephen Stanley at Pierpont Securities: "It's marginally better on the balance. More importantly we have a drop in household employment, which is not such good news. Even with the better-than-expected payroll number, it's not sufficiently big enough to change the big-picture view. The economy is growing but not at a satisfactory rate to bring down unemployment."

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The UK employment picture dims

The UK is now feeling the full impact of the Eurozone recession. The Recruitment and Employment Confederation (REC) and KPMG Report on Jobs, a leading indicator for the employment market in the UK is showing a rapid decline in placements - the worst since 2009.

Kevin Green (REC): - "The sharp drop in the number of people placed into work last month is really disappointing. A decrease in hiring activity means we could see a period of increased unemployment, especially as a new wave of school leavers and graduates will be entering the labour market over the summer.

Source: KPMG

FT: - The data suggest unemployment may shortly start to rise, partially resolving the puzzle whereby the jobless total has recently been falling despite the UK being officially in a double-dip recession.

Bernard Brown, head of business services at KPMG, said if the acceleration of the hiring decline continued, there was a “very real chance” of unemployment, currently 2.61m, reaching 3m “in the not too distant future”.

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Seasonal jobs pattern in the US

The nonfarm payrolls index indicates there may be a seasonal pattern to the US labor markets. The 2012 cycle however started earlier due to the unusually warm winter, but it seems to be following the playbook set by the previous two years.

Source: DB

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"Structurally impaired" sector job losses delay return to peak until 2015

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Commercial real estate valuations and office jobs

Commercial real estate valuations seem to coincide quite well with the overall number of office jobs. It's not necessarily obvious that this should be the case, because commercial properties include retail, multifamily, and other non-office properties. Nevertheless the relationship is striking.



source: Moody's


This doesn't bode well for commercial real estate going forward. Job creation, particularly office jobs, may lag significantly any recovery the US might experience. Commercial real estate valuations therefore may end up lagging even more.

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