I’m not looking for an economic soft patch quite as severe as we witnessed in the summer of 2011. However, the combination of somewhat weaker data coupled with another flare-up in European sovereign debt markets continue to point to heightened risks of a 5 percent to 10 percent broader market correction over the next two months.
The April employment report fits with this cautious thesis. Total US payrolls increased just 115,000 in April against expectations for a 160,000 jump, while private payrolls increased 130,000 against expectations for an increase of 165,000.
Over the six-month period from September through February, private payroll gains averaged over 216,000, which means this month’s number represents a meaningful slowdown from the recent trend. In fact, this is the weakest month for private payrolls gains since last August, the height of the 2011 summer soft patch.
The only glimmer of positive news in the April employment report was a series of positive revisions to the prior month’s data: the US Bureau of Labor Statistics (BLS) revised March data higher by 34,000 and the February number higher by 19,000. However, these revisions aren’t high enough to alter the fact that employment gains over the past two months have been much weaker than was the case between September and February.
Some will point to the decline in the unemployment rate to 8.1 percent as another positive sign, but that number is largely meaningless and a statistical curiosity. One of the most important factors to watch when it comes to the unemployment rate is what’s known as the labor participation rate (see chart, below).
Source: Bloomberg; BLS
The labor force participation rate is the percentage of people of working age (over 16 years old) who are actively seeking employment in the US. Typically, in a strong employment market you would expect to see the labor force participation rate rise, as more people outside the labor force attempt to find jobs and take advantage of strong wage conditions. This was the case for most of the great bull market and economic expansion from 1982 to 2001, when the labor market participation rate rose from the low 60 percent range to between 67 percent and 68 percent.
Throughout the 2001 to 2007 period, the labor force participation rate generally moved sideways. That’s because at some point, even a strong labor market can’t attract additional workers or coax new employees out of retirement.
However, during the financial crisis and recession of 2007-2009, the labor force participation rate plummeted at the fastest pace in history and is now back to levels last witnessed before the 1982 to 2000 run-up. As labor market conditions collapsed, many workers simply could not find work. Some gave up looking for jobs and returned to school or decided to retire early and stopped looking for jobs.
Others became what the BLS calls discouraged workers, individuals who would like a job and have looked for employment in the past 12 months but have stopped searching because they believe there are no jobs available for which they’re qualified.
For most people, a person who wants a job but can’t find one might be considered unemployed but the BLS does NOT consider discouraged workers to be part of the labor force. These individuals are neither considered employed nor unemployed because the BLS only considers people to be in the labor force if they’ve looked for employment at some point over the past four weeks. Since these workers are neither employed, unemployed or part of the labor force, they don’t factor into the headline unemployment rate at all.
Other individuals are currently under-employed. In other words, they could not find full-time jobs in their industry so instead they took on part-time work. These workers did not choose part-time work but were forced into such jobs by economic circumstances.
If we include all of the unemployed, discouraged workers and others marginally attached to the labor force, the real headline unemployment rate in the US is 14.5 percent of the labor force, down only slightly from its late 2009 highs of 17.2 percent.
In recent months, the US headline unemployment rate has fallen but only a portion of that is due to more unemployed persons getting jobs. Another chunk of this decline is really just unemployed people being re-categorized as “non” in the labor force. A declining unemployment rate driven solely by a drop in the size of the labor force doesn’t indicate a strong or strengthening labor market.