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Jobs: 5 Reasons to Be Skeptical

By Richard Stavros on July 14, 2016

Investors should be wary of Friday’s U.S. jobs report, which claimed 287,000 jobs were created in June, and which sent the S&P 500 index to an all-time high. This report comes a month after it was reported that a measly 11,000 jobs were created in May.

I’m among those doubting that U.S. government jobs reports reflect what is going on in the real economy, and I look at other data to gauge if the U.S. economy truly has rebounded, which I’ll get into in a bit.    

My main issue with the U.S. jobs reporting is that after enough time has passed job seekers are no longer counted as employed or actively seeking a job. The Economic Policy Institute (EPI) calls them “missing workers,” as they are not reflected in the unemployment rate. An analysis issued on July 8 by the EPI found the unemployment rate “drastically” understates the weakness of job opportunities. “This is due to the existence of ‘missing workers’ – potential workers who, because of weak job opportunities, are neither employed nor actively seeking a job … these workers are not reflected in the unemployment rate,” the EPI said.

Given the sluggishness of the recovery, the hiring process takes much longer and job seekers spend six months to even years landing a new job.  When you consider that most Americans don’t have more than a month’s savings, this reality behind this statistic is human suffering. 

Even if the government says these long-term unemployed are no longer looking, they are.  Many exhaust savings and must move in with family to survive, if they’re lucky. As proof of these ignored job seekers, when the jobs report came out the unemployment rate rose because more Americans sought jobs.

Finding Missing Workers

To measure how well the economy is working, EPI tracks “missing worker” estimates, updated on its page on the first Friday of every month immediately after the Bureau of Labor Statistics releases its jobs number. Current total missing workers for June 2016 is 2,630,000, and the unemployment rate of missing workers were looking for work would be 6.4%, as compared to the official unemployment rate of 4.9%.

EPI provides a valuable alternative to the government’s numbers, but look at five other measures that investors should also follow to gauge the economy’s health. 

  1. Business Capital Investment: There’s an obvious disconnect between so-called strong hiring and business investment. You can’t have confidence in the employment numbers if business investment is at an all-time low. According to a report by Standard & Poor’s, capital expenditures across all industries fell 10% in 2015 and will continue declining, though at a slower pace, dropping to 4% in 2016 and to 2% in 2017.
  1. Business Creation: Startups businesses or business creation is an important component to a healthy economy, as they create many of the new jobs. According to a Kauffman Foundation research report issued last year, the country’s rate of new business creation, which peaked about a decade ago, plunged more than 30% during the Great Recession and has been slow to bounce back. Even worse, the Kauffman report found that business deaths now outpace business births for the first time since researchers started collecting the data in the late 1970s. This is even more cause for concern as young businesses account for nearly all net new jobs (job gains minus job losses) created annually in the United States. “Older businesses, by comparison, tend to collectively shed from their payrolls almost as many workers as they add,” the report said.
  1. Job Gain Averages: Barclays Chief U.S. Economist Michael Gapen said that marked drop-offs in payroll gains from the recovery average typically herald recessions nine to 18 months later. Monthly gains are still averaging just 147,000 the past three months and 172,000 so far this year, well below the 229,000 pace in 2015. Investors should be laser-focused on whether the trend is rising or falling.
  1. Corporate Profits: A disturbing trend in the last few years has been the persistent declines in revenues of many corporations, which is being followed now by declines in profits, called a “Profit Recession” by some. Revenues declines typically mean a firm is losing market share, and the fact that profits are declining means post-Recession cost cutting (mainly layoffs) is no longer keeping profits up. Further, we know that firms have not been reinvesting in their business given the trillions of cash on corporate balance sheets, so investors should watch this trend closely. So, this does not bode well for the health of the economy if companies do not spend or hire. According to S&P Capital I.Q., aggregate corporate earnings in the second quarter of this year are down 5.5% from the same quarter last year, and for a fourth quarterly decline in a row.
  1.  Gross Domestic Product (GDP): I like GDP because no matter how bulls or bears can spin one metric, you can’t ignore the economy’s big picture. In June, the International Monetary Fund cut the U.S. economic growth forecast to 2.2% for 2016, which has been the general level of growth over the last few years.

So, let’s be happy that our jobs picture is brightening a bit, but the reaction by markets was clearly overdone.

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