Complicated Employment Situation Report Breaks Down to Trouble

The latest Employment Situation Report for September required some dissection before coming to conclusion on the cause of death. While nonfarm payrolls disappointed most, the details offered mixed information. Meanwhile, the unemployment rate seemed to calm concerns, but a closer look at the underemployment rate raises alarm.

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Employment Situation Report

The Employment Situation Report is confusing to the Main Street economist from the get-go, as the top-line measures of labor market health offered a mixed message. The unemployment rate stuck at 9.6%, rather than deteriorating to 9.7%, as economists expected. Meanwhile, Nonfarm Payrolls dropped by a net of 95,000 in September, which, in this case, matched poorly against expectations for decline of just 8,000 jobs. On one hand, we find what seems like good news and in the other we catch a palm full of trouble. As we work through the report here for you, we expect to clear up the finer points and reveal the general message. We hope this will be an aid to your general understanding of the employment situation and to your investment and business planning strategy.

Starting with the payroll numbers, the reported loss of 95K jobs is a bit misleading. For the final occasion, it included a significant number of census workers who were hired not long ago on a temporary basis. The layoffs of 77K tally-takers last month were expected and therefore also forecast, and so you must be wondering why and how economists could still be so far off in their predictions. Well, the reason was hinted to by the President just a day before the release.

President's Sneak Peak

We broke the news Thursday of the President's allusion to September private payroll growth during a stump speech he gave in Bowie, Maryland. We said that since he likely had a sneak peak at the labor market data, his comment regarding the private workforce was probably an allusion to another solid private payroll count for September. We were correct in that assumption. Private payrolls increased by 64,000 in September, not far off economists' views for +85K (ADP saw +39K). This marked the ninth consecutive month of job growth in the private sector. However, we missed another of President Obama's important clues.

The Education Warning

The President keyed on education in his Bowie address. He pumped up Maryland's governor for his state's nation leading education record, and he highlighted the general view that Republicans would seek to cut education spending if elected into control of Congress and to the governor's seat in Maryland. Why the focus on education? We thought it was clear, as the President told a college crowd that Democrats would rather let tax breaks expire for those making more than $250K than fire teachers, as has occurred in Republican led New Jersey and California. However, the broader scheme became more clear Friday morning, when we saw the payroll count affected significantly by a sharp drop of 76K public employees from local government municipalities. These job cuts were attributed to the layoffs of teachers and other government employees, as states sought to balance tight budgets.

“We want to know! Where did our money go?”

So the President was implying even more than we thought we had insightfully uncovered Thursday. He effectively told us there would be growth in the private payroll count again, a positive sign for the economy, but also that local governments would make significant cuts to teachers. So now we want to know what happened to the bill signed into law on August 12, through which the federal government issued $26 billion to states so that they would keep teachers in place? Wasn't it enough money? If not, why didn't the bill call for more funding? Or were the funds misdirected or misused? We want know! Where did our money go?

With regard to the public payroll count, with census workers now limited to about 6K, the pool will no longer fog the overall monthly number. Likewise, further changes in the number of employed teachers should be minimal, given school is now in session. Still, states and municipalities remain under pressure to balance budgets, and further job cuts are likely from the public sector generally speaking.

Private Job Market

Still, there was more good news with regard to the private payroll count, which one might view as the parent labor market, given public jobs are only possible due to tax collection from private employees (and public). The prior two months' private nonfarm payroll counts were revised higher, to 93K for August (from 67K) and 117K for September (from 107K). That said, the trend still shows a slowing pace of job creation in the private sector. Adding to that burning of the toast, the government's benchmark revisions appear set to adjust nonfarm payroll losses by another -366K for March 2010.

It seems like these adjustments keep clarifying a tougher economic situation than upon first data declaration. I'm having a hard time defending the honesty of my government, given the consistent favorable lean of data to whichever Administration is in place (I saw it under Bush and I see it now too). However, I believe it is an issue that does not reach to the upper echelon of government, and it may simply be due to human error in any or each case.

Health Care Adds Jobs

The details of the payroll data reveal the Health Care sector again contributed job opportunities, adding a net +24K in September. Indeed, the demographics of our nation have offered health care professionals steady work. Bars and restaurants also added a bunch new servers in September (+34K), as more Americans drown their sorrows and burn some savings. The same cannot be said for most other employment sectors.

Construction Dives While Bars Thrive

Construction entered a renaissance of job destruction, shedding 21K jobs this month, which net well against a similar numerical gain in August. Earlier this week, we expressed our view that construction job losses must be in the commercial space, given the dearth of any residential activity. The Labor Department's report highlighted the location of these cuts in nonresidential specialty trade (electricians, plumbers and heating and air conditioning specialists we assume). Hey, I know these guys personally, given my 14 year carpentry apprenticeship under my father. These guys might single-handedly be behind the increase in bar traffic implied by establishment job increases.

Temporary Work

Finally, temporary help increased by 16.9K in September, but we cannot classify this as a positive, as the temp workforce is expected by most to give way for permanent hires if the economy gains true traction. This is the general view, but I expect both the temporary workforce and permanent workforce to grow simultaneously this time around, given the degree of cuts that have taken place (low levels of staffing are in place).

Underemployment Deteriorated

The Household Survey showed the unemployment rate held steady, but we all know how that goes… Get this! Unemployment stuck at 9.6% in September, but the number of part-timers working fewer than the full-time hours they would like and need to be working, increased by some 612,000 last month. Meanwhile, the Marginally Attached count, which includes folks who are not sure they can get a job anymore, rose by 178K. So guess what happened to the underemployment rate then… it increased to 17.1%, from 16.7% in August. That is a significant change. Thus, the number of folks not spending as they usually might is high and growing.

Our underemployment figure includes part-timers who once worked full-time, in the count. This adjustment also adds back "discouraged" and marginally attached workers, who are not counted as part of the workforce or unemployed. If we add back the 2.548 million displaced workers to the labor market, and include the 9.472 million underemployed part-timers in the unemployed count, adjusted unemployment reaches ((14.767M + 2.548M + 9.472M) / (154.158M + 2.548M)) * 100 = 17.1%. That's greater than the 16.7% recorded in August, and compares to 16.5% in July and June; 16.6% in May; 17.1% in April; 16.9% in March; 16.8% in February; and 16.4% in January.

Conclusion

So, while we will not have teachers nor census workers to blame in the future, and should see better overall nonfarm payroll counts moving forward as a result, the trend in private sector hiring is down. Meanwhile, other public sector jobs remain at risk. Also, the underemployment rate is on the rise, and spending should be likewise contained. Thus, net net, a complicated Employment Situation Report breaks down to show general trouble after its dissection.



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