The True Unemployment Rate is Much Worse than the Government Says

Over the past several months we’ve been asking a question, where have 600K Americans disappeared to since November, as they are no longer showing up in the labor pool. So we’ve taken to adding back our disenchanted brothers to the labor force and to the unemployment pool, thus developing the Wall Street Greek Real Unemployment Rate and the like Under-Employment Rate. We calculate those truer estimates of the employment situation for you again here, and the result stands in stark contrast to Wall Street’s Friday morning rally.

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True Unemployment Rate is Much Worse than the Government Says

Last month, we presciently said, "Perhaps the growth in the labor pool over the last couple months is the start of the discouraged returning to look for work again, which would imply the unemployment rate could increase again as it normalizes." Well, Friday, even as Nonfarm Payrolls were reported robustly higher, the unemployment rate deteriorated two-tenths of a point, to 9.0%...

A Survey of the Data

The Labor Department reported that Nonfarm Payrolls increased by a net 244K in April, much above the 185K average net increase forecast by economists surveyed by Bloomberg. April also illustrated an improved rate of job additions, as the revised March figure was noted at 221K (216K initially). The government’s data blew away ADP’s estimate for private nonfarm payroll change, as the feds reported 268K private sector net job additions, versus the 179K seen by ADP (NYSE: ADP). That’s a much healthier increase than the market had ever dreamed of, and it gave life to U.S. equity markets Friday morning.

The DOL reported job growth in services, which certainly could change in the near-term, given recent ISM Non-Manufacturing Index data. Perhaps helped by Easter lift, seen also in the latest Chain Store Sales data, April marked job growth in the Retail Trade Sector (57K+). Real estate enthusiasts will be pleased to hear about increases of 6K in both the Building Materials & Garden Supply Stores and Electronics & Appliance Stores, segments that tend to benefit in tandem with housing (or at a lag according to renowned portfolio manager Peter Lynch – see Beating the Street). The problem here is that increases in Construction employment are still nonexistent, but don’t forget, there’s a buffer to this growth that will keep it hidden; it can be found standing outside Home Depot (NYSE: HD) with empty pockets where green cards should be.

Another notoriously struggling services sector, Professional & Business Services, added 51K jobs in April. However, temporary help hiring hit a soft spot this past month. Temporary help is seen as a labor mezzanine between economic trough and full blown expansion. Health Care has been a regular stalwart sector, and added another 37K jobs last month. Leisure & Hospitality, which should have some seasonal play now, added 46K jobs in April, though over the last three months, two-thirds of the segment’s 151K job additions have come in eating and drinking establishments. Well, the boardwalk down the Jersey Shore officially opens in a just a few weeks, and it is full of food servers in high season. I tend to favor pizza at the beach.

Manufacturing posted growth in April, adding 29K jobs, much of which is supported by emerging world demand. The sector has now added 141K jobs in this short year-to-date. The mining sector added 11K jobs, we suppose some of which was found in rare earth unearthing given the sudden revival of Molycorp (NYSE: MCP) and friends. As long as oil-rich Middle Eastern despots keep finding crowds in the streets each morning, mining opportunities should be aplenty (for even more coal than we already choke on).

The weakness this month, dear fellow citizens, was again found in the public sector, where federal, state and local governments are only seeing increasing reasons to lay off firemen, police officers and even welfare workers in this time of great need. The Public Sector shed 24K jobs in April, after losing 10K in March and 26K in February.

The good news found in the Establishment Survey overwhelmed the Household Survey headline, which sure seemed to evidence a deteriorating employment situation. The rate of unemployment increased to 9.0%, up two-tenths from 8.8% in March. According to Household inquiries, unemployment increased most among teenagers (+0.4%), African Americans (+0.6%) and Hispanic Americans (+0.5%). Adult men and women saw equal increases of 0.2% each. Also, unemployment increased most among people with less than a high school diploma, with that least skilled group seeing a 0.9% increase in joblessness. As we move up the educational scale, we find lower degrees of increased joblessness in April.

The count of Americans working part-time, who would rather be working full-time, increased in April by 167K, to 8.6 million. The number of people marginally attached to the workforce, meaning they had not looked for work over the last four weeks, was relatively unchanged in April at 2.466 million. Finally, those discouraged workers who currently believe there just are no jobs available for them right now, increased by 68K. The biggest problem with this is that it marked a shift into hopelessness from desperation, as these folks simply shifted within the marginally attached group into its most desperate segment.

Calculating Under-Employment

Calculating this month's under-employment rate: If we add back the 2.466 million (previously 2.434 mln.) displaced workers counted in April to the labor market, and include the 8.6 million (previously 8.433 mln.) underemployed part-timers in the unemployed count, adjusted unemployment deteriorates two-tenths of a point to ((13.747M + 2.466M + 8.6M) / (153.421M + 2.466M)) * 100 = 15.92% in April.

Under-Employment Rate Trend:

• April 2011: 15.9%
• March 2011: 15.7%
• February 2011: 15.9%
• January 2011: 16.1%
• December: 16.7%
• November: 17.0%
• October: 17.0%
• September: 17.1%
• August: 16.7%
• July: 16.5%
• June: 16.5%
• May: 16.6%
• April: 17.1%
• March: 16.9%
• February: 16.8%
• January: 16.4%

Getting to the Wall Street Greek Real Unemployment Rate Estimate

While the workforce grew by another 15K in April, that still leaves it 586K short of November's tally. The problem comes when we compare the change in the unemployed with the change in employed Americans over that same span. While 786K more people were counted as "employed" since November, 1352K less people were counted as "unemployed." Where did the extra unemployed people go to, some 566K unaccounted for Americans?

The numbers seem to tell us, they left the labor pool. If we consider they may have retired (from both the labor force and unemployment), then we might find the difference. You see, we have 586K fewer folks in the labor force and a difference of 566K folks between the change in employed and unemployed. The 20K difference can be explained by the DOL’s disclaimer: "Detail for the seasonally adjusted data shown in this table will not necessarily add to totals because of the independent seasonal adjustment of the various series."

But have that many people really retired, fallen ill or died, or have many of them simply fallen off the radar, yet while remaining unemployed? It is pretty much universally agreed upon (now) that the growth in the labor pool over the last couple months is the start of the discouraged unaccounted for unemployed returning to look for work again. This explains why the unemployment rate increased last month, as it should if the labor market is normalizing to account for the abnormal disappearance of Americans from the data.

The difference between the employment increase and unemployment decrease nearly matches the number of Americans no longer considered part of the civilian labor force. Therefore, we add back the lost and unaccounted for Americans into the equation, and we find March's more likely unemployment rate, or the Wall Street Greek Real Unemployment Rate Estimate, sits at 9.3% (versus the government's 9.0%) and the Wall Street Greek Real Underemployment Rate Estimate at 16.2% (against government's 15.9%).

Therefore, in our estimation, unemployment deteriorated in April and was three-tenths of a percentage point worse than the government’s estimate. However, the situation was even worse in February of this year. True Underemployment also deteriorated this month by two-tenths, and was three-tenths of a percentage point worse than the estimate made on pure government figures. Last month, we could at least point to an improving trend, while our numbers marked lower absolute economic health. This month, we cannot even say that. So while the market rejoiced over a solid nonfarm payroll figure, and also on upward revisions to the two previous months of data, the truth is that there is a segment of the population that has given up looking for work, understating the depth of disgust with the economy among our citizenry, not to mention the degree of economic ill-health.

Wall Street Greek Real Unemployment Rate Estimate for 2011:

• April: 9.3%
• March: 9.2%
• February: 9.4%
• January: 9.2%

Wall Street Greek Real Under-Employment Rate Estimate for 2011:

• April: 16.2%
• March: 16.0%
• February: 16.3%

Article should interest investors in Bank of America (NYSE: BAC), J.P. Morgan Chase (NYSE: JPM), Goldman Sachs (NYSE: GS), Citigroup (NYSE: C), Morgan Stanley (NYSE: MS), Wells Fargo (NYSE: WFC), TD Bank (NYSE: TD), PNC Bank (NYSE: PNC), State Street (NYSE: STT), Janus (NYSE: JNS), T. Rowe Price (Nasdaq: TROW), General Electric (NYSE: GE), Wal-Mart (NYSE: WMT), McDonald's (NYSE: MCD), Alcoa (NYSE: AA), American Express (NYSE: AXP), Boeing (NYSE: BA), Caterpillar (NYSE: CAT), Cisco Systems (Nasdaq: CSCO), Chevron (NYSE: CVX), DuPont (NYSE: DD), Walt Disney (NYSE: DIS), Home Depot (NYSE: HD), Hewlett-Packard (NYSE: HPQ), IBM (NYSE: IBM), Intel (Nasdaq: INTC), Johnson & Johnson (NYSE: JNJ), Kraft (NYSE: KFT), Coca-Cola (NYSE: KO), 3M (NYSE: MMM), Merck (NYSE: MRK), Microsoft (Nasdaq: MSFT), Pfizer (NYSE: PFE), Procter & Gamble (NYSE: PG), AT&T (NYSE: T), Travelers (NYSE: TRV), United Technologies (NYSE: UTX), Verizon (NYSE: VZ), Exxon Mobil (NYSE: XOM), Paychex (Nasdaq: PAYX), Manpower (NYSE: MAN), Robert Half International (NYSE: RHI), 51Job Inc. (Nasdaq: JOBS), Monster World Wide (NYSE: MWW), Korn/Ferry International (NYSE: KFY), Administaff (NYSE: ASF), Kforce (Nasdaq: KFRC), TrueBlue (NYSE: TBI), Dice Holdings (NYSE: DHX), Kelly Services (Nasdaq: KELYA), SFN Group (NYSE: SFN), CDI Corp. (NYSE: CDI), Cross Country Healthcare (Nasdaq: CCRN), On Assignment (Nasdaq: ASGN), AMN Healthcare Services (NYSE: AHS), Barrett Business Services (Nasdaq: BBSI), Hudson Highland Group (Nasdaq: HHGP), StarTek (NYSE: SRT), RCM Technologies (Nasdaq: RCMT), VirtualScopics (Nasdaq: VSCP), General Employment Enterprises (NYSE: JOB) and TeamStaff (Nasdaq: TSTF).

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