Bad News on U.S. Unemployment
Posted by Jason Apollo Voss on Jul 8, 2011 in Blog | 2 comments
Ah yes, the last 24 hours is one of those brief spans as an investor and a finance blog writer designed to make you look foolish. First we had good news on U.S. unemployment and now, today, we have bad news on U.S. unemployment.
Yesterday ADP (the private payroll processing firm) said that there had been 157,000 private sector jobs created in June. Today, the official number of jobs created as reported by the U.S. Department of Labor says that non-farm payrolls only grew by 18,000 in June, and the unemployment rate rose to 9.2%. So what’s going on?
Analysis: This is one of those moments as an investor where having multiple data sources is a good thing, not a confusing thing. Rather than obsess about the specifics of how many jobs were created and which of the two numbers is accurate, the actual confusion is the thing to focus on.
When there is a conflict in data, and not agreement, it usually indicates a time of confusion in the actual, real world. In fact, two years ago on this blog it was confusing data about economic growth that led me to declare an end to the Great Recession, as measured by gross domestic product (GDP).
For me then, the ADP vs. Department of Labor disagreement is a sign of a labor market in transition. The question then becomes: a transition to what? Fortune and ecstasy or ruin and agony?
To answer this question we can actually turn to the data.
First, yesterday’s ADP report is a statistical sampling survey so it has the possibility of statistical error. In fact, the report is routinely criticized by investors because it frequently overstates the number of jobs created. That is, the ADP report is usually too aggressive. But, and this is a big ole but (apologies to Sir Mix A Lot), the direction of the ADP report is not often wrong. ADP’s report says that jobs were created in June in the private sector. How many? Who knows?
Second, today’s U.S. Department of Labor unemployment numbers, also gathered in a statistical survey, show that jobs were created in the U.S. in June. How many? A very small 16,000 jobs. Yet, note the trend: jobs were created.
Third, so both of the major jobs surveys say that jobs were created in June. This is a good thing. The question is whether or not the jobs creation is really good – the ADP survey – or not so good – the Department of Labor survey? I’ll get to that in a moment.
This morning’s official U.S. governmental data also includes the slightly unsettling information that the April and May unemployment numbers have been revised downward. Specifically, the total number of jobs created was revised downward by 44,000 to 217,000 jobs created in April and 25,000 in May.
Again though, note that even with the revisions that the trend is toward job creation.
Now, is the U.S. economy creating lots of jobs, or very few? Encouragingly, consumer spending continues to trend upward. This means that business revenues are continuing to grow and that sales volumes are up. Why is this important?
When sales volumes are up it means that the business is selling more units. Those new units have to be manufactured, shipped, stocked, and sold. In turn, this requires more people working. So businesses will have to start hiring soon.
A mitigating factor, though, is whether or not consumer confidence holds up. Weakly confident consumers don’t buy and unfortunately the trend in consumer confidence is down.
So this is a moment where intuition can really help serve as another source of information.
My intuition tells me that the U.S. consumer is still in her/his thick skin mode. By now folks in the United States have adapted to the environment of the Great Recession. They have modified their spending behavior to the point where, on average, they are living within their means. Most consumers are not happy about the unemployment rate, but most also realize that the worst of the Great Recession is over. So the consumer is unlikely to be wobbly even in the face of big, bad news. I also know that most consumers confidence closely tracks the gyrations of the Dow Jones Industrial Average. Stock market up? Consumer confidence up. Stock market down? Consumer confidence down.
My intuition also tells me that investors are gaining confidence. They seem to feel that the Greek debt crisis is tapering in importance. They also seem to feel that three of the four possible outcomes in the U.S. debt crisis are positive. Scenario 1: the Republicans completely win – and the U.S. budgetary books come more into balance – and investors party. Scenario 2: a compromise is reached – the U.S. staves off a debt crisis until some point in the future and investors are happy. Scenario 3: the Democrats completely win – and the U.S. increases the debt ceiling and puts off to another day the day of debt reckoning; investors are glad. Scenario 4: there is an impasse and the U.S. government defaults on its obligations and financial markets worldwide crater. Most investors don’t seem to think that this latter scenario is likely. There is a small constituency of investors that do seem to be very nervous.
What to focus on: the U.S. debt crisis is the most important issue confronting the financial markets right now. Of secondary importance, but still important, is that the second quarter corporate earnings season is about to kick off. U.S. businesses are likely to have done well. That should be a positive force for investors to focus on.
In conclusion, I think that investors and the investment markets will muddle through the next 6 weeks and come out on the other side amidst improving, if not blue-blue skies. If you are a risk averse sort I would avoid investing until there is greater clarity on the twin debt crisis of Greece and the U.S. If you are not as risk averse, then you can probably be invested in a mutual fund or index fund that broadly invests in U.S. financial markets.
Importance grade: 10; just as yesterday’s data was very important, so is today’s unemployment data. Until there is greater clarity around the important debt crises, markets are likely to move sideways.
Jason
I believe the inconsistency in jobs reports has a simpler explanation. I believe the ADP report only considers private sector jobs, but the public sector shed almost as many jobs as the private sector added, hence the U.S. Department of Labor report.
And now a comment about consumer confidence. You’ve mentioned in other posts about the need for consumers to spend within their means (“trim the fat”). In the three decades leading up to the crisis, household debt grew substantially from about 60% to over 130% of GDP. The recent economic crisis has forcibly reversed this trend in three ways:
(1) Consumer credit became harder to obtain and more expensive.
(2) The housing market crashed putting a large proportion of home owners underwater on their home loans.
(3) A substantial proportion of people had their work hours reduced, in addition to those who lost their jobs outright. Estimates I’ve seen suggest that 10% (roughly) of workers are underemployed.
As long as household debt continues to drop (which is a good thing!) but real incomes and employment ratios stay at or lower than they were pre-recession, I don’t see how it’s possible for consumer spending to show any sort of recovery. Unfortunately, consumers have been “putting on the fat” over a period of decades, so the diet may take a very long time. I for one believe the consumer debt crisis is more immediately serious than the U.S. government debt crisis, excepting perhaps the political fiasco with regard to the debt limit and the threat of default.
Hi Stephen,
Thank you for your insights!
If you look at the actual breakdown of the Department of Labor numbers you would see that, according to their survey methods, the private sector only added 57,000 jobs in June. This is still a full 100,000 below the ADP numbers. So your theory of why there is a divergence holds some water, but there is still a substantial gap between the two major surveys.
The way for consumer spending to rebound without a change in debt or employment numbers is for consumers who have slowly paid down their debts to spend those marginal dollars. That is, money that previously went to pay down a credit card, or better yet, pay off a credit card, can now be spent. In this way, even if incomes stay flat, there can be an uptick in consumer spending.
But let’s also remember that consumer spending is not the only way for the economy to grow. There is the possibility of businesses and people finding news ways to use their resources more efficiently. However, I think that this ‘innovation’ type number will, at most, make up about 1% incremental GDP growth going forward. That’s because, to my eyes, it looks like there is a surfeit of innovation.
Thanks again for your continued loyalty!
Jason