What Markets Overlooked about US Non-farm Payroll Figures

Barring any unexpected hitches, the week is shaping up as a relatively calm one for markets.

There were fears last week that the potential impact of subpar US unemployment figures would send stocks tumbling. Yet markets needn’t have worried. These concerns were well and truly put to rest over the weekend.

On Saturday, the latest gauge in the strength of the US jobs market revealed a better than expected spike in employment data.

US non-farm payrolls were up 255,000 for the month of July. That was well north of the 180,000 new jobs economists had expected. And, more importantly, it ensured the unemployment rate remained steady at 4.9%.

Not surprisingly, this feel-good factor swept across US markets last Friday, pushing the Dow Jones up to near all-time highs.

Some analysts have suggested that, once markets start pricing in the potential of rate hikes on the back of strong jobs numbers, blowback will follow. But don’t bet on it. Markets certainly aren’t.

In any case, the upbeat sentiment is likely to spread across global markets to start the week. On the local front, the ASX is up 44 points in mid-afternoon trade.

But with non-farm payrolls having risen by an average of 190,000 over the past three months, what does it tell us about the US economy?

Well, these figures are not quite as clear cut as statisticians might have you believe. Shielded behind the headline 4.9% unemployment rate is a less optimistic picture of the US economy’s strength.

It’s unfortunate that more ‘accurate’ or ‘reflective’ figures often get lost in the noise. Both the general public and markets only hear that 225,000 jobs were added, and that unemployment is at 4.9%. They walk away believing that economic conditions are robust, even when the facts suggests anything but.

Paring facts from ‘facts’

There are several reasons why we should discount the validity of the headline unemployment rate.

For one, this figure only takes into account people still looking for work. That refers to people who don’t have jobs, but are actively seeking employment. Yet this fails to account for people who have dropped out of the workforce altogether. And it doesn’t take into account people that are employed part time for economic reasons.

Taking these sub-segments of the unemployment rate, we get a more discouraging image of the US economy. Just how discouraging?

The so-called ‘U6’ unemployment rate for the month of July was 10.7%. This figure accounts for ‘unemployed’, ‘discouraged’ and ‘marginally attached’ workers. At 10.7%, the U6 unemployment rate is more than double the headline jobless number.

Why is important to factor these sub-segments into the equation? After all, if someone isn’t looking for work, should they really constitute any part of the unemployment rate?

The answer to that should be obvious.

As active participants in the economy, their contribution makes a big difference to its overall wellbeing. If people aren’t working, they’re not likely to be contributing to the economy, either. This is especially true of people aged 25–55.

In any case, not only are these people not paying any income tax, but they’re not likely to be purchasing as many goods or services, either. In cases where this group has some disposable income, it is likely to be lower than among those holding full time positions.

It is important, then, not to underestimate the significance this can have for the economy.

If we’re led to believe that US unemployment is at 4.9%, we need to be able to bridge this figure with GDP growth as well. Yet, considering the US economy grew at an annual rate of 1.2% in the June quarter, it does make you wonder.

Here’s a chart of annual US GDP growth, by quarter, going back five years (2011–2016):

US GDP growth by quarter

Source: Trading Economics

And here’s the US unemployment rate over the same period:

US unemployment rate

Source: Trading Economics

Look at the period between 2014 and 2016. Unemployment has been trending down, even as economic growth has trended downwards. It doesn’t quite add up, does it?

Mowed the lawn? You’re employed!

Of even bigger concern is how, or ‘what’, the US Bureau of Labor Statistics (BLS) classifies as employment.

The BLS deems people that work 15 hours a week, regardless of whether they get paid, as employed. That only muddies the real state of the jobs market. Not only does it keep the headline unemployment rate down, but it skews the U6 one lower as well. We could just call the BLS’ definition of ‘employment’ what it is: stat padding.

Even worse, the BLS deems someone employed if they make US$20 for an hour’s work every week. And they count people who help out family members, for no pay, as employed, too.

If none of that sounds like ‘employment’ in the traditional sense, you wouldn’t be the only one to think that way. Mowing the neighbours’ lawn once a week is enough to make you part of the workforce! Who needs those costly degrees to get a job, eh?

Of course, none of this is to suggest that every job in the US is junk. But it does reveal the kind of tricks government agencies employ to improve perceptions of the jobs market. And we can’t understate the effects of these perceptions. They have tangible effects on both consumer confidence and market sentiment.

But, of course, the BLS isn’t alone in this respect. The ABS measures employment in much the same way here in Australia.

Either way, the exclusion of sub-segments in the headline (or U6) unemployment data poses a more pertinent question for the US. That is, how can its jobs market be expanding when so many people are opting out of the workforce?

At present, US workforce participation is at 62.8%. That figure is down almost 4% over the last decade. What’s changed?

There is an argument to be made that the growing US population is partly to blame for this. There are almost 20 million more Americans today than there were in 2007. What this means is that jobs growth hasn’t kept pace with population growth.

The fact that this is taking place even as baby-boomers enter retirement en masse should be a cause for major concern.

Mat Spasic,

Contributor, Markets and Money

PS: ‘Better than expected’ jobs numbers, both in the US and Australia, only hide the fact that we’re edging closer to the next major crisis.

Markets and Money’s Vern Gowdie believes we’re already at the beginning of this next crisis.

Vern is the Founder of The Gowdie Letter and Gowdie Family Wealth advisory services. As one of Australia’s top financial planners, Vern says the coming crisis is already in motion.

He warns that stocks won’t be the only assets to implode when things turn for the worse. There’s another multibillion dollar market that’s poised to collapse when the credit bubble pops.

Australia has gone through two credit bubbles in its history. The third, and latest, has built up over the past 65 years. When it pops, the impact will leave a lasting mark. One that makes the 2008 financial crisis look like child’s play.

The fallout of this crash could damage your wealth. But you can safeguard your wealth from the worst effects of the coming crisis, provided you act now.

Vern will show you how to do this, and more, in his latest report, ‘Global Financial Crisis 2016: 3 Crisis Scenarios, and How They’ll Impact Australia’. To get your free copy today, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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