There is a saying on Wall Street that investors are constantly climbing a wall of worry. Judging by the market's strong start to the new year (with the S&P 500 Index up 3.22%), investors are falling off of that wall in mirth and merriment.
We, however, see no reason for exuberance. Yes, Congress avoided the fiscal cliff, but only by agreeing once again to come to an agreement on the hard choices in several months' time. And, yes, non-farm payrolls grew in December despite all of the uncertainty in Washington.
Perhaps we downloaded the wrong pdf file from the Bureau of Labor Statistics (BLS) website. The report we reviewed and studied made us want to have a few stiff drinks and not partake in a celebratory mood. We hardly call a 155,000 increase in non-farm payrolls strong and steady growth. Month-over-month, payroll growth is a scant 0.12%. Year-over-year, growth at 1.39% is hardly more encouraging. Rather, December's report (and, October's and November's) suggest the labor market is at stall speed. What employment growth there is, is barely sufficient to offset civilian labor force growth. If it were not for the long-term unemployed giving up and exiting the labor force, the unemployment rate would be higher than the 7.8% reported for December.
December's pace is no "Goldilocks" number. True, at this slow pace, the Federal Reserve will probably be compelled to keep interest rates low — helping to prop up share prices — for some time to come. Cynics and wags though may joke that if the stream of the unemployed leaving the labor force continues at the current pace, the Fed may find the unemployment rate hits its target of 6.5% sooner than imagined.
Since the Great Recession's trough (dated by the National Bureau of Economic Research at June 2009), employment (as measured by the household survey) has grown by 2.2 Million or 1.6%. Over the same forty-two months, the civilian labor force has contracted by 1.0 Million workers (0.7%). Meanwhile, the civilian non-institutional population has expanded 8.7 Million (3.7%).
What explains the disparity in the numbers? Our working hypothesis is that legions of the long-term unemployed have ceased looking for employment; and, by the definitions used by BLS economists, have exited the labor force. Those who could retire accepted whatever inducement was offered. And, others claimed disability. Individuals, aged 16 and older, who are not either employed or actively seeking employment (and, by definition not in the labor force) has surged 9.7 Million (12.2%).
Contrast these trends to the same trends in months after the trough of the 1982 downturn. Before there was the Great Recession, there was the 1981 to 1982 downturn. It remains the most severe post-war economic contraction (as measured by the unemployment rate) in U.S. history. In November 1982, at the recession's trough, the unemployment rate stood at 10.8%; in contrast, high water mark for the unemployment rate in the Great Recession was 10.0%.
Forty-two months later the differences between the two contractions are pronounced. By May 1986, the labor force had expanded by 6.3 Million (5.4%) as employment spiked by 9.7 Million (8.9%). Individuals not counted in the labor force grew by just 0.9 Million (1.4%). Further, the majority (99%) of those gaining employment secured full time jobs (more than thirty-five hours per week). In the aftermath of the Great Recession, less than one-half (48%) of the new jobs are full-time positions. The difference between the experience of two generations — the Baby Boomers and their offspring, the "Millennials" — could not be starker, despite the palaver of politicians who see progress in the numbers.
So, you may ask yourself, What is an investor to do? Worry, perhaps.
Notes on Sources and Methods:
All statistics cited based on non-seasonally adjusted series.
The civilian non-institutional population is the population over age 16 that is not in the military or confined to a criminal or mental institution.
The civilian labor force is a sub-set of the population defined as individuals over age 16 employed full-time (>>35 hours per week) or part-time (<35 hours per week), or, who are unemployed but are actively engaged in seeking employment.
The population age 16 and over not employed or seeking work are categorized as not in the labor force.
The S&P 500 Index is widely regarded as the best single gauge of the large cap U.S. equities market since the index was first published in 1957. It is a market capitalization weighted index of the performance of 500 stocks which S&P believes are representative of the U.S. equity market. You cannot invest in an index.
Recession trough dates estimated by the National Bureau of Economic Research (NBER).
(Source: Bureau of Labor Statistics; Lipper; NBER; AIFS estimates.)
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