Monday, February 22, 2010

Parsing the Unemployment Headlines

Each month, even each week, the financial markets focus on the release of unemployment numbers. Lately each week we again see the nascent green shoots of recovery--don't we? There is no denying that fear had abated in the past year. Corporate earning by the standards of last year are improved. But how much of the breathless optimism is real and how much overblown?

The focus on weekly statistics is largely misplaced. Of course weekly improvement is a precursor to monthly and annual improvements, but the statistical noise and revisions make the number misguiding and volatile. Currently the 4 week moving average of new claims for unemployment is 468,000 which normally means about 80,000 in new monthly job losses. Better, but more indicative of an economy in stabilization than recovery. The temporary surge in census bureau employment should also be considered as less than sustainable employment gains.

What concerns me about the employment outlook is how the various pieces of the puzzle fit (or don't fit) together.

Recently the unemployment percentage fell back below 10%. However the employment number fell more indicating that the participation rate has fallen to the lowest level in a quarter century.
The exodus of discouraged workers from the labor force is unprecedented. The growth of the number employed is lagging the population growth badly. To use this statistical legerdemain to present an improving employment outlook is beyond suspect. If the participation rate were the same as it was in 2000, the unemployment rate would be closer to 13% instead of 10%. Additionally, the share of employed persons who are working full time has also dropped 3% which would accurately reflect an unemployment rate in the mid-teens, not slightly below 10%.

At a time when the economy is weak and government policies are subject to intense scrutiny and discussion, obvious diddling of the numbers does not increase one's faith in the leadership.

John Barnyak
Stonehouse Asset Management