In many ways, the employment report for June is the mirror image of the report for May. Just as the headline in May of 433,000 new jobs added looked fantastic...until you noticed that 400,000 of those jobs were government jobs, and that more than 400,000 of the jobs were temporary hires to help with the Census (the rest of government actually lost jobs in May, mostly at the State and Local level). Then things didn’t look all that great.
This time around, the headline looks scary, with a loss of 125,000 jobs. However, 225,000 of those lost jobs were Census workers whose jobs finished up. Overall, the government employed 208,000 fewer people in June than May, so net of Census, government employment rose by 17,000.
The private sector added 83,000 jobs. That’s not great, but it is a distinct improvement over the 33,000 added in May, and one heck of a lot better than in June of 2009 when the private sector slashed 452,000 jobs. April is looking more and more like an aberration, when 241,000 private sector jobs added.
As the first graph below shows we have turned the corner, and are generally adding jobs, with (solid red line) or without (dotted line) the Census. However, the damage from this recession far exceeds anything the country has faced since the Great Depression. The percentage of jobs lost (relative to the peak just before the recession started) was a full point worse than any previous downturn (1948 during the demobilization after WWII held the previous record) and about twice as bad as most recessions.
By this point, after previous recessions had started, in every case but the 2001 recession we had not only started to have gained jobs back, but we had set a new high in total employment. With total employment now 7.311 million below where it was when the recession started, even if we were to add 250,000 jobs per month (which is better than was averaged in the Clinton second term, one of the best periods for job creation in recent history) it would still take us more than 29 months to get back to the December 2007 level of jobs, or not until November 2012. It is far more likely that we will not see a new employment peak until 2014.
The goods-producing sector lost 8,000 jobs in June, partially reversing the gains of 13,000 in May and 67,000 in April. The main culprit continues to be the construction industry. It shed another 22,000 jobs in June on top of 30,000 lost in May, but with 22,000 gained in April.
Construction has been one of the hardest hit areas in this recession. Since the downturn started in December 2007, the industry has lost 1.909 million jobs. The entire economy has lost “just 7.311 million jobs. So this one industry has been responsible for 26.1% of all job losses. However at the start of the recession, it only employed 5.43% of the workforce (down to 4.27% of the workforce now).
Manufacturing, on the other hand, has been actually adding jobs rather consistently in recent months, although it slowed to an addition of just 9,000 in June, down from 32,000 in May and 38,000 in April. That is a heck of a lot better than the 129,000 lost a year ago.
Manufacturing employment had been in a secular decline for about the last 30 year or so. We have now seen manufacturing employment expand for six straight months. The last time the economy could make that claim was in March of 1998.
The service sector added 91,000 jobs, on top of 20,000 added in May and 174,000 in April. A year ago, the service sector was losing 224,000 jobs. The one area in the service sector that never saw a decline in employment in this downturn is health care. It added 16,800 workers in June on top of 16,000 in May and 25,400 in April. Thus there is no evidence that the passage of health care reform has hurt the employment prospects of that industry, although many of the provisions have yet to kick in.
Temp Workers (non-Census) a Key Indicator
Of particular interest is temporary employees. Private temps are a whole different story than the temporary Census workers. They are an important leading indicator of where the job market is going. After a recession when demand starts to pick up, employers are not really sure if it is going to last. Thus they are reluctant to bring on new full-time employees.
The first thing they will do is work the remaining employees harder, particularly if they had previously cut back on the hours. The next step is to call up Manpower (MAN - Analyst Report) or Kelly Services (KELYA - Snapshot Report) and bring on a temp. Only after the employer is more confident that the upturn is for real will he bring on a full-time permanent employee. In May, temporary workers rose by 20,500, on top of gains of 31,100 in May and 23,300 in April.
On the other hand, the average work week ticked down to 34.1 hours in June from 34.2 hours in May. The average workweek in April was also at 34.1 hours. The increase in the average workweek in May was one of the silver linings in an overall report that was very poorly received by the market. Similarly, the decline in the average work week in June is a bad sign for the future. A one-month tick down might be just noise, but it bears watching in the July report next month. If it continues downward and becomes a trend it will be a very bad sign.
Unemployment Rate Comes Down
The biggest positive headline in the report is that the unemployment rate fell to 9.5% from 9.7% in May and 9.9% in April. The unemployment rate was also 9.5% a year ago. There is much less than it appears to the drop in the unemployment rate. The key reason for the decline is a drop in the civilian participation rate, or the percentage of the population that is either employed or unemployed. That rate will never come close to 100%, unless we totally do away with the idea of retirement and insist that all those lazy toddlers start pulling their weight.
The unemployment rate can be deconstructed as the ratio between the employment rate and the participation rate. The civilian participation rate fell to 64.7% in June from 65.0% in May and 65.2% in April and is down from 65.7% a year ago. A full percentage point drop over the course of a year is not a good sign, but it does help out the unemployment rate. The percentage of the population that is actually employed, or the employment rate fell to 58.5% from 58.7% in May and 58.8% in April and 59.4% a year ago.
Both the participation rate and the employment rate were on secular up-trends from the mid-1960’s through the end of the 20th century. This was mostly due to two major demographic factors: early on, it was mostly the Baby Boomers entering the work force, and then the movement of women into the labor force. Back in the 1960’s if an article mentioned women and labor in the same paragraph, the odds were that it was about childbirth. Today, there are almost as many women working (in paid employment) as men.
The recovery after the 2001 recession was anemic on both fronts, as is shown in the second graph. The high point in the employment rate in the last expansion was far below where it was at the high point of the late 1990’s expansion and roughly the same as it was at the end of the 1980’s expansion.
The plunge in the employment rate has been far steeper than in the 1982-83 downturn, but the unemployment rate has managed to stay below the levels hit in that recession. The reason is that then the participation rate was stable-to-rising (the participation rate tends to flatten out or decline in recessions even during a secular uptrend) and now it is falling. In that sense, both presidents Carter and Reagan got a bit of a bum rap on the employment situation during their presidencies, and Bush and Obama are getting a bit of a free ride.
Late winter it looked like we had turned the corner and both the participation rate and the employment rate had begun to pick up, but that progress has faltered over the last three months. While it is nice that the unemployment rate is no longer worse than it was a year ago, there is less to it than meets the eye.
Turning to the major demographic groups. This recession has been particularly hard on men, in part because they tend to dominate the construction industry, which has been so hard hit. Women, on the other hand, tend to be over represented in the health care industry. The unemployment rate for men ticked up to 9.9% in June from 9.8%, but is still below the 10.1% in April and the 10.0% a year ago. The unemployment rate for women fell to 7.8% from 8.1% in May and 8.2% in April, but is slightly higher than the 7.6% a year ago.
The unemployment rate for teens (both sexes) fell to 25.7% from 26.4% in May. That is still a very lousy summer job market, even worse than a year ago when the rate was 24.3%. The rate for whites fell to 8.6% from 8.8% in May and 8.7% a year ago. The rate for blacks ticked down to 15.4% from 15.5% in May and 16.5% in April, but remains well above the 14.8% rate of a year ago. The rate for Hispanics was unchanged at 12.4% in June, and up just marginally from the 12.3% rate of a year ago.
By level of education, the unemployment rate fell across the board in June, but the age-old advice to stay in school never applies more than during a recession. The rate for high school dropouts is 14.1% down from 15.0% in May and 15.4% a year ago. For those that stuck it out and got their high school diploma but did not go on to college, the rate fell to 10.8% from 10.9% in May, but is up from 9.8% a year ago. Those who have some college or an associates degree had an unemployment rate of 8.2% in June, down from 8.3% in May but up from 8.0% a year ago. Those who hold a BA or more have an unemployment rate of 4.4%, down from 4.7% in May and also 4.7% a year ago.
So relative to a year ago, does the big drop in the unemployment rate among the high school dropout crowd mean that the economy is adding a whole lot of unskilled jobs? Nope. The decline in the participation rate as been particularly sharp for the less educated. The participation rate for dropouts is just 45.4%, down from 46.3% a year ago. For H.S. grads it is 62.0%, down from 62.9% last year. For those with associates degrees it is 70.7%, down from 71.2% last year, while for those with a BA or more the participation rate only fell to 77.3% from 77.7%.
Unemployment Duration Key to This Downturn
One of the defining features of the Great Recession as opposed to previous recessions is that once people are out of work, they have stayed out of work. The rate of people being laid off is actually relatively tame right now, but the pace of new hiring is absolutely awful (we will get the delayed stats on lat next week in the JOLTS report).
The third graph shows the average and median duration of unemployment since 1967. Both measures are simply off the chart. The average length of time someone who is out of work has been looking now stands at 35.2 weeks, up from 34.4 weeks in May and 24.4 weeks a year ago. That sort of understates just how bad things are. The year-ago level was already a record. Prior to the Great Recession, the worst it had ever gotten was 21.3 weeks in July of 1983. Similarly, the median amount of time (which will always be lower than the average since it is not possible to be unemployed for less than zero weeks) rose to 25.2 weeks, up from 23.2 weeks in May and 18.2 weeks a year ago. That is more than twice as long as the previous record (May 1983, 12.3 weeks).
In every recession, Congress has extended unemployment benefits, and has done so as an emergency measure and let the deficit rise. Regular state unemployment benefits run out after 26 weeks, and now almost half of the unemployed have been out of work for longer than that. The recent move to cut off extended unemployment benefits is hard to fathom. Is it a cynical ploy to make economic conditions as bad as possible so the party in power is blamed and punished in November? The only other explanation is that those opposed to extending unemployment get some sort of pleasure out of seeing people suffer.
People who have been out of work that long have probably already drawn down their savings, including tapping their 401-k’s and IRA’s, and run up their credit card balances. With no more unemployment benefits, they will have no income at all, and no financial resources. How will they get food to feed their kids? How will they pay the mortgage?
Do you think they will be doing much shopping at Wal-Mart (WMT - Analyst Report) ? Heck, they will have a hard time shopping at the Salvation Army. That lack of demand will actually lead to more unemployment. They will not take their kids to get their hair cut, so barbers will lose business. They will not be able to go out to eat, so restaurants will lay off cooks and busboys.
The non-partisan CBO scores extended unemployment benefits as among the most effective stimulus programs on a jobs-saved-per-dollar-spent basis. Extending unemployment benefits is good economics as well as being a good thing to do on a humanitarian basis.
There are now 6.751 million people who have been out of work for more than six months. Being out of work for that long is a very different experience than being out of work for just a few weeks. It is no longer just an unplanned vacation. Skills start to deteriorate, and contacts grow stale.
The odds of getting reemployed at anything close to your previous salary diminish with each passing week. While things vary by state, as a general rule of thumb, unemployment will pay about 60% of what people earned prior to being laid off, up to a cap of about $400 a week. At the maximum, that works out to be $20,800 a year. That should provide plenty of incentive for people to actually be looking for work rather than laying back and treating unemployment insurance as a back door form of welfare.
Simply telling these people to “get a job is not a realistic answer when there are no jobs to be had, and when cutting off unemployment benefits is likely to make even more jobs disappear. What we are witnessing is the descent of millions of our fellow citizens -- many of whom used to be middle class -- into abject poverty.
Most of the people in this country have never even seen abject poverty first hand. I have traveled to India and East Africa, and thus I have. I have no desire to see it come to this country, but it is on its way. Cutting off of extended unemployment benefits will greatly speed its arrival.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
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