Over the past week you have heard, read, and seen all kinds of noise about the government’s employment report. I even supplied some of that noise. We’ve seen all kinds of analyses explaining why the data was worse than expected, or better than it looked, etc. To the casual observer, it’s all very confusing. That’s the way Wall Street likes it.
I like to focus on just one major metric in order to cut through all the numerical crap and pundit noise. The number I am interested in is the number of persons employed full time. As usual, I’m only interested in the not seasonally adjusted total, which comes closest to an accurate reflection of reality. It’s not a perfect indicator, but it gives us the clearest picture of the trend both in the short and long run. The seasonally adjusted version is a form of modern impressionist art presenting a smooth line that represent’s the artist’s distorted idealized view of reality. While it attempts to represent reality, it’s a fake number that is not real. It’s completely made up. As with art, it sometimes imitates life. And sometimes the abstraction is pure fantasy.
The best way to view and understand the reality is with actual, not seasonally smoothed data, by comparing the most recent data with the same month last year and in prior years. That gives us a clear idea of whether the trend is improving or deteriorating. We can also look at a long term chart to get an idea of how the current situation stands in the big picture.
I’ll cut right to the chase. The change in full time employment in March was much, much better than the headline data suggested. The seasonally adjusted increase in non farm payrolls of 120,000 was a big miss, and is ostensibly the reason for the stock market selloff. The real reason is that the government and Primary Dealers have a pile of long term Treasury paper to roll over and sell this week, so they needed to shake the stock market tree to free up some dollars for Treasuries. I covered that story in the Wall Street Examiner Treasury and Fed updates. But the government and the market owners and managers needed a kernel of a story to kick off the selling of stocks and buying of Treasuries, and the employment data was it. The enabling mainstream financial media shills played their Chicken Little roles perfectly.
But the story was wrong. In terms of full time employment, March was a blockbuster, gargantuan positive month. Nothing in the past dozen Marches even comes close to last month’s gain. Full time jobs increased by 1.3 million in March versus February. Compare that to March 2011, which was up by 455,000. In 2010, when the economy was rebounding from the depression low, March was up by 777,000. The average gain in March, which is virtually always a positive month, was 300,600 over the 10 years from 2002 to 2011. Excluding the recession figure of -732,000 in March 2009, the average was 421,000. This year was triple that.
OK, so it was the weather, I thought. We all know about the warm weather in March. I figured the best indicator of that would be construction jobs. I checked, and they weren’t up any more than any other year. If the weather were responsible for the jump, it should have shown up in construction jobs, and it didn’t. So, sorry, you can’t explain away this number by the weather.
As good as this number was, the labor market still has a whole lot of catching up to do. We’ll probably never see the bubble levels again in this generation. There were simply millions of fake jobs that aren’t coming back until the next systemic bubble. Full time employment peaked in July 2007 at 122.4 million. Today that the number stands at 113.9 million. There are 9.3 million fewer people with full time jobs today than there were in 2007. That fact is even more negative considering that the civilian non-institutional population over the age of 16 has grown by 10.5 million over the same span.
The seasonal employment peak comes in July or August each year. This year, full time employment is ahead of the year ago level by 2.7 million, which is the biggest year over year gain in March since 2006. At 113.9 million now, this number just below last year’s peak level of 114.3 million set in August. The economy needs to gain just 500,000 jobs by August to break last year’s high and confirm an uptrend in employment. The data already made a higher seasonal low in January.
What are the odds that it will make it? Last year the March-August gain was 3.1 million. In 2010 it was 3.6 million. The average gain every summer from 2002 to 2011 was 3.3 million. Even in the recession years of 2008 and 2009, the gain over that period was 1.6 million. Barring a seemingly unlikely sudden economic collapse, total full time employment will break out to a new high within the next couple of months. That would confirm an economic expansion. Stock chartists will recognize a reverse head and shoulders breakout, very similar to the one in 2004 that kicked off the acceleration phase of the housing and credit bubble economy.
What this means in terms of stock prices is an open question. Employment can be a lagging, coincident, or even sometimes a leading indicator of stock prices. In this case, it has been a lagger, and it has not confirmed the bull market in stocks under way since 2009.
That may be a danger sign for the future performance of stock prices. An indicator of the ratio of the level of the S%P 500 to total full time employment has reached the upper trend parameter where the stock market topped out in 2007 and 2000. If it rolls over here, that could be a bear market signal. On the other hand, a breakout would suggest that this bubble has room to run. I would not give this indicator a lot of weight without confirmation from other more familiar indicators, primarily those based on the market averages themselves.
The fact that March was a big month doesn’t mitigate the fact that the US has a big problem. The current ratio of full time employment to total non-institutional population over the age of 16 is 47%. This ratio has been below 48% for the past 3 years. That means that 48% of the people or less, are carrying the load for the other 52%.
Only twice before in the past 43 years since data on full time employment has been available, was this ratio lower. That was in 1975 and 1983, both at the absolute bottom of bad recessions. Today, 26 months after the low, this ratio is only 1% higher than its January 2010 low of 45.9%. 26 months after the 1983 low the ratio had rebounded by more than 4%. In 1976, 26 months after the low this ratio had bounced by 2.1%. In those terms, the current recovery isn’t a recovery. The problem of fewer people earning from and contributing to an economy with an ever growing social burden is not going away.
This is one of those things that, to the stock market, doesn’t matter, for now. The only thing that matters to the market is liquidity. But if things don’t improve significantly in this measure, eventually it will matter, because as the system becomes increasingly top heavy, it will become increasingly unstable. Aside from the ever increasing human suffering the weakness in this ratio represents, it represents an intractable problem for government finances. Government’s need to suck up an ever increasing percentage of available liquidity to support the social safety net, or else enact draconian spending cuts and tax increases, will lead to the next inevitable, financial and social crisis. For a template of what lies ahead for the US, see Greece, Spain, Italy, and Ireland.
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