Guest Post: Employment Report And The Market

Tyler Durden's picture

Submitted by Lance Roberts from StreetTalk Advisors

Employment Report And The Market

If you listen to the bleating of the mainstream media and economists there is absolutely nothing to worry about and Friday’s employment report proves it.  The official unemployment rate remained steady at 8.3 percent, and 227,000 jobs were added.  Just don't look at the number of long-term unemployed, or those without jobs for more than six months, that stayed the same at 5.4 million.  Don't talk about the number of those working part time but wanting to work full time, at 8.1 million, which remained unchanged as well.  Most importantly don't mention that the number of new entrants into the unemployment ranks rose sharply last month as we discussed in this past weekend's newsletter.  If you are lucky enough to have a job, and particularly an hourly pay job, there was little change in hours worked per week and real disposable incomes continue to lag behind inflation.  With oil and gasoline prices on the rise the noose around the household budget was just drawn a bit tighter.

employment-gallupvsbls-031212While the recent employment report will most assuredly give the current Administration plenty to boast about the underlying trends are far more disturbing.   The ongoing structural realities, the fact that many of the jobs that have been destroyed will never return, combined with the demographic shift make the headline number much less important compared with the emerging trends.  Take a look at a recent Gallup Organization poll which polls weekly, rather than one week out of a month with BLS, in regards to the emerging trends of employment.  The most recent poll update shows the trend of the percentage of unemployed rising.   As you can see the Gallup survey tends to lead movements in the BLS poll by about 4 weeks or so.   Therefore, it is highly likely that in the coming month as the massive seasonal adjustments in January and February fade out we will see the unemployment rate rise back towards 8.5%. 

employed-fulltime-gallup-031212More importantly, the trends of the data, reveal the existence of a very large class of unemployed, underemployed, and employed but poorly paid workers. Gallup this month actually showed the pace of layoffs increasing in January, and its surveys reveal very little change in the past two years of unemployed and underemployed, with a peak of just over 20 percent in 2010 and declining only to 19.1 percent today. According to Gallup, the jobs situation was actually better at the end of 2010 than it is now.

One of the most important components to employment is wages.  An economic system whose primary growth comes from bartenders, wait staff and store clerks is not the recipe required for long term economic growth and expansion. 

The year over year trend in average hourly earnings is a testament to the shift of employment in recent years.   The trend toward temporary hires continues to exert downward pressure on wages.  While good in the short term for corporate profit margins - it is a long term economic anathema.  Without incomes growing at a rate to offset inflationary pressures consumption is constrained.  As we have seen in the recent releases of consumer credit - consumers are being forced to expand credit usage without increasing consumption.

employment-yoychg-hourlyearnings-031212The good news that is shared by all of the employment reports released as of late is that there has indeed been job creation.  Unfortunately, for the average American, it is almost been entirely in lower-income jobs. According to the recent releases of the BLS employment report the fastest-growing sector of employment is “professional and business services.”   While this category sounds very impressive on the surface and brings visions of men and women with white button down shirts, dark blue business suits and "power lunches" - in reality it which includes temporary hires.  In this month's BLS report 45,000 of those 227,000 hires, roughly 20%,  fell into that temporary hire category.  The next fastest growing category is "health-care services", mostly lower-paid jobs such as caretakers, aids, and assistants followed by the "leisure" category.  Most of the jobs created in the "leisure" arena were in “food services and drinking places"  and includes wait staff, bartenders and cooks.

nikkei-employpopratio-031212As I stated above, an economic system whose primary growth comes from lower order jobs is hardly the recipe for long-term affluence and global preeminence.  Don't get me wrong - all of these jobs are very necessary and they require hard work which is most respectable.   That is not my point.  What is important here is understanding the shift that has occurred and the impact on the future of the economy.  

When it comes to investing in the markets expectations for a high return market in a low growth economy does not compute.  While the market can remain detached from the underlying economic strength, especially when plied with enough liquidity to buy 1/3 of the entire world, the reality is that eventually the markets are a function of the economy and not vice-versa.  However, this is not just an employment problem.  It is also a demographic problem.

While analysts and economists are quick to point out that the aging baby boomers moving into retirement is the reason for the decline in the labor participation rate.   The reality is twofold.   First, many of the baby boomers retiring is no longer an option after two major market declines in the last decade that has destroyed a large chunk of their retriement capital.  Furthermore, most individuals are heading into their retirement years sorely underfunded and working well into their "golden years" is not a choice but a requirement.  Secondly, if the assumptions that 78 million baby boomers are indeed moving into retirement then the effect on the investing markets is much more dire than analysts and economists are giving homage to.  Current expectations are that they market will continue to grow over time and investors should remain committed to long term investment portfolios.  The chart above is the employment to population ratio of Japan compared to the Nikkei 500.  Japan has been locked into the same scenario for the last 20 years that the U.S. faces today.  As employment falls relative to the population there is less and less contribution to the financial system and more demand.  This supply-demand inversion has led to not only lagging stock market but also declining economic prosperity.

employment-population-sp500-031212Unfortunately, this effect is not just related to Japan.  The chart shows the S&P 500 versus the employment to population ratio in the U.S.  (the dotted lines are estimates for demographic shift in the economy)  The rise and fall of the financial markets coincide with the adjustments to the level of employment in the economy.  The lack of real employment relative to the population, as a whole, has a long term impact on the financial markets.  If the economy remains at sub-par growth rates for an extended period the employment to population ratio will continue its decline.  This will lead to more assets being taken out of the investment scheme in order to fund basic living requirements.   This fact will be further compounded by the massive underfunding of pension schemes that are still banking on very high rates of return to shore up a decade of shortfalls.  Eventually, the strain on the system over time will be reflected in the financial markets.

Much like Japan the battle in the future will be the effect of net withdrawals from the financial system.  As more and more individuals move into retirement, either by choice or force, it will contribute to sustained higher levels of real unemployment.  While the headlines are replete with messages of employment growth and a return of the economy - the real question should be the return of what type of economy?  The structural shift of employment into lower income producing jobs doesn't bode well for a resumption of economic prosperity or a stock market that will embark on the next great secular bull market run.

For economists and mainstream analysts the trend of the data is far more important than the headlines.  For investors it is critically important to understand the impact of a sustained decline in the employment to population ratio.  This is the P/E ratio that we need to be watching in the future.

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redpill's picture

Deleveraging has only ended because 99ers are getting kicked off the trough and they want to eat, so they put groceries on their Chase card.

The job market is utter garbage, the jobs people are getting are crap and they are only taking them because they have to.  They've run out of unemployment money and the choice is to do part time shit work or not be able to pay their kids monthly unlimited data iPhone bill, and god knows they'll keep paying that no matter what.

Meanwhile, upcoming retirees will be completely dependent upon the government's social security pittance, since ZIRP has erased any possibility of surviving on savings alone, as they were informed by their laughing financial advisor whose mouth was open so far during his guffaw they could see the gold fillings in his molars and were momentarily tempted to impale him with their walking canes as surely the gold fillings would be of more help than the yapping douchebag wearing them is.

This situation will define the lives of everyone that lives through it.  And hopefully a few of the Wall St jumpers who don't. 

Global Hunter's picture

edit: deleted due to me being way off topic from your post (thumbs up the gears in my head are churning)

redpill's picture

No one minds OT if it's interesting :)

Global Hunter's picture

ha ya of course.  

I now do the shit jobs after being a white collar professional.  I started to see what was really important, things like my health, my friends, my family, my hapiness.  I now get more satisfaction and hapiness from the so called shit jobs, stacking and building our wood pile, stocking up on food, booze, even lighters than I ever did in an office.  I was very fortunate though and made the choice myself (wife was a rock and drove the bus a lot I must say), others won't be so fortunate and the choice will be made for them, and I suspect made for them all at once for the most part and then the depression sets in.  All I can say is get out of their stupid game as much as you possibly can as soon as you possibly can.

redpill's picture

Hugh Akston rather enjoyed being the head cook at a roadside diner compared to participating in what he saw as a farce.

infinity8's picture

I'm with you. Could have a j.o.b. right now that would almost double my income but, I'm done with this shit-show. I actually did the j.o.b. in question for a year+, gov't subcontract, after losing a good job 12/08. Never held a .gov job any other time in my life. Couldn't take it - so many layers of b.s. Back to a shit job or 2 and doing my own thing as much as possible. All is chill. Hilarious that I have been getting an ad for "Gov't Contracting for Dummies - win, manage and optimize gov't business" ads on ZH lately.

Squid Vicious's picture

If we get back to 8.5% the sell-side clarion call for QE3 will grow measurably louder, sending the S&P through 1400 and Brent to $140 -$150 before it all comes crashing down, again...

Rainman's picture

Don't worry...unemployment will be 5% by the second Tuesday in November.

Yen Cross's picture

Good post Rainman. I can see the 100$ vouchers flowing in October. The Giant Accorn is coming!

TheGoodDoctor's picture

100? Shit the credit card debt, education loans, and home mortgages are only 1 trillion each. (From what I recall) We bailed out Wall Street, banks, and corps foreign and domestic for at least 16 trillion. So, it better be more than $100! My vote is worth more than that! But nothing will get fixed until there are more jobs.

youngman's picture

We are de-evolving.....less pay...less house..less toys...less vacations...less debt..less will take a few generations as this is a learned behavoir...and no one has learned it yet...When the Fed finally realizes that they will never get the economy back to the 2008 boom...then the people will start learning...hunger helps...its a great motivator..

disabledvet's picture

Yeah...well, "here's where i'm at" Henny:
and "you really CAN call me Dennis."

HD's picture

Turning Japanese, were turning Japanese - I really think so.

TheGoodDoctor's picture

Hey youngman how about less government?

Jason T's picture

Germany had 1% unemployment the summer of 1922.  Debase the hell out of the dollar and we too can have 1% unemployment.  Of course that road to hell is paved with good intentions, to turn the unemployment ill into a good.  

Conrad Murray's picture

Ben & Barry's 8-8-8 Plan: 8% unemployment, 8% returns, 8% inflation

100% fail

greecerules's picture

Ben and barry saved the country from depression. They saved the auto industry. Kept rates low so more homeowners didn't lose their homes. Brought healthcare for all. And on and on. Things could be much worse. 

BKbroiler's picture

"Ben and barry saved the country from depression"

New survey shows only 22% of people in Mississippi believe in evolution.  Try convincing them of that.

Dr. Engali's picture

You forgot your sarc button. I've got news for you. We have been in a depression. The only reason you don't see the soup lines is because of the homeless shelters and food stamps. As for the auto industry .. That's a joke. All those shlubs should be trying to get a job with Toyota, which by the way, is more American made than GM.

Everyman's picture

Like Rex Nutteg and Kate Gibson on MarketWatch.  Two of the biggest losers and market cheerleaders.  Rivaled only by Liesman and Kudlow.  Can't wait till SHTF and these pricks are put up against the wall for lLYING as a course of their business.

Rex and Kate are so called "journalists" where Kate has written 37 headline stories with "Greek and Hope" in it, and Rex is a liar whose byline was "Jobs on a "tear".  These two are just total lying losers.

Start listing these liars names, shame them.  They are and will be costing people LOTS of money.

Westcoastliberal's picture

I agree with the author's premise and if one is tuned into Main St (as in Human and has a family) then you know the unemployment situation in the U.S. is dire; much worse than I've ever seen things, and it doesn't seem to be getting any better.

QE3 or anything else the Fed has done has any effect on this, rather the $$ flowing to the Banksters who can then get even larger bonuses.

What scares hell out of me is thinking these idiots in our government are actually believing their own numbers.  For example, in Ron Susskind's book "Confidence Men" Obama was quoted as saying the high unemployment is the result of "increased productivity" and is natural and NOT something government can do much about.  According to the book, his inside circle was appalled.

I just don't see anything on the horizon which will improve the situation.  All the politicos want to talk about is how a Woman has no right to choose, including contraceptives.  Reminds me of when Bush the first was running and his big issue was flag burning.

And Boomers will be/are in the process of depleting their IRA's/401k's just to maintain a roof over their heads and food on the table.  No one I know is getting rich in this Depression.

realtick's picture

The recent decline in initial claims is simply a pullback in an uptrend.

I fully expect the number to get above 700k:



luna_man's picture



It's a sad state of affairs, when luck is the only reason you're employed!...Having a skill, seems to be the thing of the past!


A desire to work?...Family to feed?...FORGET ABOUT IT!!

lucky, INDEED!

Yen Cross's picture

  Anyone like a " Piece of shit" on their shoe?  I don't either!

  Let's see what the Fed drival is this morning, and digest it!

brettd's picture

We are now Europe.

Huge retired/ing population.

No jobs for the younger generation.

Yet the younger generation needs jobs to pay obligations to the older generation.

I wonder when the younger generation says " wasn't me who made those promises!"

2discern's picture

As ZH stays on real numbers, the BLS produces fraudulent numbers (even consistently) tax withholding + food stamp recipients+ unemployment APPS+ drop off unemployment (still unemployed) records give the better picture. In simple terms, barry soetero lies. He lies ALL the time. The DEPRESSION levels of REAL unemployment is present policy of CONgress, usurper barry soetero (can anyone produce a legal name change filing from his adopted Indonesian name?).


lunaticfringe's picture

I think we should ask Ben, based on this great economy, how he can possibly hold interest rates down. When will he raise rates before the inflation genie is out? Let's embrace their fairy tale.

They've bees spouting this garbage for so long that they are beginning to believe it. The jobs being created are dogshit with no benefits. Part time. Actual tax receipts tell the real story. Wait until the tax rate is 30% on minimum wage workers...and I am not making that up...that's what they'll do to try and keep the elite happy and this facade of a train wreck from leaving the rails.

Iconoclast's picture

We all have our left field Freakenomics barometer for gauging the 'health' of the economy and moreover the habits of those of us trapped in the machine. In the uk we have a store chain called Primark, shopping addicts have gravitated towards it for their shopping fix, they proudly walk about the uk city centres displaying three or four brown paper bags filled with Primark clothing tat, socks and undies for a pound, pjs for two pounds jeans for three..etc..etc.. When I see this phenomena has ended it'll tell us two things, the consumer is really all tapped out, there's no more credit and wages are just about at support level, secondly it'll mean that the "taking from my cold dead hands" addiction to shopping in order to feel self worth amongst the masses has ended..

tony bonn's picture

"...the reality is that eventually the markets are a function of the economy and not vice-versa...."

yes, but whose economy? in the age of globalization, domestic international companies are largely insulated from the plight of the population at poverty is up 20% - the company can find a richer market somewhere in the world to continue growth....

this is what truly creates class division....the usa will look like india in 20 years with a highly developed caste system....