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Questions Remain After Blowout Employment Report

Lance Roberts
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I like to think of myself as a pretty simple guy. I don't like complexity or complications, but most importantly I like things to make sense. The latest employment report, which showed a surge in employment in recent months, left me with more questions than answers.

For example, WaPo stated:

"The economy added 257,000 jobs in January, added a whopping 147,000 more in revisions to previous months, saw average hourly wages creep up 2.2 percent the past year, and, best of all, the unemployment rate ticked up from 5.6 to 5.7 percent. This last part was good news, because it wasn't about people losing their jobs, but rather about more people looking for them. Indeed, the labor force grew by 703,000—yes, that's not a misprint—after you include annual population adjustments. So joblessness went up because the economy is creating so many jobs that people have stopped giving up. This is the best the economy's been in 15 years."

Let's assume for a moment that WaPo's deep diving economic team did their analysis correctly. If that is the case, then here are the questions that remain?

  • If jobs are indeed booming as suggested, and growing faster than population growth, then why is the deviation from the long-term employment growth trend still so deviated?

Employment-GrowthTrend-020915

  • If employment is increasing as rapidly as suggested then why did the number of workers considered "not in labor force" just hit the highest annual level on record at the end of 2014?

Employment-NILF-Annual-020915

  • Oh yes, thanks for reminding me about the retiring "baby boomers."  If we strip out all those over the age of 55, (assuming all of those are in the top 1% and can retire on their massive wealth piles), then why is the prime working-age class of 16-54 year olds that are employed, as a percentage of that group, still near its lowest levels since the financial crisis?

Employment-16-54-020915

  • Which also begs the question that if so many individuals are becoming employed, as the BLS suggests, then why is the number of 16-64 year olds not counted as part of the labor force still near its highest levels since the financial crisis?

Employment-NILF-16-64-020915

  • WaPo was correct in stating that average hourly earnings crept up 2.2% in the past year. However, did they just forget to mention that hourly earnings has been stagnant since 2009 but individuals are now working much longer for the same amount of pay?

Employment-Wages-Hours-020915

  • Of course, if we look at the annual rate of change of average hourly earnings it begs the question as to just who is actually becoming employed? Maybe it has something to do with the fact that those over the age of 65 which are still employed and the number of 16-64 year olds "not in labor force" are near their respective peaks?

Employment-AvgHourlyEarnings-020915

Employed-65-Over-020915

While the data does not go very far in supporting the WaPo's claim of the best economy in 15-years, it does explain why, despite the BLS's booming employment reports, that wage growth remains stagnant while the economy "muddles" along at roughly 2%.

As I discussed recently in "The 5.6% Lie:"

"This is an extremely important point as it suggests that employment, as presented by the BLS, has been significantly overstated over the past six years. If we take the differential as stated by Gallup and compare that to the annual birth/death adjustment used by the BLS we find that jobs have been overstated by 3,678,000 or more than 613,000 annually.

How does this compare to the cumulative number of jobs as reported by the BLS since 2009? It is quite substantial."

Employment-BD-Adj-020915

While I am not suggesting that the economy is not creating jobs, as it clearly is, there is a huge difference between creating employment and creating "quality" employment. Multiple job holders, lower wage-paying employment, and large exclusions from the labor-force count does not create stronger economic growth, household formations and higher wages. Of course, this is why a large majority of American's are still living paycheck-to-paycheck or are on some form of governmental assistance.

There is one interesting aspect, however, of spiking employment.  As shown in the chart below, sharp gains in employment are not uncommonly seen during late-stage economic cycles. Of course, while this time could be different, considering that the economy is already more than six years into one of the longest economic recoveries on record the question of sustainability is valid.

Employment-3Mo-NetChg-020915

Maybe WaPo is correct, and the economy has finally reached the much hoped for "lift-off" stage of this economic cycle. It all depends on the lens from which you view the data.

However, this debate raises one final question?

"Is the Federal Reserve about to start lifting interest rates into an employment cycle that is actually much weaker than statistical headlines suggest?"

That answer is for you to decide and invest with accordingly.

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