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Posted: June 10, 2013

Jobs picture: A Picasso or a Rembrandt?

Just what are we looking at?

KC Mathews

Recently, the initial unemployment claims number made headlines by hitting a level not seen since the Great Recession.  In April, the four-week moving average of claims fell to 336,750, the lowest since January 2008.

Even though we think the claims number is encouraging, we believe there is more to the picture than initially meets the eye.

Unemployment

As of April, the unemployment rate stands at 7.5 percent. The unemployment rate peaked at 10 percent in October 2009. In January 2008, unemployment was 5.0 percent. However, the unemployment number must be accompanied with the participation rate.

Participation Rate

The decline in the labor force participation rate has been a meaningful contributor to the positive unemployment rate trends over the past few years.  The participation rate has fallen to a 30 year low at 63.3 percent.  The participation rate reached a high of 66.4 percent in January of 2007.  A portion of the declining participation rate can be explained by baby boomers reaching retirement age and thus dropping out of the labor force. 

A CBO study estimates that the demographic shift has already reduced the overall rate of participation by about 0.5 percentage points since 2007 and that it will do so by an additional 1.2 points by 2016 and by another 1.4 points between 2016 and 2021. That said, much of the decrease, in our opinion, is a result of job seekers becoming discouraged at job prospects and therefore have stopped looking for work.  The labor force participation rate could increase once labor market conditions materially improve as formerly discouraged job seekers re-enter the labor force.   

Duration of Unemployment

A key contributor to people becoming discouraged with job prospects is the duration of unemployment.  The average duration of unemployment now stands at just over 36 weeks.  This is down slightly from the high of 40.7 weeks recorded in December of 2011 but still elevated from normalized levels of 15-20 weeks.   The pre-recession low was registered in September of 2007 at 16.3 weeks.  Often times an extended time spent unemployed or underemployed will lead to a degradation of skills that employers are seeking and thus creates a vicious cycle that makes it even more onerous for the unemployed to find jobs. 

Job creation

Number of employed peaked in January 2008 at 138,056, bottomed in February 2010 at 129,320, and today sits at 135,474 below pre-recession levels. In 2012 the U.S. created on average 181,000 jobs per month. In the last three months ending in April 2013, we have created an average of 212,000 jobs per month.

We anticipate seeing 2013 job growth in the 200,000 per month range; the initial unemployment claims number supports our forecast.

Hours Worked

In 2008 the average annual hours worked was 1765, and current hours worked has not returned to per-recession levels. In 2011, the most recent data from the Fed, it sat at 1758.  For a more up-to-date picture of the trend in hours worked we look to an index created by the BLS that aggregates weekly hours of all employees. 

This index recently registered a reading of 97.9 up from the lows of 90.7 in February of 2010 but down from a pre-recession level of 100.3 in January of 2008.  Due to budget cuts we expect hours worked to decline. An estimated 600,000 government workers may see some type of furloughs, reducing the hours worked statistic. We already see evidence of this taking place as weekly hours decreased to 34.4 in April from 34.6 in March.

Employment to Population Ratio

Some consider the employment to population ratio to be the best indicator of labor market conditions as it measures the proportion of the country’s working age population that is employed.  That is, it remedies the muddying taking place in the unemployment rate figures, as the employment to population ratio does not remove people who stopped looking for work from the calculation. 

In April, this ratio stood at 58.6 percent compared with 62.9 percent in January of 2008.  The ratio troughed in July of 2011 but has remained relatively constant in the 58 percent range since the start of the economic recovery.  This ratio further supports that much of the improvement in the unemployment rate can be attributed to the decline in the participation rate.

Final Verdict

In general, while many may feel the employment picture is much like a Rembrandt in that it’s easy to understand or digest in a quick view, we would actually say it’s much more like a Picasso. As with his works of art, there is much more to consider and deeper analysis needed to fully capture the overall meaning.

Overall, we believe employment is headed in the right direction. While the labor market is clearly in a transition stage, with fewer people working today than five years ago, we think the current employment picture is neutral to slightly positive and supports our Policy Basin theme and our economic growth forecast of 2-2.5 percent real GDP.

KC Mathews, CFA is executive vice president and chief investment officer of UMB Bank.

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