I promised some notes on the US Employment situation for 2012.

The best that can be said about US employment during 2012 is that at least the growth rate seems to have settled around a level (1.39% year over year for December 2012) that allows the “official unemployment rate or U-3 unemployment to gradually come down”. Thanks to the declining trend in the official labour force participation rate(63.64% for December 2012, down from 64% in December 2011).

Yes, it’s basically playing with numbers. If you take more unemployed people out of the “official labour force” than jobs being added each month (shrink the denominator used to calculate the official “employment rate”), on a net basis, the official unemployment rate (1 – “the employment rate”) is eventually going to come down (this official number is called U-3 unemployment, the number quoted by government and Wall Street). In theory, taking this “ignore anyone that says they can’t find a job” logic to an extreme, you could make the official employment rate near 100%.

Note: There is an accepted notion in economics of a “natural rate of unemployment”, which in theory, historically has been around 5%. They probably won’t push it so the official number shows below 5% unemployment, given the public knows the job environment is not that good in reality. It will be hard enough for them to get U-3 unemployment to 7.0%, but we’ll see what they come up with in 2013 and 2014 before the US mid-term elections.

Courtesy of the St. Louis Fed: S&P 500 vs US Employment (year over year % chg.) & Real Disposable Income (less transfer payments)

US unemployment and real disposable income vs S&P 500 (Dec 2012)
US unemployment and real disposable income (YoY % chg.) vs S&P 500 (Dec 2012)

Note: Notice just how brutal the year over year decline in disposable income excluding transfer receipts (the green line) was during the 2008/2009 recession. And notice that the growth in real disposable income still remains low, 2.78% year over year for November 2012. The twelve month trailing year over year growth average in real disposable income less transfer receipts is just 1.55%. Again, the 1.5% to 2% growth value range showing up. Simply, reflecting a 1.5% to 2% annual growth US economy.

In my view, even the Wall Street sell-side analysts and government economists have come to accept between 1% and 2% growth (however you want to define growth) for the US economy for the foreseeable future. They realize most S&P 500 companies are global companies and the US domestic market is probably not the growth area going forward for the next 15 to 20 years.

Given the slow growth scenario for the US economy has become the current norm, you see recent policies like the US Fed’s implementation of indefinite quantitative easing (indefinite QE). There is less and less talk of “below trend” growth in the US economy (as defined by the historical 3% real GDP growth trend) as they try to re-set public expectations going forward.

Behind closed doors, the objective is to avoid another US recession (avoid negative economic growth) at all costs, keep the important US economic data series (retail sales, employment, production, etc.) above 1% growth, and hopefully above 1.5%.

Getting the official U-3 unemployment rate below a certain level (in my view, the politically unacceptable level is above 8% on the official U-3 unemployment rate) is just a tool used to justify the aggressive monetary policies, most of which benefits an exclusive club of banks and other select financial institutions.

There is no statistically significant research and analysis to support that the aggressive monetary policies currently deployed by the US Fed and US government over the last 4 years (US Fed QE, zero interest rates policy and a host of borrowing programs specifically directed towards select financial institutions) helps the average person develop and maintain useful skills needed to obtain a productive job in this global economy. At least no significant evidence to support the top-down, financial institution driven manner in which the live experiment is being conducted. Alternatively, instead of working for other people, there’s no evidence the current monetary and government policies are providing capital that would allow an individual to deploy their talents and start a business providing needed goods and services(just look at the excess bank reserves held at the US Fed, more on this another time).

Some numbers to consider from the US BLS Employment Situatation report for December 2012.

    1. As mentioned, US labour force participation rate declined from 64% in December 2011 to 63.64% in December 2012. Yes, there may be some demographic trends (older baby boomers retiring, etc.) going on here, but this declining “official labour force” is one of biggest contributors to the decline in the official U-3 unemployment rate to 7.8%.

    2. On a positive note, private payrolls from the Establishment survey increased 1.72% year over year for December 2012. Better than the “Total Employment” year over year increase of 1.39% for December 2012. The slight decline in government jobs across all levels continues(bringing down the total employment growth number). A result of the drawback of just one element of the “fake” job growth that occurred in the 90’s and 2000’s as simply too many people were added to the government payrolls relative to overall economic growth. And many of these government jobs paid very well and had much better benefit packages than the equivalent job a similarly skilled individual would receive working for a private company. Just a fact that government sector growth is always, eventually, limited by the long-term productive growth in the private sector.

    3. Over all of 2012, the private sector monthly year over year job growth averaged 1.85%; again, another positive. But over the past trailing six months (July through December 2012), the year over year monthly average is just 1.78%. This is an example of my investment research interest in the direction of the trend. Though the first derivative (year over year % growth) is still positive over the last six months, the second derivative, the difference between two first derivatives is negative. Simply, the shorter time period 6 month year over year average is below the longer term 12 month year over year average. Not a good sign (the six month growth average is -3.98% below the 12 month growth average). Recent private sector job growth is slowing down.

    4. The average monthly total payrolls job growth (from the Establishment survey) for 2012 was about 1.43%, or about 152.91 thousand jobs added each month (on average). Nothing to get excited about (only Wall Street likes the slow job growth numbers). And similar to the private sector, average monthly total year over year percentage job growth for the past six months of 2012 is lower than the monthly average for all of 2012. This is simply a reflection of the trend I pointed out in the recent slowdown of year over year job growth in the private sector(from the point above).

Courtesy of US St. Louis Fed: S&P 500 vs US Non-farm Employment(Total, Private & Government)

S&P 500 vs US Non-farm Employment (Dec 2012)
S&P 500 vs US Non-farm Employment (Dec 2012)

From the above graph (I know it’s hard to read), you can see essentially zero total growth to total non-farm payrolls in the US since the late nineties. I wish the private non-farm payroll data series went back further than 2001, but I believe they made some revisions in the latest set of data and I could not find a useful data series for total private payrolls that went back any further.

Another important observation: A significant amount of the low net job growth in the 2000’s was attributed to growth in government jobs, as private payrolls had very little net job growth in the first half of the 2000’s.

Contrary to popular opinion, the growth in US government jobs over the last twenty years is not extreme on a percentage basis, but it is slow and steady. You have to go back to the early 80’s to see even a prolonged flat growth period in US government jobs. Even the recession of 2008/2009 did not put a big dent in US government payrolls. Total government payrolls have essentially been flat for the last 4 years (though there was a slight decline in 2012). Part of the issue with US government finances is maybe not a “headcount” issue, but a “cost of the headcount” issue. I have to study this some more.

It used to be no one wanted a government job, mostly because you could get a better paying job in the private sector. Now people teach their kids that the private sector is too risky and even if you can land a job, it doesn’t pay as well as the equivalent government job. Working for the government does not carry the negative stigma that it used to, at least not in the US (other developed country cultures view government jobs differently. This is a new trend in the US). As you can see from the above graph, government employees generally don’t need to worry about recessions. Though, some government employees of near bankrupt local governments in the US have found that government finances eventually reflect the economy. Maybe this will change in the future, but don’t bet on it, at least at the federal level. Total US government jobs declined slightly in 2012, from 21.993 mln to about 21.925 mln; down about -0.31%.

Maybe the best that can be said about the US jobs picture right now is that at least the US economy is outperforming Canada in this category(average 1.43% year over year monthly growth for 2012, versus average 1.14% year over year for Canada in 2012).

For now at least, the US is not the basket-case economy amongst the developed country economies (in spite of the US Congress).


Until next time.


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