Employment Numbers: You Can’t Put Lipstick on a Pig

What goes up, must come down: this simple rule may give us insight into what to expect from the employment reports in the second half of the year.  It has been widely reported that the vast majority of employment gains in the month of May were due to temporary hiring of government census workers.  So, while the headline number shows payrolls rose by 431,000, only 20,000 of those were created in the private sector.  Still the headline unemployment number fell to 9.7% and the U6 number fell to 16.6%, which some may argue is a silver lining for consumer confidence.  However, the government’s murky “birth death model” adjustment accounted for some of this improvement in headline unemployment rates.  The BLS has flexibility in “adjustments” for the size of the labor market but there is little visibility into the specific reasoning or methods used.

With payrolls expanding largely due to temporary government hiring, it makes for an uphill battle in the latter half of the year as those jobs begin to disappear—some imminently.  Census hiring has likely peaked and will soon slow and then turn into a negative for the jobs report.  Obviously, if the private sector does not begin adding a meaningful number of jobs, expect the unemployment number to remain high and possibly rise in the second half of 2010—just in time for the November election.  Were this to occur, confidence in the recovery would be shaken, negatively impacting consumer spending–by far the largest source of domestic economic growth.

One particularly distressing leading indicator of job growth is that the number of workers re-entering the labor force was negative in May.  May traditionally sees a jump in the labor force because of all the new graduates entering the job market, but this was not this case last month as 286,000 workers left the labor market tally.  May actually reversed a trend of re-entries that had been improving since last summer.  Perhaps the month’s stock market swoon served to sour a few on finding work, but we cannot imagine it was the overwhelming factor in the minds of job-seeking Americans.

In an attempt to be balanced, the report did offer some positive signals as manufacturing hours worked were stronger than expected, which is a positive indicator for industrial production.  We can infer that businesses are beginning to rebuild inventories after allowing them to become very lean over the last year. Furthermore, average hourly earnings rose by .3% during the month, as wage inflation has been lacking for quite some time and has severely lagged a rebound in corporate profits.

While last month does mark the fifth straight month of employment gains, in our view this may be the weakest report thus far this year.  The labor market is not hemorrhaging jobs like it did last year, but we think job growth will continue to be sluggish.  This is especially true as the temporary jobs start to work against the headline numbers in the second half.

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

Ockham Research provides its research in a variety of forms and products including our company specific reports, portfolio analytics tools, newsletters, and blog posts. We also offer a white labeling research solution that can give any financial services firm their own research presence without the time and cost associated with building such a robust coverage universe of their own.

Be the first to comment

Leave a Reply

Your email address will not be published.