Employment Report In-Depth (pt. 1) - Analyst Blog - Abercrombie & Fitch (NYSE:ANF), McDonald's (NYSE:MCD)

The economy added a total of 39,000 jobs in November. That is far below consensus expectations for a gain of 130,000. Government payrolls declined by 11,000 and the private sector added a total of 50,000. The consensus was looking for a decline of 10,000 Government jobs and thus a gain of 140,000 private sector jobs.

The job growth was not enough to drive the unemployment rate down, and it rose to 9.8%. The numbers for September and October were revised higher -- the one silver lining in an otherwise dismal report. In October, we actually gained 172,000 jobs, not 151,000. In September we lost just 24,000 jobs, not 41,000.

Almost all of the upward revisions came from the private sector. The job losses in September were driven by the loss of temporary Census jobs. The private sector actually added 121,000 jobs in September.

Unemployment Rate

The unemployment rate is derived from a separate (household) survey from the total number of jobs (establishment) survey. The household survey actually pointed to a loss of 173,000 of jobs in November, and a loss of 330,000 jobs in October, but in prior months it has been showing big gains while the establishment survey has been pointing to declines (mostly due to the end of temporary Census jobs).

The unemployment rate rose to 9.8% after being stuck at 9.6% for three straight months, but still down from the 10.0% level a year ago. The civilian participation rate -- or the percentage of people in the labor force, both employed and unemployed -- remained at 64.5%, and down from 64.6% a year ago. The employment-to-population ratio, or the employment rate, fell to 58.2% from 58.3% in October, and down from the 58.5% level of a year ago.

Average Workweek Unchanged

For all employees the length of the average workweek remained at 34.3 hours after having trended up in recent months. It is up from 33.9 hours a year ago. For production and non-supervisory employees, the length of the average workweek fell to 33.5 hours from 33.6 hours in October, but equal to the level in September. A year ago it was at 33.2 hours.

While an increase of 24 minutes a week over the last year might not seem all that significant, it really is when you multiply it by the 130.539 million people who were working in October (per establishment survey). Average hourly earnings for all employees edged up just $0.01 to $22.75 on the month and are up just 1.6% from $22.39 a year ago. Average hourly earnings for production employees were unchanged at $19.19 on the month, and up 2.1% from $18.80 a year ago.

The year over year changes are not great, but then again, inflation is pretty low as well. It is not inflationary from a cost push point of view because it is less than the rate of productivity growth. It also means that there is not a lot of fuel for increased consumption, or the wherewithal for people to pay down their debts more quickly, even if they do have a job.

While the unemployment rate is still better than a year ago, most of that is a mirage due to falling participation rates. A falling participation rate is not exactly a new development, it has been in a downtrend for a decade now, but the decline has been very steep in the Great Recession and has yet to really turn around.

Participation and Employment Rates Rise

While the unemployment rate gets the headlines, it is worth digging just a little bit deeper into the number. The unemployment rate is really the civilian participation rate divided by the employment rate, also known as the employment population ratio. The total population is divided into three groups, the employed, the unemployed and those not in the workforce.

The participation rate (blue line in the graph below) is the percentage that are either employed or unemployed. It will never reach 100%. For that to happen, we would have to do away with all child labor laws and insist that those lazy 2 year olds stop napping and get to work. The Social Security retirement age would have to be raised not to 67, but to 167. The highest the participation rate ever reached was 67.3% in April of 2000.

The participation rate will normally slump during a recession and its aftermath. However, as the first graph below shows, the participation rate was in a huge secular increase from the mid 1960's until the end of the 20^th century. Yes, it would flatten out and decline slightly during recessions, but it would always return to a higher high, and the low during the next recession was always much higher than the previous low. That did not happen in the last expansion. The highest the participation rate hit during the last expansion was 65.8% in January 2005.

The Historical Context

The secular rise in the participation rate was due to two huge demographic trends. First was the entry of the Baby Boomers into the workforce. Remember you are neither employed nor unemployed when you are a kid. The Baby Boom started in 1946, so by the mid-1960's they were reaching the age when they were either employed or unemployed (or out of the country getting shot at in Vietnam). That was a major force lifting the participation rate until the early 1980's.

The second major demographic force that started just a bit later (in force) but continued longer was the increased participation of women in the labor force. Back in the mid-1960's if a magazine article mentioned the words "woman" and "labor" in the same paragraph, the odds were that the article was about childbirth. That clearly is no longer the case today. In October, there were 65.8 million women working (over age 20), not that much behind the 71.4 million men with jobs (per household survey). The front end of the Baby Boom is just now hitting retirement age, and that will put continuing downward secular pressure on the participation rate for years to come.

Participation Rate

The participation rate took a big dive during the early part of the recession, started to rebound earlier this year, but then started to drift lower in June and July. It ticked up in August, and managed to hold onto that increase in September, but fell again in October.

This month it remained at 64.5%. A rising participation rate will put upward pressure on the unemployment rate, but should nevertheless be considered to be good news. If the rise from 9.6% to 9.8% unemployment had been due a rise in the participation rate, it would have been easier to disregard it as a bit of a statistical anomaly, but unfortunately this is the real thing.

Employment Rate

The other side of the decomposition of the unemployment rate is the employment to population ratio, or the employment rate (black line). That is the percentage of the population that actually has a job. One way or another, these are the people that have to support the rest of the population.

This is a hugely under-reported number, and one that deserves a lot more attention than it gets. Like the participation rate, it had been in a secular upward trend from the mid-1960's through the end of the century. It is, however, much more volatile than the participation rate (it has to be -- if it always moved in tandem with the participation rate, the unemployment rate [red line, right-hand scale] would never change).

Its high water mark was 64.7% in April 2000. Unlike previous recoveries, it never came close to hitting a new high after the 2001 recession was over, only getting back to 63.7% in March of 2007 before starting to fall again.

During the Great Recession it really fell off a cliff, hitting 58.2% in December 2009. It has erratically pushed its way higher so far this year and hit 58.5% in August, and remained there in September. Unfortunately the decline resumed again in October, falling to 58.3%. This month we again fell back to 58.2%.

We are now tied for the lowest percentage of the population working since November of 1983. Graph from http://www.calculatedriskblog.com/.

Better Than the Last Two Times

Note that in the 1991 and 2001 recessions, the employment rate continued to decline for a very long time after the recession ended. The NBER declared the Great Recession officially over as of June 2009.

You would never know it from listening to the press or the pundits, but this recovery has been significantly better on the jobs front than the two recessions that preceded it, particularly when it comes to private sector employment (for more on that see Post-Recession Private Job Growth). Well, at least that is the way it appeared a few months ago, the renewed downtrend in the employment rate is a very troubling development. To my mind it is more significant than the rise in the unemployment rate, although clearly the two numbers are related. The unemployment rate though can be more subject to distortions than can be the employment rate.

As a matter of economic history, it should be noted that both Presidents Carter and Reagan get a bit of a bum rap when it comes to the unemployment rate. When the participation rate is rising, the economy has to produce significantly more jobs to keep the unemployment rate from rising.

On the other hand, the second President Bush gets way too much of a free ride when it comes to the unemployment rate, since the participation rate was falling for most of his time in office. As for Obama, if the participation rate had remained where it was when he was sworn in, and the employment rate was where it is now, then the unemployment rate would have been 11.4% in November.

Duration Measures Deteriorate

There was bad news on the duration of unemployment front. Over time, the number of short term unemployed really does not vary that much. People are always losing jobs, or in boom times, quitting jobs. Next week we should get the Job Openings and Labor Turnover Survey (JOLTS), which will tell how many people are getting laid off versus quitting and the actual number of new jobs created.

The numbers today simply show the net difference between jobs lost and jobs gained, rather than the totals for each side. Unfortunately, the JOLTS data will be for October, not November.

It is the number of long-term unemployed that really make the difference between boom and bust. The extraordinarily long time that people have been out of work after they lose their jobs is what has really set this recession apart from all the previous pre war recessions.

Over the summer we had a couple of months of good news on that front, after two years of absolutely horrifying numbers. This month brings a mixed picture in this regard.

The average duration of unemployment fell to 33.8 weeks from 33.9 weeks in October but that is well above the 33.3 week level in September. The peak was 35.2 week in June. We are well above the 28.6 week level a year ago, and at the time, that was an all-time record. Prior to the Great Recession the previous all-time record high was set in June of 1983 at 20.8 weeks.

The median duration will always be lower than the average duration since it is impossible to be unemployed for fewer than zero weeks. Its history is not quite as long as the average. It rose for the third month in a row, hitting 21.6 weeks, up from 21.2 weeks in October and an interim low of 19.9 weeks in August. It is still well below the 25.5 weeks (all-time record) in June. It is still higher than it was a year ago when it was at 20.2 weeks. The rapid decline in both the average and median duration in July and August was highly encouraging, and the reversal over the last three months is deeply disappointing.

Prior to this downturn, the highest the median duration had ever hit was 12.3 weeks in May of 1983. Note that it is normally the case that the duration of unemployment continues to rise even after the recession ends. This happened not just in the last two recoveries, but in all post-war recoveries.

However, following the 1991 and 2001 downturns the persistency of high and rising unemployment duration was much more pronounced than in the earlier downturns. This time, while the peak was an Everest relative to any previous experience (except perhaps for the Great Depression, but the data is not available).

(Note: this article has been separated into two parts. "Employment Report In-Depth [pt. 2]" will be released shortly.)

ABERCROMBIE (ANF

): Free Stock Analysis Report

MCDONALDS CORP (MCD

): Free Stock Analysis Report

Zacks Investment Research

ANFAbercrombie & Fitch Co

Market News and Data brought to you by Benzinga APIs

To add Benzinga News as your preferred source on Google, click here.