Bulls, Elephants, Jobs

MarketWatch is reporting October jobless rate at lowest rate in five years.

Although U.S. nonfarm payrolls grew by a lower-than-expected 92,000 in October, this was not the entire picture. The unemployment rate fell to 4.4%, the lowest level since May 2001, the Labor Department reported Friday. Economists were expecting payroll growth of about 123,000, according to a survey conducted by MarketWatch. The jobless rate was expected to remain at 4.6%. The job report may dispel some worries that the economy is slowing sharply. Third quarter gross domestic product fell to a 1.6% annual rate from 2.6% in the second quarter.

The above numbers are even worse than they look given that government added 34,000 of those 92,000 workers. How many time can one paint lipstick on a pig and have the results still look pretty? That is what I want to know.

Assuming that one believes the GDP numbers how the hell does this anemic report dispel worries that the economy is slowing? One either believes the numbers or not. For the record, I don't believe the GDP numbers. They were much worse. I talked about this in Numbers Game.

If you are bullish write this down on a piece of paper and recite it every day: "Jobs are a lagging indicator". That jobs are doing so poorly this far along in a recovery is telling. In fact, this "recovery" is now over and jobs have only one way to go and that is downhill.

That bit of reality did not stop MarketWatch from reporting Good news for bulls ... and elephants

The surprising drop in the U.S. unemployment rate to a 5-1/2 year low of 4.4% is a big boost for bulls on Wall Street and Republicans on Capitol Hill. The employment report for October was much stronger than anyone expected. While payrolls growth itself was a relatively tepid 92,000, nearly all the other details in the report showed signs of a healthy economy. The biggest shock was the drop in the unemployment rate to 4.4%, marking the lowest since May 2001.

For embattled Republicans just days away from key elections, the report hands them fresh talking points over the weekend to assure voters that the economy's doing fine. Lower gasoline prices in the past few months have been calming consumers' spirits, but polls have not indicated any real boost for Republicans in opinion polls because of the economy.

Once again we see belief in the most volatile of numbers (the household survey) at at critically suspicious time instead of a much harder to turn GDP number that in and of itself was suspiciously high.

Economic Policy Institute

Let's look at what the Economic Policy Institute is saying about the Jobs Picture.

The nation's employers added 92,000 jobs last month, about 30,000 fewer than expected, according to today's report from the Bureau of Labor Statistics. Private-sector job gains were only 58,000, the lowest month for job growth in a year. However, upward revisions of data from August and September added a total of 139,000 more jobs to those months' gains, bringing the average monthly gain for the year thus far up to about 150,000 per month for total payrolls, and 126,000 for the private sector.

The unemployment rate fell to 4.4%, the lowest rates since May 2001, due to a large increase in employment as measured by the survey of households (up 437,000). Analysts typically pay less attention to monthly employment gains from the household survey as these data come from a much smaller sample and are too "noisy," or volatile, to trust on a monthly basis. Over the past two years, for example, the variance (I.e., data volatility) of monthly changes has been five times greater in the household than the payroll survey.

There are some signs, however, that the slowing economy is beginning to reach the job market. The first chart below shows job gains over the past three months, both total and private sector. The slowing of monthly gains is clear, and if this pattern persists, unemployment will eventually reverse course as the job market slackens.



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The slump in residential housing is clearly contributing to the diminished job gains in recent months. EPI's index of jobs related to residential housing, including construction and real estate, fell by 33,000 last month, led by large losses in residential contractors. As shown in the figure, thus far this year jobs related to housing are down 26,000, compared to a gain of 245,000 over the same period last year.


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Once again, we have a tale of two surveys, with the household survey painting a prettier picture of job market conditions than the payroll survey. However, the payroll survey is widely agreed to be a more reliable measure of monthly job changes, and while it shows moderate gains so far this year, it also reveals steadily slower job growth in recent months. If the economy continues to grow below trend, as was clearly the case in the third quarter (real GDP up only 1.6%), monthly gains will continue to disappoint in coming months, and the job market will slacken.

Birth/Death Model

The Birth/Death model added 73,000 jobs to the total this month. Those are presumed jobs that only exist in the minds of bureaucrats related to the birth or death of businesses based on estimates of where we are in the business cycle. Given that "presumed jobs" are not seasonally adjusted although reported jobs are (is this on purpose?), it is not possible to subtract presumed jobs from actual jobs and get a reliable count (not that any of these numbers are reliable anyway). But IF one could do that then the actual number of jobs gained this month would be 92,000 - 73,000 or roughly 19,000 jobs. Another way of looking at it would be that 79% of the job gains this month were presumed (forgetting for a moment that 34,000 of those 19,000 jobs were government jobs as opposed to being anything remotely productive). Bear in mind that is not technically accurate for reasons I just stated.

Nonetheless we see bulls and elephants whooping it up over the household stats although data volatility is five times greater in the household survey than the payroll survey.

Job Prospects

Meanwhile other anecdotal evidence piles on. The New York Times is reporting A Job Prospect Lures, Then Frustrates, Thousands.

The call for job applications seemed routine; certainly nobody at corporate headquarters gave it much thought. A new candy store that would be opening in Times Square needed workers. Starting pay was $10.75 an hour.

But by midmorning yesterday, a huge, swelling, discontented crowd of job seekers was milling around the sidewalks of Midtown Manhattan, not far from Macy’s in Herald Square, filling the air with curses.

The crowd put a human face on jobless statistics at a time when the city’s unemployment rate, 4.5 percent in September, was the lowest since 1988.

Several thousand people — mostly young, black and Hispanic — had shown up to apply for fewer than 200 positions, only 65 of them full-time jobs. They came, they said, because of a phrase that had leapt out of the advertisements for the jobs: “on-the-spot hiring.” But there were too many people clogging the sidewalk outside the building on Eighth Avenue between 35th and 36th Streets where the company was conducting interviews, and everyone was abruptly told to go home and mail in the job applications.

Yes, I know about the other side of the story. This is the inner city... Even though the unemployment number is low there are still huge numbers of unemployed... etc etc.
The fact remains there are hundreds or thousands of these stories playing out across the U.S. and not just in inner cities either.

No matter how one slices or dices things it takes approximately 150,000 jobs a month just to keep up with population growth and the immigration rate. In a recovery we should be vastly exceeding that amount but we are not.

Here is the latest hard number for bears to consider:
Initial jobless claims rise to 16-week high.

Bulls and Elephants might make note that the subtitle was "Reflecting healthy job market, continuing claims fall to 4-month low".

Pricing Pressure

Where is it?
[/sarcasm on] In obviously inflationary news Wal-Mart cuts more prices in time for the holidays [/sarcasm off]

Nov 4, 2006

SAN FRANCISCO Wal-Mart Stores Inc., which just turned in softer-than-expected same-store sales growth for October and forecast flat results for November, on Friday said it was cutting prices on nearly a hundred electronics products, including high-definition TVs, digital cameras and cell phones.

It's the second price cut by the world's largest retailer ahead of the key holiday shopping season; The price cuts, including a Panasonic 42" HD plasma TV for $1,294 instead of $1,794 and a Dora The Explorer Talking Kitchen for $65 vs. $89.84, will be in effect until Dec. 31.

Pricing pressure simply is non-existent even as other deflationary pressures are not.

Outsourcing Pressure

CNNMoney is reporting White-collar outsourcing pressure builds

U.S. companies could save billions by sending administrative jobs overseas, says study.

Job losses in the United States from outsourcing, already a touchy political issue, could mushroom in the next decade as companies shift hundreds of thousands more professional white-collar jobs offshore, according to a new study.

Fortune 500 companies could potentially save $58 billion annually, or some $116 million per company, by offshoring general and administrative jobs, according to the Hackett Group, a strategic advisory firm.

The study estimates that increased use of cheaper overseas labor could affect up to 1.47 million back-office jobs over the next decade, or nearly 3,000 at a typical Fortune 500 company. And the jobs under review will go far beyond call centers.

"People have become more confident in the analytical capabilities of the overseas staff, and that is expanding the profile of the kinds of jobs that are under consideration," Wayne Mincey, the Hackett Group's president, told Reuters from Atlanta.

Some of the jobs that can now more readily be shipped overseas than they could several years ago include those in information technology, finance, human resources and procurement.

The education base and skill set, and with it the potential savings on labor costs, are on the rise in India, China, the Philippines, Pakistan, Eastern Europe, Brazil and other emerging countries, the Hackett study said.

Sending certain jobs offshore results in typical savings in salaries of about 70 percent, compared to savings of 10 percent to 20 percent by moving jobs to lower-cost U.S. locations, Mincey said.

Should that scenario play out there is absolutely no way the loss of that number of white collar jobs can be replaced anywhere, especially in the face of a housing slump and recession.

Catch 22

In the rush to maintain profits in the wake of an economic slowdown, corporations who outsource white collar will be cutting their own throats if such outsourcing commences on a massive scale. After all who will be left that can afford to buy discretionary items? The problem is, if a corporation does not outsource but the competition does, the former will be driven out of business by a loss of business. It is the perfect "catch 22" otherwise known as "Economic Zugzwang" corporate style.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/