The economy added a total of 151,000 jobs in October. That is far above consensus expectations for a gain of 60,000. Government payrolls declined by 8,000 and the private sector added a total of 159,000. The consensus was looking for no change in Government jobs and thus also for a gain of 60,000 private sector jobs.
That, however, was not enough to drive the unemployment rate down, and it remains at 9.6%, more or less where it has been stuck since May.
The numbers for August and September were revised higher, to losses of just 1,000 and 41,000 respectively, from the previous estimates of losses of 57,000 and 95,000. Private sector job gains for September were revised up to 107,000 from the previous estimate of 64,000. For August, the BLS now estimates that the private sector added 143,000 jobs, instead of just 93,000.
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 330,000 of 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).
Behind the Headline Numbers
The unemployment rate remained at 9.6%, the same level as in September and August, and up from 9.5% in July and June, but down from the 10.1% level a year ago. The civilian participation rate, or the percentage of people in the labor force — both employed and unemployed — fell to 64.5% from 64.7% in both September and August, and down from 65.0% a year ago. The employment-to-population ratio, or the employment rate, fell to 58.3% from 58.5% in both September and August, and down slightly from the 58.4% level of a year ago.
The Census is no longer a major factor in the jobs picture; only 5,000 were laid off from it in October. There were 77,000 temporary census workers laid off in September, down from 114,000 laid off in August, and following layoffs of 143,000 in July. The Census workforce peaked at 564,000 in May and in October was down to just 1,000, so it is a pretty safe bet that the Census layoffs will be not be a factor going forward.
Given the political sensitivity of the employment numbers, I think the large volume of Census layoffs speaks volumes about the integrity of the Obama administration. It would have been very easy to keep them, or at least a large percentage of them, on the payroll through the November elections.
For all employees, the length of the average work week rose to 34.3 hours from 34.2 in September and is up from 33.7 hours a year ago. For production and non-supervisory employees, the length of the average workweek rose to 33.6 hours from 33.5 hours; a year ago it was at 33.0 hours. While an increase of 36 minutes a week over the last year might not seem all that significant, it really is when you multiply it times the 130.462 million people that were working in October (per establishment survey).
Average hourly earnings inched up to $19.17 from $19.10 in August, and up from $18.78 a year ago. That works out to be 2.1%, which is 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 is also worth considering how well we are doing on the employment front relative to where we were a year ago. Last October, the economy dropped 224,000 jobs in the month, including 262,000 from the private sector. The unemployment rate stood at 10.1%. This month is the third month in a row that the unemployment rate is lower than the rate a year ago. That, however, has to be taken with a big grain of salt since the civilian participation rate last year was 65.0% and it is just 64.5% now.
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 (red 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 66 or 67, but to 166.
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 20th 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 not 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. 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.
A rising participation rate will put upward pressure on the unemployment rate, but should never the less be considered to be good news. The falling participation rate in October is a fly in the ointment of an otherwise very encouraging report.
The other side of the decomposition of the unemployment rate is the employment to population ratio, or the employment rate (green 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 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%. That is a smaller percentage of the population employed than in November of 1983.
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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).
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 President 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 11.2% in October.
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 September, not October.
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. Now things are getting worse again.
The average duration of unemployment (red line) rose to 33.9 weeks in October from 33.3 weeks in September but that is still well off the 35.2 week peak in June. Still, that is well above the 27.2 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 (blue line, half above, half below) duration will always be lower than the average duration since it is impossible to be unemployed for less than zero weeks. Its history is not quite as long as the average, but it backed up in October rising to 21.2 weeks from 20.4 weeks in September, after falling to 19.9 weeks in August and from 25.5 weeks (the all-time record) in June. It is still higher than it was a year ago when it was at 19.0 weeks. The rapid decline in both the average and median duration in July and August was highly encouraging, the reversal this month is 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).
Long-Term Unemployment
Long-term unemployment is a very different experience than short-term unemployment. It is not just an unplanned vacation, it is an existential threat to your standard of living. When you lose your job you don’t know how long it will take you to find a new one. You get unemployment insurance benefits (usually, but not always), but in general, they cover just 60% of what you were earning when you were employed, up to a cap of around $400 per week (varies a bit by state).
Thus, for many if not most, the pay cut is much more than 40%. Most people have fixed, or at least semi-fixed, expenses that use up more than 60% of their income. They thus have to dig into their savings and/or run up their credit cards. Regular state unemployment benefits run out after 26 weeks, and after that people move over to extended benefits, which are paid for by the Federal Government, and which this time around have become a political football.
When people get to the six-month mark of joblessness, they have usually depleted most of their savings outside of their 401-k or IRA plans, and may have started to dip into those as well (in the process paying a 10% penalty plus having the withdrawals taxed as ordinary income). That is particularly true this time around because going into this recession the savings rate was at a historic low.
In past downturns, the unemployed who were also homeowners could generally tap into their home equity to tide them over. With 23% of all homes with mortgages now underwater, and another 5% with less than 5% positive equity, that option is no longer available for millions. Thus, without extended benefits these people would be left with no financial resources at all.
The census bureau tracks four different groups by length of unemployment. The short-term unemployed are those that have been out of work for less than five weeks (blue line). Almost always this is the largest group of the unemployed. The next biggest group is usually those that have been out of work between five and 14 weeks (red line).
Being out of work for a month is really not that big a deal, but as the joblessness stretches on it becomes a bigger and bigger problem. Not only do your finances start to run dry, but your contacts start to dry up and your skills start to wither. The longer you are out of work, the lower your likely salary once you return to work.
Normally the next two groups, those out of work for 15 to 26 weeks (green line), and those out of work for more than 27 (orange line) weeks are a very small proportion of the total unemployed. That changed in a very big way during this downturn: in October, 6.206 million — 41.8% of the 14.843 million total unemployed — have been looking for more than 26 weeks.
This is the first increase in the number of long-term unemployed after four straight months of declines. In May, there were 6.763 million very long-term unemployed, or 46.0% of the total. A year ago there were “only” 5.620 million people, or 36.0% of the total unemployed, who were out of work for more than 26 weeks.
The numbers in the graph below are not adjusted for population growth, so we should expect to see a bit of an upward tilt in all four groups over time. Sill, in a healthy economy, the number of very long term unemployed should be down closer to 1 million, not above 6 million. On the other hand, the 2.657 million who are out of work for less than five weeks is actually lower in absolute terms than the average of the last 35 years (despite population growth over that time).
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Editor’s Note: Due to the length of this report, we are dividing it into two sections. “Part 2” will be published shortly.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
