In general, the employment report released this morning was better than expected, but there were many cross-currents. There was a slight disappointment in the establishment survey’s job count, which came in at a loss of 20,000 jobs, as job gains of 15,000 were expected. Also, the revisions to prior months were mostly negative.

This month is when we get the annual benchmark revisions for the whole prior year, not just the prior few months like we do most of the time. December’s job losses were revised up to 150,000 from 84,000, but November actually added far more jobs than we had thought, with a net gain of 64,000 instead of just 4,000.

Every other month of the year was revised downward, and for 2009 as a whole we actually lost 617,000 more jobs than originally reported. In total, we have lost 8.424 million jobs since the recession began, of which 3.623 million were lost in 2008, and 4.781 million were lost in 2009.

The 3-Month Moving Average

However, there has been a steady decline in the rate of job losses, particularly if one looks at a three-month moving average. The worst single month of job losses was January 2009, when 779,000 people got their pink slips, and the worst point for the three-month moving average was March 2009, when losses averaged 753,000 per month. Over the last three months we have only been losing an average of 35,000 jobs a month.

The first graph below, (from http://www.calculatedriskblog.com/) shows that the year-over-year change in jobs is still very negative at 3.0%, which is worse than anything seen since 1960 prior to this downturn, but it is vastly improved from the 5.0% level hit last summer. As the absolutely horrific job losses of early 2009 roll off, that measure should improve significantly in coming months.

The Household Survey

The separate household survey was far better than expected. The unemployment rate dropped to 9.7% from 10.0% in December, when it was expected to have remained unchanged. The number of jobs as reported by the household survey actually increased by 541,000, and the number of unemployed fell by 430,000.

The unemployment rate can be deconstructed into the percentage of people in the workforce, and the percentage of people who are actually working. Obviously, the former will always be higher than the later. Also, unless we seriously do away with child labor laws and get rid of the idea of retirement, neither number will come close to 100%.

The civilian participation rate, or the percentage of people who are either looking for work or are working, actually rose to 64.7% from 64.6%. The graph below shows the long-term changes in the participation rate, the employment rate and the unemployment rate (green line, right scale). The unemployment rate shown it the “official” one, also known as U-3.

A broader measure of unemployment that also takes into consideration discouraged workers and those working only part time but who want to work full time is the U-6, also called the underemployment rate. The U-6 posted an even more impressive decline in January, dropping to 16.5% from 17.3% in December, but it is still well above the 14.0% level of a year ago.

The employment-to-population ratio, or what I like to think of as the employment rate, also increased to 58.4% from 58.2% in December. As shown in the first graph below, both figures had been plunging. This might be a one-month blip, but the reversal on both counts is very welcome news.

Historical View

The participation rate had been on a secular upward trend from the mid-1960’s through the end of the century, peaking at 67.3 in March of 2000, but has been trending downward ever since. There is a tendency for the participation rate to decline a bit during recessions and increase during expansions. However, the increase in the participation rate during the last expansion didn’t really happen. It continued to fall early in the expansion and then showed a very minimal rise just before things started to fall apart again.

Most of the secular rise in the participation rate in the last half of the 20th century was driven by demographic forces, first and foremost the flood of women into the workforce. Baby Boomers coming of age also played a significant role, particularly in the late 1970’s and early 1980’s. If the participation rate is rising, the economy needs to create more jobs to achieve that same level of unemployment than if the participation rate were flat.

To that extent, both Presidents Carter and Reagan get a bit of a bum rap for the economic performances while they were in office on the unemployment rate front. The second President Bush gets a massive free ride on the unemployment rate. Obama is getting a bit of a free ride as well. The unemployment rate would be 11.1% if the participation rate had remained at January 2009 levels.

Employment Rate vs. Participation Rate

The employment rate is obviously more volatile than the participation rate; if they always moved the same amount the unemployment rate would never change. The employment rate peaked in April of 2000 at 64.7%, during the last recession it dropped to 62.0% in September of 2003. However unlike in previous expansions, it never really showed much of a recovery, only rising to 63.4% by March of 2007 before it started to sink again.

The decline in the employment rate was masked by the decline in the participation rate. It is a very positive sign that the big drop in the unemployment rate this month was not driven by a decline in the participation rate.

However, looking forward, it is likely that as the economy starts to add jobs, many of the people who left the workforce all together during the recession will start to return. That will drive the participation rate back up, and, all things being equal, the unemployment rate with it.

The decline in the unemployment rate was very broad-based, with declines seen for almost every major demographic group. The rate for adult men, a group that has been particularly hard hit by this recession, dropped to 10.0% from 10.2% in December and 10.4% in November, but remains far above the 7.8% rate of a year ago.

The rate for adult women fell to 7.9% from 8.2% in December, but is up from 6.4% a year ago. Teen unemployment fell to 26.4% from 27.1% in December, but is far higher than the 20.9% rate of a year ago. Blacks were the only demographic group to see an increase in their unemployment rate, rising to 16.5% from 16.2% in December and 12.8% a year ago. The rate for Whites fell to 8.7% from 9.0% in December but up from 7.0% a year ago. Hispanic unemployment fell to 12.6% in January from 12.9% in December, but up from 9.9% a year ago.

By Education

By level of educational attainment, there were improvements seen at all levels for the month. The unemployment rate for high school dropouts edged down to 15.2% from 15.3% in December but is up from 12.4% a year ago. High school grads saw a much bigger improvement, with the rate declining to 10.1% from 10.5%, but much higher than the year-ago rate of 8.1%.

People with some college or an associates degree saw the biggest improvement, with their unemployment rate dropping to 8.5% from 9.0% last month, but up from 6.4% in January of 2009. The unemployment rate for those with a Bachelors Degree (or higher) was 4.9%, down from 5.0% in December but up from 3.9% a year ago. As the demographic numbers show, particularly the year-over-year comparisons, recessions always hit those most marginalized in the society the hardest.

By Age & Race Demographics

Breaking the demographics down a bit more finely, the rate for white adult men fell to 9.1% from 9.3% in December, but it is up from  7.0% a year ago. The rate for white women dropped to 6.8% from 7.4% in December but is up from 5.9% a year ago. The white teen unemployment rate edged down to 23.5% from 23.6% but is well above the 18.6% rate of a year ago.

Black men saw a big jump in their unemployment rate in January, rising a full point to 17.6% from 16.6% in December and up from 14.4% a year ago. The unemployment rate for black women edged up to 13.3% from 13.1% and 9.4% a year ago. There was a substantial improvement in the unemployment rate for black teens, with the rate falling to 43.8% from 48.4%, but up from 36.8%. Still, an unemployment rate of 43.8% is more something we would normally associate with Africans, not African Americans.

Establishment Survey

Turning back to the establishment survey, there were a number of positive indications, even though the overall job loss of 20,000 was somewhat disappointing. For starters, private job losses were only 12,000. Manufacturing and construction are now both relatively small parts of overall employment, together accounting for just 16.0% of total private sector jobs.

However, given their volatility they deserve extra attention, since they have an outsized influence on if we are in a boom or a bust. The goods-producing sector lost a total of 60,000 jobs, but more than all of those were in construction, which dropped 75,000 positions. January was colder than normal, so it is possible that the seasonal adjustment factors are causing an over estimate of the number of jobs lost there in January.

Without question, though, construction has been absolutely demolished by this downturn. Since the recession started in December of 2007, there have been 1.9 million construction jobs lost, or 22.6% of all jobs lost. In January, the sector only accounted for 5.25% of all private sector jobs, down from 6.48% of all private sector jobs when the recession started.

Furthermore, job losses in Construction started well before the overall recession did. Since the sector’s peak in August of 2006, 2.1 million construction jobs have been lost. That is 27.2% of the peak level jobs in the sector gone.

We actually saw an improvement in manufacturing jobs of 11,000. Manufacturing jobs have been in a steady decline. The green graph below shows the year-over-year change in employment for total private industry (blue line), construction (red) and both durable goods (green) and non-durable goods (purple) manufacturing.

Historically, the construction and durable goods manufacturing sectors have been the most volatile in terms of employment. Note, however, that non-durable goods manufacturing employment has not been positive on a year-over-year basis since the mid-1990’s. Durable goods jobs just barely made it into positive territory briefly during the last expansion, despite being hit very hard in the 2001 recession.

In January, durable goods jobs actually increased by 13,000, while non-durable goods jobs fell by 2,000. I think the increase in durable goods jobs is a very good sign.

Average Workweek Improves

There were some other very encouraging signs in the report. For starters, the average workweek rose to 33.3 hours from 33.2 hours in both December an November. While a 0.1 hour per week increase might not sound like much, remember that there are still 107.1 million people working in the private sector, and 129.5 million people working including all levels of government. That works out to an additional 1.295 million more hours worked each week.

If the average workweek had remained the same, then we would have had to add an additional 39,000 workers to have the same total number of hours worked. When coming out of a recession, the first thing an employer will do when business picks up is ask the people already on the payroll to work a bit longer. That is particularly true if businesses had previously cut back on the hours of the employees. They don’t have to pay any extra benefits, and more often than not, they don’t even have to pay overtime. 

Only after they have increased the hours of existing employees as much as they reasonably can (or until they start having to pay significant amounts of overtime) do employers move to the next stage. Usually employers are tentative at first, not knowing if the upturn they are seeing is just a blip or the start of a real upturn in business.

So after they have been working their current employees more, the first thing they tend to do is call up the Temp agencies like Kelly Services (KELYA) or Manpower (MAN). Only when they are confident that the upturn is for real will they bring on permanent employees. Thus, along with the average workweek, the number of temporary employees is an excellent leading indicator of employment. Temp jobs increased by 52,000 in January and are up a total of 206,000 over the last three months.

The Overall Take

While there were many cross-currents in this report, overall I think it was quite positive, particularly when the more forward-looking indicators in the report are considered. The revisions to prior months were overall pretty negative, and remind us of just how deep a hole we are in.

The final graph (which includes the effects of the benchmark revisions) compares the percentage job losses in the Great Recession to all previous post WWII recessions. Nothing else even comes close. Cumulatively we have lost 6.1% of all jobs since the downturn started. The previous worst downturn was in 1948. Back then, the economy was in the middle of switching over from wartime to peacetime production. 

Not only that, we are still losing jobs 24 months into this downturn, although the pace of job losses has slowed dramatically. Only the 2001 recession lasted as long in terms of falling job numbers, and it was a very shallow downturn, with peak cumulative job losses less than a third of what we have suffered this time.

With the exception of the past three recessions, not only had we stopped losing jobs by two years after the recession had begun, but we had already regained every single job lost and went on to new highs in total jobs. The 2001 recession was a huge outlier in that regard, taking almost four years before the country had more jobs than when that recession started.

To regain the 8.4 million jobs lost this time, it will take heroic job growth to get us back to even. Say, for example, we could get back to the average level of job growth that was seen in Bill Clinton’s second term (232,000 per month). It would still take us until January of 2013 to get back to where we were in terms of total jobs in December of 2007, and that is if we start adding 232,000 jobs next month.

The chance of that happening is only slightly less than the chance that the city fathers of Atlanta will erect a statue of General Sherman in front of City Hall. Without a doubt, we are in a very deep hole, but at least we are not digging very fast anymore.

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.

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