the Employment Situation report for July 2012

the report

On Friday August 3rd at 8:30am EDT, the Bureau of Labor Statistics of the Labor Department in Washington released its Employment Situation report for July 2012.  According to the BLS, the US economy added a net +163,000 new jobs during the month–the best showing since February.  The private sector created 172,000 positions;  state and local governments laid off -9,000 workers.

the revisions

As regular readers are well aware, the employment figures come from a BLS survey of large corporations and state/local government bodies.  Respondents have three months to get their data in.  As a result of differences in reporting speeds, each monthly figure compiled by the BLS  is revised twice, once each in the two months following the initial report, before it is considered final.

The May ES figures were initially reported as +69,000 jobs, consisting of +82,000 in the private sector and -13,000 layoffs by state and local governments.  These numbers were revised up in June to +77,000 (+105,000 private, -28,000 government).  The final tally, reported on Friday, is another upward revision, to +87,000 jobs (+116,000 private, -29,000 government).

The June figures were initially reported as +80,000 (+84,000 in the private sector, -4,000 government).  In the July ES, they’re revised down to +64,000 (+73,000 private, -9,000 government).  

Between the two months, revisions clip -6,000 positions from the total in July, all the decline coming from to state and local government layoffs.  (Despite the large May government layoff figure, the rate of shrinkage of state and local government employment is slowing.  Two reasons:  state/local revenues, rising rapidly as the economy recovers, are now approaching their previous 2007 peak; and, balanced budget rules have already been forcing trimming for a number of years.)

what makes this ES important


Employment in the domestic economy hit its low point about three years ago.  At that time there were about 9 million fewer people working than at the (overheated) peak of 2007, and maybe 7.5 million people fewer than normal.  Since then, due to a combination of natural healing and the Fed dropping interest rates to an emergency low of zero, the economy has added back over 4 million jobs.

It’s tempting to do simple subtraction and say that there are still at least 3.5 million out of work due to the recession.  It’s not that simple, however.  Students are constantly finishing school and looking for their first post-education jobs.  Older workers retire–though at a below normal rate at present–freeing up positions for new workers to take.

How big is this movement in net terms?  Economists estimate that the US needs to create an average of 125,000-150,000 new jobs each month just to absorb net new entrants into the workforce.

Therefore, the big army of unemployed only starts to get whittled down when the economy generates more than 125,000-150,000 jobs a month.

the recent past

Over last winter, job creation suddenly accelerated to around 250,000 new positions a month.  Wall Street was elated!  The economy appeared to have not only absorbed all the new school-leavers but also reduced the ranks of the long-term unemployed by 10%.  Maybe a 1970s-, 1980s-style (read: faster) recovery was finally underway.  And this during a period when bad weather tends to slow hiring.

Then came the March figures, which were slightly below 150,000 job adds.    …and the April figures   …and the May figures   …and the June figures–all sub-100,000 job creation months.  Wall Street was deflated!

Initially, investors read the apparent slowdown as mild winter weather pulling forward into February construction work that usually comes only in April.  But as the sub-100,000 months began to pile up–and, at the same time the EU economy was turning out to be worse than expected and slowdown in China was deepening–investors began to fear that simple seasonality wasn’t the culprit.  Wall Street began to think that the job figures were signaling the US was beginning to be dragged back into recession by economic woes elsewhere.

At least for the moment–and for good, I think–the July ES has restored seasonality as the most likely reason for the poor job numbers posted during the spring.  We’re back to the idea that the domestic economy is growing just enough to absorb new entrants–but not to make any appreciable dent in the large number of chronically employed.

stock market implications

1.  Having several million “extra” unemployed is a calamity for the unemployed themselves.  It’s also a key long-term social and political problem.  It isn’t necessarily as big an issue for publicly traded companies, however.

The long-term unemployed represent maybe 3% of the workforce.  When working, they represented far less than that percentage of total consumption spending–1% would be a generous estimate.  Corporate profits would be dented severely by a global recession.  But, sad to say, ex materials companies, failure of Washington to ease chronic unemployment won’t make very much difference to S&P 500 earnings.

2.  In the manic, black-or-white, all-or-nothing view of short-term traders, Wall Street is again a safe place to be long.  This doesn’t necessarily mean that stocks are going to go up a lot from here.  But it does, in my view, lower the odds of a protracted slide in the S&P 500.

3.  If, as I think they will, the July ES figures do prove indicative of what August and beyond will bring, it may well also be that the world will see the upcoming US presidential election as not as crucial as it does now.  The belief that neither major party candidate is competent would be less threatening if the economy is, although admittedly slowly, healing itself.  Wall Street would then probably default to its traditional stance that, after all, gridlock is the best one can hope for from politicians.

Again, this doesn’t mean that stocks will go up–or that Washington will do anything for the chronically unemployed.  It does mean, however, that some growth is possible without helpful/needed fiscal policy changes the government refuses to make.  The magnitude of another worry is reduced.

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