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Why the January Jobs Report Is Alarming


The January nonfarm payroll number was 130.27 million, but what does that actually mean for the economy?

The January nonfarm payroll number was 130.27 million -- a figure first reached in October 1999. That's right! The fabled American job machine has come to resemble nothing so much as Cisco's (CSCO) stock price. For the last 12 years, the nonfarm job count has been revisiting the same point over and over again, and each time it crosses from below Wall Street economists put on their best John T. Chambers imitation and whoop it up for job growth.

To be sure, on Friday morning they were only emitting a half cheer because most of the expected employment gains allegedly got lost in the January snow jobs. But if you weren't peddling "risk-on" trades, it was the sharp job losses in December and prior months that caught your eye. About 30 days ago, the Bureua of Labor Statistics (BLS) had reported 130.7 million jobs in its December report, which was a gain of 103,000 over November. Likewise, November was originally reported as being up 39,000 over the prior month; and when October was originally released that report too showed a gain -- up 151,000 from the 130.2 million jobs reported for September.

Now, however, the revised December number at 130.2 million had been flushed all the way back to where the day traders thought the nonfarm job count had stood in September, and was actually only 100,000 above the 130.1 million nonfarm jobs first reported way back in April 2010. Even Lucy never respotted the ball on Charlie Brown that many times!

What happened to the 500,000 December jobs now MIA, of course, is that the BLS annual benchmark revision (always published in February) removed the over-count that had built up in last year's monthly reporting due to a variety of estimating and seasonal adjustment factors and especially the infamous birth-death model. And that big ding to the jobs picture came on top of a similar 800,000 downward adjustment to the jobs counts originally reported for 2009.

These massive downward revisions (1.2 million jobs in the last two years) are important because the obvious fact is that workers feed their families on paychecks, not statistical deltas from the prior month. Thus, given the lack of sustained recovery in the number of paychecks, it is not surprising that private wage and salaries reported in December by the Bureau of Economic Analysis (BEA) were still down $100 billion, or nearly 2% in nominal terms from the summer of 2008.

In this respect, no amount of weather-spinning can obfuscate the dismal facts about the medium-term jobs trend -- to say nothing of any net job gains since the last century! Specifically, during the December 2007-June 2009 official recession period, we lost 7.3 million nonfarm payroll jobs, bringing the nonfarm payroll count to 130.64 million at the point the National Bureau of Economic Research (NBER) said recovery officially commenced. But after 19 months of green shoots, we now actually have 400,000 fewer jobs. And, yes, employment is purportedly a lagging indicator, but it is simply off the historical charts to have the job count down 5.5% at a point that is currently 37 months after the cyclical peak.

Until the latest benchmark adjustments, December 2009 was the low point in the jobs cycle and as of December 2010 reporting, we had apparently gained 1.1 million jobs, or about 100,000 per month -- not enough to cover working age population growth but at least modest progress. But now Lucy has pulled the football here, too. As of the January report, the nonfarm job gain since December 2009 is now only 677,000, or just 52,000 per month. At the rate of gain over the past 13 months, therefore, it will take 160 more months to recover the jobs lost during the Great Recession.

By any adult standard of assessment, these short-, medium- and long-term trends all point to a profound structural impairment of the nation's job market -- a fundamental reality that will constrain the entire set of core economic variables including income growth, consumption gains, GDP expansion, corporate earnings, and, ultimately, the capitalization rate for risk assets. Yet the Wall Street spin doctors spent the weekend examining the data for weather-related absence from work shown in the household survey -- which has no connection to the establishment survey on which the monthly jobs count is based -- and are out this morning saying not to worry: January actually generated about 300,000 jobs if you adjust for the snow storms.

Really? Did these learned disciples of Dr. Pangloss actually notice that the seasonal adjustment factors for the inherently stormy, post-Christmas month of January are always so violent as to trivialize their current quibbles about the unusual intensity of this year's storms? The fact is, the non-seasonally adjusted payroll number for January was down 2.92 million from December, and notwithstanding the alleged economic improvements over the past year, this unadjusted figure materially exceeded the 2. 82 million December-to-January decline reported a year ago. But what was also higher this year -- don't giggle now -- was the seasonal adjustment factor! Last January's unadjusted survey number was marked up by a factor of 1.015X to account for the January chills and hangovers, while this year it got an extra boost to 1.016X. So the BLS' latest advance in the science of seasonal adjustment added about 200,000 jobs to the reported January number, and saved the bulls from the pain of explaining away a negative jobs headline.

In this vein, the old "switch the report card" trick doesn't work, either. The household survey reported that the number of employed was up by 117,000 in January to 138.3 million, and this is supposed to indicate that small business hiring -- allegedly better captured in the household than the establishment report -- is beginning to pick up steam. Actually, the household survey reported more jobs -- 138.4 million -- as far back as April 2010, and the number has bobbed up and down around the January level ever since. The only change of material significance in the household survey over the past year is that the labor force participation rate has continued it swoon -- dropping from 64.8% to 64.2%.

This means that had the participation rate remained constant and had 1.5 million American not dropped out the labor force over the last year, the unemployment rate in January would have been about 10%, not the 9% reported. Indeed, based on this sort of "progress" it might be worthwhile to revive the old "odd-even" day rationing system used during the gasoline shortage of 1979: Henceforth each unemployed American would be deleted from the labor pool every other month.

Unfortunately, gamesmanship with the monthly headline noise rather than focus on the underlying trends is only a small part of Wall Street's present delusionary view of the jobs situation. The far bigger distortion comes from the absurd preoccupation with the single number for total nonfarm job change -- as if all jobs were created essentially equal in terms of economic significance for income, spending and GDP.

Well, in January the average finance (aka FIRE) job clocked 37.1 hours at $27.54 per hour for an annual wage equivalent of about $53,000. Likewise, the average manufacturing job recorded 40.5 weekly hours and annual pay of $49,000. By contrast, about 14 million jobs in the retail sector averaged just 31 hours per week and hourly pay of $15.64 -- for an annualized equivalent of $25,000. Further down the scale are 13 million jobs in restaurants, bars and hotels. These jobs clocked just 25.8 hours per week at hourly pay of only $13.22. Consequently, workers in the Bureau of Labor Statistics' "leisure and hospitality" category earned at a rate of $18,000 per year, and are the economic equivalent of one-third of a FIRE job and less than 40% of a factory job.

Based on the more meaningful concept of economic "throw weight," the 130.27 million jobs reported in January can be sorted into three distinct buckets. The first has been termed "Breadwinner Jobs" and totals 65 million positions in manufacturing, construction, trade, transportation and all of the upper level white-collar categories such as FIRE, information technology, media, the professions, business management/services and all governmental jobs except education. These jobs pay an average of $45,000 per year, and as the heading suggests, constitute the core middle class economy which supports the nation's family-based households.
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