Blog : The Jobs Report's Flip Side

by Ed Zwirn on May 3rd, 2014

Friday's employment situation report was so good it is hard to find the flip side.

To recap the good news: A much higher-than-expected 288,000 jobs (the most since January 2012) were added to the U.S. economy last month. Most analysts had been expecting this figure to come in at 210,000, which in-and-of-itself would have represented a gain over the 192,000 new jobs which opened up in March. Not only was the new jobs figure a pleasant surprise (to say the least), but the February and March figures were increased by an aggregate 36,000, meaning that job gains have averaged 238,000 over the past three months. In the 12 months prior to April, employment growth averaged 190,000 per month.

The April job gains were pretty much evenly distributed throughout the economy. Employment in professional and business services was up 75,000. Retail trade employment was up 35,000. Food services and drinking places added 33,000 jobs; health care, 19,000; wholesale trade,16,000; and mining, 10,000 (much stronger than the 3,000 of average gains seen over the prior 12 months).

A particularly notable bright spot materialized in the construction sector, with gains in both heavy construction and residential building adding 32,000 to the payroll last month. Construction has added 189,000 jobs over the past year, with almost three-fourths of this gain occurring over the past six months.

Bucking a recent trend, even the government added jobs (15,000 of them) in April.

The data also indicates slack in the labor market (and therefore more room for improvement), rather than the tightening that would have been expected with job gains. Average hourly earnings, the best indicator of labor market demand, held flat at $24.31 in April. Over the past 12 months, hourly earnings have risen 1.9%, while the Consumer Price index for All Urban Consumers rose 1.5%.

At the same time, the unemployment rate dropped sharply in April, from 6.7% to 6.3%, its lowest level in five-and-a-half years. The number of unemployed persons fell by 733,000, to 9.8 million, after having shown little movement over the prior four months.

And Now For the 'Bad' News...

While it's pretty hard to quarrel with the positive spin on the April jobs growth figure, the rub comes when you look at the unemployment rate. It turns out that the decline in this figure was driven entirely by an exit of 806,000 people from the civilian labor force, more than offsetting the 503,000 gain seen in March. In tandem with this, the labor force participation rate fell to 62.8% in April, from 63.2%, returning to October's level. If the participation rate had not declined, the unemployment rate would have risen to 6.8%.

According to analysts, much of this labor force exiting was caused by unemployed workers whose emergency benefits ran out and who no longer had any need to keep up even the pretense of a job search. While this falloff had been expected to occur in January, it seems that these workers kept up the search for a few months before giving up the ghost.

Long-term unemployment remains a stubborn feature of the U.S. economy. The 2.2 million or so people defined as "marginally attached" to the labor force (meaning that they had not looked for a job for the prior four weeks but wanted a job, were available for work and had looked for a job over the past year) is down only slightly from one year ago. In addition, the number of discouraged workers, a subset of the marginally attached who believed that no jobs were available was little changed from a year ago at 783,000. Of the unemployed, 35.3% have been out of work for 27 weeks or longer, down from March's 35.8%.

The upshot for penny stock investors: The latest news on the jobs front is good news. It is hard to disparage the broad-based gains seen on the labor front last month. All types of people with a broad range of skills and educational attainment found work in April, and this is the evidence that we have been waiting for that the economy is picking up after a harsh Q1. Economists are already upwardly revising their projections of Q2 GDP growth as a result.

On the other hand, investors, particularly those betting on consumer demand, should be cautious when assessing their macroeconomic outlook going forward. The divergence between the job creation figures and the outlook for labor force participation raises thorny questions, not the least of which is whether jobs growth can continue at the April level for any extended period of time. Chances are that it won't, and that the labor market will revert back to recent trend.  The proof of this pudding may well come as soon as the morning of June 6, when the news for May comes in.