Keep the Champagne Corked
Judging from the headlines following the Employment Situation Report for February, released by the Bureau of Labor Statistics (BLS) two weeks ago on March 9th, one might get the impression the corner has been turned in the job market. In the report, the BLS announced non-farm payrolls increased by 227 Thousand during February. Deemed just as encouraging was the upward revision in the January count by an additional 41 Thousand jobs.
Over the past twelve months, payrolls have expanded by slightly more than 2.0 Million positions. This compares to roughly 1.4 Million jobs in the preceding twelve months ending February 2011. Investors generally interpreted this trend as good news, emphasizing the uptick in the pace of job creation. So it is no wonder that in the days to follow the yield on the benchmark 10 Year Treasury Note rose 34 basis points to 2.38 percent; or, that the S&P 500 Index broke through the 1,400 barrier shortly thereafter. For both equity and bond investors, the payroll report, on balance, augurs well for the economy's future.
Although we prefer not to spoil the party, we must beg to differ. Yes, we concur the recent Employment Situation Reports are encouraging. And, yes, we are heartened by the uptick in the pace of job creation. But we counsel caution. Our reason? When set against the rebound in job growth from the trough of previous recessions, the current pace lacks any fizzle.
The National Bureau of Economic Research (NBER), a private, non-profit economic research organization, is the authoritative source for dating U.S. business cycles. Its committee places the Great Recession's trough as of June 2009. Since then, NBER's economists estimate the U.S. economy has been expanding after contracting sharply from December 2007 to June 2009.
Taking this date as the bottom, we compared the pace of job growth in the present recovery to job creation following each of the eleven recessions the United States has suffered since 1945. In prior recoveries, median non-farm payroll growth has been just over eight percent after thirty-two months of the expansion. Since June 2009, non-farm payrolls have risen by just 1.7 percent. The current job rebound is tepid at best.
This assessment remains unchanged when the focus is on private payrolls (excluding government employees, whether on the federal, state or local levels). Since the June 2009 trough, private payrolls are up 2.6 percent. Better, but hardly a torrid pace when compared to the median 7.4 percent for this stage in previous expansions.
Growth in the civilian labor force also signals caution. From June 2009 through February 2012, the civilian labor force (the total of the employed and the unemployed actively seeking work) has barley grown. The BLS reports it is up a meager 0.1 percent. Normally after a recession the civilian labor force also expands as discouraged workers are drawn back into the labor pool or retirees opt to swap leisure for a paycheck. Even following the March 1991 and November 2001 troughs (both recessions were "asset bubble" recessions — the first involving commercial real estate and the second dot.com stocks), the labor force grew near the median trend line. Perhaps, demographic shifts — the commencement of the Baby Boom retirement boom — explain the trend. Maybe. We however feel any surge in retirements may be involuntary — a reflection of the dearth of opportunity more than a desire to begin enjoying the golden years.
For these reasons we caution becoming too optimistic about the decline reported in the unemployment rate. While the trends are encouraging, considerable ground remains to be reclaimed. So for the time being, keep the champagne chilled and corked.
Non-farm payroll, private payroll (excludes the government sector), and civilian labor force (employed individuals and unemployed individuals actively seeking work) are seasonally adjusted statistics from the Department of Labor's Bureau of Labor Statistics (BLS). Median changes for non-farm and private payrolls based on the growth from the troughs of eleven recessions since 1945; median change for the civilian labor force based on growth from ten recession troughs since 1949. Recession trough dates obtained from the National Bureau of Economic Research (NBER).
(Sources: Bureau of Labor Statistics; NBER.)
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American Independence Financial Services, LLC ("AIFS") is the investment adviser and administrator for the American Independence Funds and the NestEgg Target Date Funds. The firm is a limited liability company founded in 2004.
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