Amazing the difference one day makes in the employment outlook. Yesterday, the market shot up because “only” 512,000 applied for initial claims — down from 532,000 the previous week. We saw banners: “Employment Situation Improvement,” “We Have Turned the Corner”, and “Jobs Fuel Market Rally”.
Today we learn that 190,000 jobs were lost in October. That’s about 40,000 worse than widely expected. The unemployment rate rose to a 26 year high, 10.2%.
Understanding the numbers
For those of you that subscribe to my twitter, you know that I was critical of the analysis of the Initial Claims release on November 5. The media noted two pieces of good news. First, the level of claims decreased by 20,000. It is true that is good news. Second, Continuing Claims decreased by 68,000. It is not clear that is good news.
The reason is simple. Many people drop off the regular program not because they get a job — but because the program expires for them. These job-seekers then have a chance to apply for extended benefits or emergency benefits. Hence, you need to look a little deeper.
While the reporting of Extended Benefits and the Emergency program (EUC) is delayed, the recent numbers show an increase of 25,000 in Extended Benefits and a surprising 90,000 in the EUC.
The bottom line is that people are not getting jobs.
Let me give you some perspective on how serious this is. We have lost 7.3 million jobs in this recession. The last really bad recession began in 1981. Many don’t remember this was a time of considerable turmoil with some short term interest rates going above 20%! On a population adjusted basis, the jobs lost in the recession that began in 1981 was 4.3 million. At the time, that was really bad.
In addition, it is not over.
Yes, it is true that the rate of job loss is slowing. That is good news. However, we really need to get at least +100,000 in non-farm payrolls to stop the rate of unemployment from rising. We need about +200,000 to start recovering jobs. That is hugely different from where we are today.
Now, you are used to me saying negative things. I did see three pieces of good news in the employment report. First, temporary employment rose by 33,000. That is often a leading indictor of employment bottoming out. Second, the amount of overtime slightly increased. Again, this is a leading indictor. Finally, the revisions of the previous two months were also good news.
My guess is that the temp employment and the overtime are completely overlooked by market observers.
Time to Revisit the Stress Test
Do you remember the famous stress test that was done after the government had bailed out the big banks?
There were two scenarios: “Baseline” and “Alternative More Adverse”.
The Adverse scenario had unemployment hitting 8.9% in 2009 and rising to 10.3% in 2010. These assumptions were announced in April 2009. I quickly referred to this exercise as a “sham”.
The Adverse scenario is supposed to be a real downside scenario. In contrast, I thought the Adverse scenario would be “the good outcome”. Think about it. The worst case was 8.9% unemployment in 2009 (note this was supposed to be the average for the year). We are already at 10.2% in October and the average over the past 10 months is 9.1%. We have blown through the worst case scenario.
If we hold the rate at 10.2% for the last two months of the year (which is very optimistic), the average rate for 2009 will be 9.3%. Again, this is far from the assumed 8.9% worst case.
We are a hair away from 10.3% which is the worst case for 2010.
There is another critical input to the stress test that needs to be revisited: the assumption on prime mortgage defaults.
There is a positive relation between unemployment and prime defaults. However, using historical information can be misleading. Defaults are much more sensitive to unemployment today because as many as half the houses with mortgages have the situation where the loan is worth more than the house.
I have said previously that another “sham” are the number of bank closures. 115 closures is no where close to the number that should be closed. We had over 700 institutions closed during the S&L crisis including 406 FDIC insured banks in 1988-89.
Is the delay because the FDIC has run out of funds?
It is better to resolve the uncertainly. The weak banks need to fail. Our current situation leads to a lack of confidence. People don’t know if the bank is weak or strong because the FDIC is allowing the zombies to operate.
The All-In Unemployment Rate
I like to look at U6. This is the rate that includes: total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons.
Let’s be clear on the definitions (from the Bureau of Labor Statistics):
- Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past.
- Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job.
- Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.
The U6 rate (sometimes referred to as the “all in” rate) is a staggering 17.5% in October — rising from 17% in September.