October 8, 2012
After 43 straight months of unemployment above 8 percent, as Mitt Romney had been fond of reminding potential voters, an unemployment rate of 7.8 percent almost looks rosy, doesn’t it? But before you seize on that number, announced by the Bureau of Labor Statistics on Friday, as an excuse to race back into “risk on” investments – equities, high yield bonds and other asset classes likely to outperform in an improving economy – you may want to pause and study something beyond the headline number.
For starters, says Kristen Scarpa, investment strategist at Barclay’s wealth and investment management division, “it really is a gift from part-time workers.” About two-thirds of the improvement registered came from the addition of workers who found new part-time jobs. “This is the single largest gain recorded in the number of those employed part-time for economic reasons,” she added.
Specifically, what is more important than the 7.8 percent unemployment rate in the eyes of many observers is the rate known as U-6. That’s a category on the Bureau of Labor Statistics monthly report that often gets overlooked in favor of the broader and simpler to understand “unemployment rate.” But U-6 is particularly important right now, because it does a better job of capturing the gap that exists between the reported unemployment rate and what might really be going on in the economy.
The U-6 rate measures note only those folks who are unemployed but also those who are only “marginally attached” (people who have been looking for work during the last 12 months, but who don’t count in the unemployed total because they haven’t been looking in the last four weeks covered by the BLS survey) as well as individuals who are working part time but would prefer to find a full-time job. And right now, that U-6 rate still stands at 14.7 percent, not quite double the “official” unemployment rate, telling us that a lot more new jobs will need to be created to meet the need.
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As far as the rest of the monthly jobs report goes, well, there’s plenty of ammunition there to delight spin doctors on both sides of the partisan debate. Bulls can point to the fact that the numbers of new jobs created in July and August were revised upward; that the initial surveys understated the number of new jobs by a hefty 86,000. Bears will point to the fact that the percentage of private-sector firms surveyed that either cut the number of jobs available in September or kept staffing levels unchanged rose to 47 percent from 42 percent in June. And so on.
As she helps to Barclays’s affluent clients set their investment strategies, Scarpa says she won’t be allowing the employment data to have much influence. One reason? “This may not be a sustainable gain,” she says of the number of new jobs created and the dip in the unemployment rate. To be convinced that the 7.8 percent figure is a real one – that it will be sustainable and reflects the real experience of job seekers in today’s market – Scarpa says she would like to see that U-6 rate decline as well, at a similar pace. Nor, she adds, is it a great sign that all the job creation is coming from the service sector.
After an initial rally, the stock market response to the jobs data on Friday wound up being rather ho-hum, with the Dow Jones Industrial Average posting a modest advance and the S&P 500 index recording a small decline. That’s probably appropriate, because, ultimately, what happened to corporate profits during the third quarter is going to matter more than the jobs data.
The earnings season kicks off “officially” tomorrow after the closing bell with the announcement of Alcoa’s (AA) third-quarter results – and it’s no secret that for many companies the news is likely to be grim. True, Apple (AAPL) will see a benefit from the sales of the new iPhone 5 in the final week or so of September, but most companies can’t count on anything similar.
Overall, analysts are in agreement that companies in the S&P 500 will report lower earnings than they did in the year-earlier period for the first time since 2009. Hoping that analysts and companies were deliberately downplaying their outlook in hopes of beating those lowered expectations seems a risky strategy given that we are going into this earnings season after a late-summer rally.
“Don’t fight the Fed”, the saying goes – but the Fed can only do so much. True, its latest round of quantitative easing may improve sentiment and encourage companies that need to issue or refinance debt to do so. But will it encourage them to create new jobs in an environment in which their revenues and profits already are under pressure? It’s hard to see the Fed having that much impact, at least in the absence of confirming signals from the broader economy. There are still too many headwinds to be anything but cautious.