Analyzing the Jobs Picture

A few weeks ago, the US labor department released their monthly employment report for January. I wanted to talk about this today, because the number was surprisingly good and led to a strong up day in the stock market. But it's important to read deeper into the numbers and see what they mean. Yes, on the surface they were much better than expected, but, as cliched as InvestingDecoded can be, the devil is in the details. 

Understanding the Numbers

First, let's talk about what the report is and how it's calculated. First, and most important, the unemployment rate is calculated as the percentage of working age people that don't have a job but are actively looking for a job. This is key - if you're not actively looking for a job, you're not considered unemployed. Also, the government does analyze the 'underemployment', which is people that are working, but are actively searching for something better (e.g. working part time but want full-time). The labor force participation rate is the percentage of the total working population that is actively working or searching for work. It's important to look at all these numbers combined to provide a more coherent view of the country's employment picture rather than a headline number.

Finally, and this is something that's been controversial especially in January's report, is the seasonal adjustments. These adjustments are made to essentially smooth out the numbers and provide a more realistic estimate. January's report had a somewhat larger than usual adjustment, and some are saying that the gains in employment are just a function of the statistical assumptions made by the BLS in coming up with the figures (read more about that here).

So To The Numbers

Alright, so the unemployment rate fell to 8.3% as the economy created 243k jobs - well ahead of economist expectations if 140k. But in the details, you see the following information:

• The number of people working part time for economic reasons (i.e. underemployed) did not change at 8.2 million. This indicates that people aren't getting promoted from part time to full-time even though they want to and is concerning for the overall health of the job market.
• The number of long-term unemployed people (those that have been searching for 27 weeks or more) hasn't changed at 5.5 million or 42.9% of the unemployed. This shows that we still have a ways to go in adjusting our workforce to be more aligned with the skills required for the current economy. 42.9% of the unemployed in the country still don't seem to be on that path.
• The labor participation rate held steady at 63.7% - so even though there were more jobs created, it doesn't seem that the percentage of people actually working has increased. 
• The average workweek was unchanged, indicating that companies have not had to 'stretch' their employee's hours to keep up with demand. Average hourly pay increased slightly (0.2%), also indicating that employers haven't had to pay more to retain good workers. 
• In terms of where the jobs came from - a majority of the jobs came from the services sector (70k), which is typical. The manufacturing sector added 50k jobs, and the most promising part of this is that it was almost all in durable goods - which is a good indicator for the health of the overall economy. Government jobs was flat, bucking a recent trend of government layoffs. I would expect that trend to resume soon, and, frankly, I don't mind it at all. 

Conclusions

So looking deeper into the numbers, it seems that the recent report wasn't quite as promising as it seems on the surface. What I would consider the leading indicators (things like average workweek or hourly wages) didn't improve. Long-term unemployment is still an issue and points to a large part of the unemployed that are structurally present. 

Nonetheless, I think the report was still overall positive as it shows the economy continues in the right direction. I would be on the lookout for revisions for the number in the coming months. But, again, make sure you look into the details!

What are your thoughts?

Questions/Comments/Feedback?Please don't hesitate to let me know of questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!

The Standard Disclaimer

Everything I've written above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting a financial advisor.