A Second Hand Conjecture

Employment as measured by the “establishment survey,” was down by 190,000; and Many feel it is an improvement that we are not falling as fast.

Well, let us take a moment to look under the hood of these numbers. First, while the establishment survey was down 190k, the number of unemployed soared by 558,000, to 15.7 million, as measured by the household survey. The establishment survey is taken from large businesses while the household survey calls individual households. It is the household survey that sets the unemployment rate. The establishment survey of companies doesn’t count the self-employed and undercounts employees of small businesses. So the economic picture is probably worse than the headlines when it comes to jobs.

Let’s look at the establishment survey. The actual change in unemployment for October was 641,000, not 190,000 which is seasonally adjusted. The so-called birth-death ratio added 86,000. Who knows if that is a reasonable statistical adjustment. While we should adjust the number seasonally, in the real world the jobs were still lost.

The total (U-6) employment rate has climbed to a record high of 17.5%. This is complied by adding in those employed part time for economic reasons. Total job losses since the onset of the recession now are approximately 10.5 million.

From John Mauldin we get this report from Greg Weldon (www.weldononline.com). Greg points out one of the issues with just looking at unemployment, because if you have not looked for a job in four weeks they no longer count you as unemployed:

Moreover, when we combine the monthly change in the number of Unemployed, with the number Not in the Labor Force, we might consider the result to be a proxy for the actual ‘change’ in the underlying labor market situation … in which case, October’s figure of 817,000 represents the fourth LARGEST yet, behind last month’s (September’s) second largest figure of 1,021,000 … for a two-month combined figure of 1.838 million, in newly Unemployed, or no longer ‘in’ the Labor Force …

… the second LARGEST two-month total EVER posted, barely trailing the December-08/January-09 total 1.955 million.

Bottom line … basis this measure AND the ‘Total Unemployment Rate,’ we could conclude that not only is there NO ‘improvement’ in the labor market, but moreover, that it continues to DETERIORATE, intently.

Of course, unemployment is typically a lagging indicator, but not always. In a “balance sheet” recession where home price declines, rising defaults (yes they are still rising) credit losses, a wave of foreclosures as large or larger than the subprime tsunami and deleveraging are in motion, unemployment rising at the rate we are seeing now is likely to be a significant drag for years to come.

Looking back at 1982, which so many people told us was far worse than today could ever be, we see households dealing with similar “levels” of unemployment with more than three times the debt load and half the savings. Workers are finding it takes longer to find work than in 1982. The count of people jobless for six months or longer stands at a record 5.6 million.

There was a bright spot, though it is so early we might see it revised down or a statistical aberration. Temporary employment grew by 33,700 jobs, its third straight month of gains after steep losses earlier this year. Typically employers add temporary workers before hiring permanent ones.

The even uglier fact. Average hours worked still stands at 33, a record low. Two important things to be gleaned form that number:

The unemployment number is much lower than it otherwise would be because workers hours have been cut rather than jobs lost.
Hiring is likely to be slower than normal as early on we will see hours worked rise rather than bring in new employees.

So how are companies beating their estimates amidst all this gloom? First off, they always beat their estimates. They are not beating the estimates of a year ago, or six months ago, or even three months ago. They are beating the estimates which keep getting chopped almost until they are reported. The estimates six months out from now are unlikely to be met, but by then they will be reduced yet again.

Still, profits are better than many expected six months ago, even if they are worse than the analysts estimates from then as well. Why? John Forsyth gives us the skinny:

The genius of American business for doing more with less has been evident in the parade of earnings reports showing profits improving far more than the revenue that produces them. The secret: Productivity soared at a 9.5% annual rate in the third quarter, a stunning increase that was nearly half again as much as economists had projected. Business cut labor costs at a 5.2% annual rate, with total hours falling at a 5% pace. Fewer workers worked fewer hours.

That is a recipe for deflation and slow growth if it doesn’t reverse. Profits can only be improved by cost cutting for so long, and the carnage amongst workers is made even worse.

Charts are courtesy of Barry Ritholtz. Also posted at The View From the Bluff.