Return of the Kitchen Sink Stock Market
Kurt Brouwer June 6th, 2008
U.S. Economy: Payrolls Fall, Unemployment Rises (Bloomberg, June 6, 2008, Shobhana Chandra)
The U.S. lost jobs for a fifth month and the unemployment rate rose by the most in more than two decades, as an influx of students into the workforce drove the biggest jump in teenage joblessness since at least 1948.
Payrolls fell by 49,000 in May, the Labor Department said today in Washington. The jobless rate increased by half a point to 5.5 percent, higher than every forecast in a Bloomberg News survey. The surge in youth unemployment exacerbated losses in every category except Hispanics.
Factories, builders and retailers axed workers last month; UAL Corp.’s United Airlines, truck-engine maker Cummins Inc. and bookseller Borders Group Inc. are among those announcing cuts this week as businesses try to survive the slowdown. Treasuries rose while stocks and the dollar slid after the report.
“This is an ugly report on the labor market,” said Allen Sinai, chief economist at Decision Economics Inc. in New York. “Most of the economy looks in recession.”
As we reported in The Strangest Recession in Economic History and The Peekaboo Recession — Is It or Isn’t It?, the economy is under lots of stress right now and, by all rights, should be deeply in recession. Housing prices are dropping, foreclosures are at record levels, financial institutions are stressed, oil is at record high prices and the dollar is weak. Yet, as we saw earlier this week in the positive ISM reports (see here and here), some segments of the economy are doing very well.
On Wall Street, the stock market fell sharply on today’s news, but bond yields fell and bond prices rose:
Ten-year Treasury yields dropped to 3.94 percent at 12:20 p.m. in New York, from 4.04 percent late yesterday. The Standard & Poor’s 500 stock index fell 1.7 [KB: the S&P fell over 3% for the day] percent to 1,379.36.
The unemployment rate rose considerably today although a portion of the increase appears to be due to seasonal factors related to kids getting out of school and looking for work:
…Economists had projected payrolls would drop by 60,000 after a previously reported 20,000 decline the prior month, according to the median of 79 forecasts in a Bloomberg News survey. The jobless rate was forecast to rise to 5.1 percent.
…The unemployment rate, the highest since October 2004, reflected an expansion of the workforce, led by teenagers. The increase in the rate was the biggest since February 1986.
Some of the increase in youth unemployment may reflect an earlier end to the school year than incorporated in the Labor Department’s seasonal-adjustment calculations, economists said.
Young people are “swelling the labor pool, but they’re also leading to a higher unemployment rate,” said Roger Kubarych, chief U.S. economist at Unicredit Global Research in New York, in an interview with Bloomberg Television. “It used to be you stayed in school until the middle of June, late June.”
A loss of jobs is one of the criteria used by the National Bureau of Economic Research to determine when recessions begin and end. The group, the official arbiter in the U.S., defines contractions as a “significant” decrease in activity over a sustained period of time. Changes in sales, incomes, production and gross domestic product are also considered…
The huge jump in the unemployment was probably exacerbated by seasonal factors as the article indicated, but it also reflects the fact that the unemployment rate was artificially held down by statistical measures over the past couple of months. This is probably a more realistic number.
All in all, I think we are seeing a return of troubled market conditions as we saw earlier this year in The Kitchen Sink Stock Market.
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Kurt, I agree fully with your conclusion that “the unemployment rate was artificially held down by statistical measures over the past couple of months”. At the risk of sounding like a conspiracy nut, I find it very hard to believe that the unemployment rate truly jumped by 10% in the past 30 days (blaming the big increase on the kids graduating from school and looking for work is comical, putting aside that there are seasonal adjustments to compensate for that). It’s much more plausable that the earlier numbers were understated and way off the mark.
The payroll numbers are even more of a farce. They’re completely fabricated and include huge adjustments to the data to make up for the sampling shortcomings and errors. No one who’s ever dug through the underlying data would take them very seriously.
http://www.bls.gov/news.release/empsit.t14.htm
Penelope — I think the unemployment rate was held down in March and April, but not due to fabrications. Rather, it was due to the nature of the employment statistical process itself. Remember, that the unemployment numbers come from the Household survey, not the Establishment (payroll) survey. Even though payroll jobs declined over the past few months, the number of workers seeking jobs also went down, so the unemployment rate fell. It did not make sense in the real world, but according to the Bureau of Labor Services methodology, it was valid.
This month their method of seasonally adjusting for kids getting out of school and seeking jobs did not work either because school is getting out much earlier these days (starting earlier in the summer too). Whether that is absurd or not is a separate issue, but they did make this statement about the Household survey that was quite startling:
‘…The civilian labor force rose by 577,000 to 154.5 million in May, and the
labor force participation rate edged up to 66.2 percent. Total employment was
little changed at 146.0 million. The employment-population ratio, at 62.6 per-
cent, also was little changed over the month…’
The labor force rose by 577,000! Annualized, that’s nearly 7 million. Yikes. Normally, the labor force grows by 1.5 million or so per year. So, obviously, something happened. Maybe the survey screwed up and those workers were there a month or two earlier or whatever — I don’t know. But, I do think 5% was too low last month yet I think 5.5% is too high this month.