by John Mauldin, Thoughts from the Frontline

“When more and more people are thrown out of work, unemployment results.” – Calvin Coolidge, US president, 1923-29, in his role as Mr. Obvious

“Unemployment is of vital importance, particularly to the unemployed.” – Edward Heath, UK prime minister, 1970-74

Every now and then you get some good news. Economists had projected a good solid 185,000 new jobs, with the range of expectations running from a low of 150,000 to a high of 240,000. What we got in the report two weeks ago was a boffo 271,000 jobs. Plus some green shoots of potential actual wage-push inflation, the kind of inflation pressure that most workers like, which means that, for a change, wages might start going up faster than inflation.

The unemployment rate dropped a whopping 0.01%, but that was enough to push the rounded number down to a headline 5% unemployment (actual was 5.04%).

In this article, we are going to look briefly at the latest employment numbers. Then we’ll explore some of the deeper, less understood facets of the employment data. For some of you this may be a lot of detail, but for those of us who think about employment (and you should, as it is THE ultimate driver for your business and investments), understanding how the numbers work and what they mean is important.

And now let’s take a look at the unemployment picture in America.

The Employment Numbers Say a Rate Hike Is Pretty Much Done

Let’s rewind the tape from an email sent out by Philippa Dunne of the Liscio Report so we can see where the new jobs came from:

Employers added 271,000 jobs in October, all but 3,000 in the private sector. Construction added 31,000 (well above its average of 19,000 over the last year, though two-thirds of the gain came from nonres specialty trade, those who finish buildings); wholesale trade, an above-average 10,000; retail, 44,000, also well above average; finance, 5,000, less than half its recent average; professional and business services, 78,000, well above-average; education and health, 57,000, somewhat above average; and leisure and hospitality, 41,000, also somewhat above average. Government added 3,000, all from state government; local was unchanged, and federal, off 2,000.

Manufacturing was unchanged.

This employment report was all about gains in services industries, plus a little in construction. Which squares with the data we have seen in recent months from the regional Fed banks. Manufacturing is getting soft, and services are doing well. Let’s look at a few charts that will help tell the story. The first is an amalgamation of the regional Fed manufacturing indexes. The second is the national manufacturing index, and the last one is the national non-manufacturing (read services) index.

Source

In researching this piece I also came across a very useful chart that breaks down unemployment by type. Let’s go straight to it and then add a few comments.

Source

First, the above graphs look at both the official unemployment rate and the broader rate, which is called the U6 rate. The gap between the two measures is now the smallest in more than seven years, a sign that slack in the labor market is diminishing. And as the Fed weighs a potential rate hike, what may be more important is the number of people working part-time who would prefer to work full-time – that number posted its biggest two-month decline since 1994. Janet Yellen has referred to this number as often as she has to any other specific number. It is on her radar screen.

I’m in Miami, where I’ll be speaking at a conference where my friend David Rosenberg will also present. David has been predicting wage-push inflation from a tightening labor market for over two years now. He kept talking about the data, and I would look at it, but my old eyes couldn’t see the same trend or interpret it the way he did. And I admit I may have teased him about the lack of actual follow-through on that bit of data. Today’s data suggest that even though it’s a little early to declare a trend, there is clearly a hint of wage-push inflation in the air. David may even start taking victory laps. The labor market is getting a little tighter; and for reasons we’ll go into below, it may be even tighter than is apparent from the nonparticipation rate. So David may very well be right. Finally.

As my friend Joan McCullough writes:

Wage growth: +2.5%. Can you smell the wage-push? That’s the intention, so get used to it. So while extremely premature based on the metrics provided yesterday, not the least of which is wage growth in the 3.5 to 4% range as desirable to achieve 2% inflation, this is a start. And as you know, the FED only needs a “start.”

Behind the Unemployment Numbers

When we look at employment stats, we can easily forget that these percentages are not just numbers. Each category includes real people. Some are happy with their employment classification, but many aren’t.

The BLS data don’t capture every nuance. Frankly, that would be an impossible task. Laid-off factory worker Bob who sweeps floors at minimum wage 40 hours a week while struggling to avoid foreclosure is “employed full-time.” Attorney Bill with a six-figure income and two paid-for homes is also “employed full-time.” Bob and Bill are in wholly different circumstances, but we don’t see that in the data. We have no good numbers on how many of the 149.1 million employed people look like Bob vs. Bill. Income statistics help, but plenty of financially stressed people have above-average incomes. And the income data used in “research” is often distorted by political agendas. Income data is one example of the sort of statistics that you can torture to make the numbers say what you want them to say.

The BLS data does give us insight into some other employment categories, and that’s what I want to discuss today. We will see how many people find themselves in less-than-ideal circumstances and consider why they are there.

Who Is Unemployed and Why?

The Labor Department’s monthly figures come from surveys of both households and employers. Data from the household survey is what gives us the unemployment rate.

The October BLS summary table tells us the civilian noninstitutional population was 251.5 million. This is everyone age 16 and over who isn’t in the military, imprisoned, hospitalized, in a nursing home, or otherwise separated from society. That is out of a total population of some 319 million.