By all appearances, yesterday's nonfarm payroll report for April was an absolute blowout.
According to the Bureau of Labor Statistics 288,000 nonfarm jobs were created in April, with the nation's unemployment rate plunging 0.4% to 6.3%, its lowest level since September 2008. To add sprinkles atop an already sweet report, the BLS also increased its estimates of hiring in the two prior quarters by 36,000 total jobs. By comparison, Wall Street economists had only been forecasting nonfarm payroll growth in a range of 200,000-210,000.
U.S. unemployment rate. Source: Bureau of Labor Statistics.
As I said, by all accounts it was a phenomenal report -- expect for the fact that it really wasn't.
Before I even attempt to counter the argument that the jobs market isn't completely healthy, let me clearly concede that it's doing far and away better than during the heights of the recession. More people have jobs, and consumer spending is rising, which is important since it accounts for about 70% of U.S. GDP.
But overall, the jobs market isn't as healthy as you might think. There are two figures that I believe stand out and prove this point.
The dreaded labor force participation drop
First, a rapidly falling labor force participation rate is artificially deflating the unemployment rate. Since the beginning of 2008, labor force participation has dropped from 66.2% to tie a 35-year low in April of 62.8%.
U.S. labor force participation rate. Source: Bureau of Labor Statistics.
There are, of course, some perfectly logical reasons why the labor force participation rate is falling. Baby boomers, for instance, began reaching their retirement age a few years ago and are beginning to drop out of the labor force on their own accord.
In addition, some people are dropping out of the labor force to go back to school. But before you start blaming school for the rapid fall in labor force participation, consider that the National Center for Education Statistics found 18.2 million students enrolled in college in 2007, compared with just 17.5 million as of April 2013. In other words, the number of people going to college has dropped within the past six years -- hardly convincing evidence.
What's more likely to have caused this drop in labor force participation since 2008? I believe it could be that this past recession was so severe, and companies took so long to eventually open their wallets and begin hiring again, that discouraged workers simply dropped out of the labor force altogether. If you need further proof, simply look at the following chart, which shows the number of workers in millions that currently aren't in the labor force but would like a job right now.
U.S. workers not in labor force that want work now. Source: Bureau of Labor Statistics.
Although this figure has dipped since its high in May 2013, it's still no lower than it was five years ago. The translation is that we have nearly 6.1 million people out of work who want a job right now, compared with less than 5 million before the recession.
A more direct comparison of nonfarm payrolls on a constant labor force participation basis shows that the 138.25 million working people from April 2014 matches up almost identically with the 138.28 million from May 2008. To put this into even easier-to-understand terms, the nonfarm labor force hasn't grown in six years.
Source: Bureau of Labor Statistics.
Finding work is really difficult for the unemployed
The other major problem with the jobs market is that the currently unemployed are having a really difficult time finding work.
The truth of the matter is that there is no such thing as zero unemployment. There will always be people looking for work and businesses cycling through boom and bust cycles that create hiring bursts and unemployment lulls. Over the long run, however, an unemployment rate of 4%-6% has been fairly normal.
What has been out of the norm, though, is the average duration of unemployment for the U.S. labor force. Since 1948, all 11 recessions have led to a surge shortly thereafter in the average length of time workers are unemployed. Out of those 11, the Great Recession from a few years ago stands head and shoulders above the rest. Mean duration of unemployment surged from just 16.5 weeks to as high as 40.7 weeks over the span of just three years.
Average duration of unemployment. Source: St. Louis Federal Reserve.
Before the Great Recession, the U.S. mean duration of unemployment had poked its nose above 20 weeks only twice, and both times for very short periods. This recession saw mean unemployment duration blow through those previous levels. What this tells me is that either employers simply aren't hiring as robustly as the six-year low in the unemployment rate would indicate, or they're being very specific about the skill sets they're looking for, and a good portion of those currently unemployed may not have the required or desired skills. Although the number of people unemployed by 15 weeks or more is down year over year, it still sits at a remarkably high 50.9% -- not exactly a figure that convinces me of a sustainable improvement in the jobs market.
As I said, this jobs market is vastly improved from the depths of the recession, but I'd hardly go trumpeting this latest BLS report as any justification that the jobs market is healthy or that the markets can head higher. If investors aren't careful, their blind acceptance of this jobs market bullishness could come back to bite them -- but that's merely the opinion of one skeptic.
