SERIOUS MONEY:RELATIVE CALM returned to Wall Street in recent weeks as a raft of economic data surprised on the upside, albeit modestly, leaving investors with the impression that the worst of the current cyclical economic storm had passed.
Indeed, the upward revision of first-quarter economic growth from 0.6 per cent to 0.9 per cent led many commentators to conclude that a recession was now unlikely, even though most of the weakness in final sales to domestic purchasers was preserved.
The bulls' optimism proved to be wishful thinking and the release of May's payrolls report, which saw the unemployment rate jump by half a percentage point to a cycle high of 5.5 per cent, erased the positive sentiment.
Stock prices responded with their first daily loss of more than 3 per cent since February. The price action saw the market drop below both its 50-day and 100-day moving average, which suggests that further weakness lies in wait.
The bulls remain undeterred and were quick to seize upon the deficiencies that cause the monthly payroll numbers to be less than reliable. One notable deficiency is the seasonal adjustments applied to the employment data, which can occasionally see the numbers go awry.
This seems to be the case in May, as the numbers of teenagers entering the labour force surged due to an earlier end to the academic year than usual.
The Bureau of Labour Statistics (BLS) typically adjusts for this phenomenon in June, so the 276,000 jump in the number of unemployed has undoubtedly inflated the overall unemployment rate.
The bulls' argument certainly has merit but it is far too limited. A more thorough analysis reveals that the labour market shows little sign of stabilisation. Indeed, the jump in the teenage unemployment rate accounted for only a third of the increase in the rate of joblessness as weakness was evident across all age categories.
The continued deterioration is clear when one considers that the number unemployed for 15 weeks or more increased by 147,000 or 6 per cent on the month and by 537,000 or 24 per cent over the past 12 months.
This group accounts for one-third of the unemployed, a fact that cannot be dismissed so easily.
The fragility of the labour market is corroborated by further snippets of data contained in the data release. The BLS reports that the number of persons working part-time for economic reasons increased by more than 300,000 over the past two months and is up by 764,000 year-on-year to 5.2 million. It notes that these "individuals indicated that they were working part-time because their hours had been cut back or they were unable to find full-time jobs".
The employment report also details the number of persons who "were not currently looking for work specifically because they believed no jobs were available for them". There were 400,000 such discouraged workers in May.
The number of discouraged workers combined with those working part-time for economic reasons yields a broader measure of the unemployment rate and, at 9 per cent in May, is up 1.4 percentage points over the past year - a larger rate of increase than the headline number.
It is no surprise that the bulls highlight the numbers that support their case and ignore those that don't, but the focus on statistical deficiencies arising from seasonal adjustments is entirely disingenuous, as the primary factor behind the data's unreliability at turning points in the cycle is completely ignored. This is the birth/ death adjustment, which was introduced in 2003 to account for the significant number of new jobs created by small businesses at the start of an economic upturn. The BLS fails to capture this in its establishment survey of some 400,000 businesses due to lags and the survey's focus on large corporations.
Unfortunately, since the adjustment is based on a time-series model, it will not detect turning points in the cycle where business deaths become more frequent than usual, leading to phantom job creation in the data released. This becomes evident in the numbers as the adjustment increasingly becomes the dominant source of new jobs and is clearly distorting the numbers today.
Payroll employment has increased by 104,000 over the past year but only because of the said adjustment.
Excluding the model's output, a total of 726,000 jobs have been lost and, consequently, the labour market is far weaker than the official numbers suggest.
The employment numbers were decidedly weak in May despite the bulls' protestations otherwise and the data implies that there is no relief in sight. The diffusion indices remained below the break- even level, suggesting further weakness ahead, while temporary employment, a leading indicator of labour market conditions, continues to decline and at an accelerating rate.
Data emanating elsewhere corroborates this conclusion, with Manpower hiring intentions dropping to a four-year low and Challenger layoff announcements jumping to a 2½-year high.
The worst of the cyclical economic storm has not yet passed as a contracting labour market alongside declining household wealth, limited debt capacity, tight lending conditions and rising fuel costs present a serious challenge to the consumer's free-spending ways.
To quote Winston Churchill: "This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."
