Snow job!

Marie M. Schofield, CFA, Chief Economist and Senior Portfolio Manager | January 13, 2014

  • The Nonfarm Payroll report for December showed weaknesses that cannot be easily dismissed.
  • Participation rate continues to fall; in the last year the labor force shrunk by a half-million.
  • Beyond unusual weather-related effects, discomforting trends continue to show stress in the labor markets.

The Nonfarm Payroll report for December was certainly an outlier showing payrolls rose a mere 74k (far below consensus of 197k). The private sector added 87K, but the majority came from retail (+55k) and temp help (+40k), areas noted for low wages. Outside of these two sectors, payroll counts were weaker across a broad number of industries—either smaller gains or outright losses. Construction shed 16k jobs while information/telecom shed 12k. Professional and business services added only 19k, despite the strong rise in temp hiring, due to a 25k decline in accounting and bookkeeping services. The public sector shed 13k payrolls.

Chart: December nonfarm payrolls report

Some items in this report can be dismissed as temporary or one-time effects that will reverse. However, some items in the report cannot be easily dismissed. Weather was obviously a factor that can be forgiven, with 273K “not at work due to bad weather,” the highest number in 35 years. This is confirmed by weakness in Construction, Transports, & Hospitality, where weather effects are greatest. Seasonal adjustments can also add some volatility, such as in courier services. The BLS expected big job gains but smaller gains appeared, causing this area to actually lose jobs. But fewer staff additions here could go a long way to explaining the pitiful service at UPS during Christmas.

Overall though, there was errant unexplained weakness in many sub-sectors, like motion picture/sound recording, accounting & bookkeeping services, restaurants and everywhere in health care (which saw the first declines since 2003). The weakness in these industries, viewed against strong gains in Retail and Temp Help (ahem, low wage) industries, and middling gains in remaining industries provided a confusing backdrop to the strength seen in other December data. There was little change in three-month averages too. Q4 saw 172K average payroll gains versus 167K in Q3 and 182K in Q2. For the 2013 year as a whole, job gains averaged 182K monthly, versus 2012’s 183K and 2011’s 175K. The stubborn trend of blah job gains continues, with about 2.2 million new jobs in each of the last four years. Regarding reliability, heavy revisions to prior month data are continuing and this data will surely be revised. The BLS is only 90% confident that the actual monthly change is within 90,000 plus or minus of what they report.

Despite the cheery news of the drop in the unemployment rate to 6.7% in December from 7.0%, there were warnings flags in this report as well. The Labor Force Participation Rate fell to 62.8%, the lowest since 1978. Behind this, the ranks of the unemployed fell by 490K persons, with 143K finding work but 347k leaving the labor force entirely. So most (75%) of the drop in the unemployment rate last month was due to falling labor participation. In the last year the labor force shrunk by a half-million. What this means is that the entire increase in the working age population in 2013 (2.4 million additional people) decided to sit out the labor market entirely, together with another half million people that were either working or were looking for work. That is a scary statistic. While baby boomer retirements were thought to be putting some downward pressure on participation rates, the largest demographic exiting the labor force are those ages 45-54 years old, predominantly men, with participation here falling nearly 2%!

Chart: Labor force participation by age

It is unclear if the December expiration of unemployment benefits is having some effect here. Many expected some portion of these individuals would stop looking for work and exit the labor force which would cause the unemployment rate to drop, but the timing is a little early. Participation rates are also down for teenage women, who may be furthering their education. But participation rates for people age 65+ are up 3%. Weather effects had their footprint on other data here as well with workweek and aggregate hours down due to workers sitting idle. So while we can and should discount some of the accuracy in the labor market reports this month due to unusual weather-related effects, there remain discomforting trends that are continuing to show stress in the labor markets.