What should we think about last week’s jobs report? As I am sure most of you have heard by now the official unemployment rate is finally below 8 percent at 7.8 percent, according to the Department of Labor’s Bureau of Labor Statistics. Since the release of the report the talking heads on CNBC have become screaming heads, and people such as the former Chairman and CEO of GE, Jack Welch, have accused the Administration of fudging the number for political reasons.
For the record, I do not believe there is any grand conspiracy to fudge the numbers. The problem with conspiracy theories is that they assume two things: competency and the ability to keep a secret. It would take an unbelievable amount of skill to fudge the numbers and actually get away with it, with hundreds of economists, market strategists and reporters checking every detail of your work. Then it would take an inhuman amount of humility not to have one person involved “tweet” it out to the world or update his Facebook status to read, “Just fooled America into believing unemployment is getting better.”
With all respect for Mr. Welch’s business career, the conspiracy theory just does not hold water. However, I understand the reaction; something strange happened in last week’s data and it was not just the unemployment report. For those like us who follow economic data daily, there seemed to be a pattern developing: starting around May the formerly mixed economic data started to be all negative. Manufacturing especially fell off the cliff. The Empire State manufacturing report was horrible. Shippers from Fed Ex to Norfolk Southern have warned on earnings, twice in the case of Fed Ex. The August jobs report was horrible. The only “good” data was coming from housing and frankly all that means is that we finally seem to have hit a bottom.
Then out of the blue came the Institute for Supply Management’s (ISM) manufacturing survey which showed a modest expansion in manufacturing activity, especially in new orders. This was taken as a big positive since the expectations were for continued slowing. After that we received another ISM report on the services sector that once again was better than expected. Then, finally came Friday’s big news about the unemployment rate. What has happened?
It seems to us that only one of two things could be occurring. One possibility is that we, and most other market watchers, have been wrong about the economy and we simply had a summer break in activity and now we are back to work. The recent data could support this outcome and the return to 2 percent growth – still slow, but better than the 1.3 percent of the second quarter and the seemingly even slower activity in most of the third quarter.
The other possibility is that these reports are statistical blips caused likely by the looming fiscal cliff. When one digs into the employment numbers, there were 114,000 jobs created in September. The population grew by 206,000, so jobs created obviously did not by itself lower the unemployment rate. What lowered the rate is that revisions added approximately 800,000 jobs of which approximately 600,000 appear to be part time. This is why the “underemployed” rate remained the same at 14.7 percent.
So we have a sudden increase in manufacturing orders,orders and a large increase in the number of part-time employees – many of whom are typically temporary. If I were a procurement officer in the Armed Forces and saw the cuts coming to my budget next year should the fiscal cliff not be averted, I would be stock-piling. If I were a civil servant with projects to be done I would be doing everything possible to get them done by year-end, including hiring part-time and temporary workers. In other words this could be a natural reaction to the impending fiscal cliff.
How will we know? We believe the answer will be found in third-quarter earnings reports and company forecasts. If things are as bad for companies as we previously believed, then it is likely that these improvements are illusionary blips. If, on the other hand, companies surprise on the up-side, or more importantly report signs of improving activity, then this may be a real improvement. We hope for the latter but the prudent course is to be prepared for the former. With the International Monetary Fund announcing yesterday that the risk for another global recession is “alarmingly” high, that unfortunately seems like the safer bet.
Chuck Osborne, CFA
Managing Director
