Job Picture Improving, But Slowly

On the first Friday of each month at 8:30am, the Bureau of Labor Statistics (BLS) releases information on job gains or losses from the previous month.  This is referred to as the nonfarm payroll report. 

The November report was released this morning, indicating a gain of +39,000 jobs.  This was below the consensus expectation of +145,000 jobs.  The unemployment rate increased from 9.6% to 9.8%.

Many people are questioning the economic recovery since the unemployment rate continues to climb.  The first thing to remember is that there is a large margin of error in the nonfarm payrolls report (plus or minus 100,000).  This means that the current report could be anywhere from +139,000 to -61,000.  As a frame of reference, it takes a monthly increase of about +125,000 jobs to keep unemployment rate steady and +250,000 to make it decline.  Furthermore, the numbers are often revised significantly in subsequent reports.  For example, in September the original report was a decline of -95,000 in total payroll employment.  This was revised upward to -41,000 in October, then up again to -24,000 in November.  October was initially stronger than expected at +151,000 versus an expectation of +60,000.  In November, this gain was revised upward to +172,000.

Earlier in the week, the ADP jobs report came out slightly better than expected.  While ADP is the nation’s largest payroll processor, I have found that their report has its limitations.  The ADP report is more focused on small businesses, while the government statistics are broader in nature. Unfortunately both the BLS and ADP reports can create short-term volatility in the stock market.  In the long run, it’s like last year’s Super Bowl:  I don’t even remember who played.

Rather than focusing on the month-to-month changes, we believe what is important is the bigger picture.  We are encouraged that payroll employment has increased by an average of 86,000 per month since its recent low point in December 2009.  Since that time, the economy has added about 1 million jobs.  Jobs are being created, although a bit more slowly than we would like.  It is important to remember that the current pace of job creation is a dramatic improvement from the monthly job losses of -524,000 to -651,000 that we were seeing in late 2008 and early 2009.  Unemployment is a lagging indicator, and will be one of the last things to improve as the economy recovers.

 Bill Hansen, CFA

Managing Partner

December 3, 2010

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