Decline In Unemployment Rate Belies The Real Story
There was a lot of excitement Friday about the latest Employment Situation report from the Bureau of Labor Statistics. The headline news was that the unemployment rate for October fell to 5.8%, its lowest level since July 2008. Even the broader U-6 measure of unemployment (which also includes persons marginally attached to the labor force and persons working part-time for economic reasons) is down to 11.5%, its lowest level since September 2008. That’s being received as good news.
The other headline is that nonfarm payrolls increased by 214,000 in October. While that is considerably less than what economists were expecting, it too is being received as good news. And thanks to upward revisions to prior months’ estimates, nonfarm payrolls have increased by more than 200,000 per month for nine months in a row. The optimists are celebrating that the average monthly increase for the past 12 months is 220,000.
Yet the fact is that job growth remains weak–and the Federal Reserve knows that. That is precisely why the Fed is promising to keep interest rates low. While the Fed ended its program of quantitative easing and will no longer purchase Treasuries and mortgage-backed securities on a monthly basis, it plans to keep the fed funds rate near zero percent for a “considerable time.” Most economists expect the Fed to maintain this policy until at least the middle of next year.
Clearly, if things were really getting better, the Fed would not find it necessary to maintain such a drastic policy. Here is why the Fed is still worried. As stated above, the average monthly increase in non-farm payrolls over the past 12 months is 220,000. Over the 12 months prior to that, the average monthly increase was 199,000. In other words, there has not been much improvement over the past year. Furthermore, the employment participation rate remains incredibly low. It ticked up in October to 62.8% from 62.7% in September. It is nice that it moved in the right direction; but September’s reading was the lowest in almost four decades. There are simply way too many people who have given up hope of finding work.
One reflection of how bad the employment market is the poor state of the housing market. Mortgage rates are at incredibly low levels, yet mortgage applications are down and new and existing home sales remain weak. This implies that when it comes to buying a house, a good job is more important than the level of interest rates. Even if mortgage rates fell to zero percent, unless they have good jobs with rising incomes, would-be home buyers will remain on the sidelines.
According to the Census Bureau, during the third quarter of this year, the U.S. home ownership rate was just 64.4%. That is the lowest level since the first quarter of 1995. With so many millennials still living with their parents, household formation has plummeted. This implies that there is a lot of pent up demand for houses. Unfortunately, that demand won’t do the economy any good until the employment market gets significantly stronger.
Read Vahan’s blog at Janjig.com.
Vahan Janjigian is Chief Investment Officer at Greenwich Wealth Management, LLC, a SEC Registered Investment Adviser, where he manages portfolios for clients in separate accounts. Dr. Janjigian is a former Forbes magazine columnist and former Editor of the Forbes Special Situation Survey. According to Hulbert Interactive, his stock picks returned more than 18% annually during one of the market’s worst 10-year periods.
Dr. Janjigian holds the Chartered Financial Analyst designation and has earned degrees in general sciences and finance from Villanova University and Virginia Polytechnic Institute and State University (Virginia Tech). He previously served on the faculties of several universities, including the University of Delaware, Northeastern University, the American University of Armenia, and Boston College, where he taught courses in corporate finance, financial theory, investments, accounting, and economics; and he currently teaches a seminar on equity investment management to business executives in Singapore through Baruch College’s Zicklin School of Business. Dr. Janjigian has served as an expert witness on matters involving portfolio management, churning, suitability, and hedge fund manager compensation.
Dr. Janjigian has published his research in numerous scholarly and professional journals; and has been quoted in many leading newspapers and magazines, including Barron’s, Forbes, The Wall Street Journal, and USA Today. He appears as a guest commentator on various television and radio networks, including Fox, CNBC, MSNBC, and CBS Radio. Dr. Janjigian is the author of Even Buffett Isn’t Perfect (published by Penguin) and co-author of The Forbes/CFA Institute Investment Course (published by Wiley).