By John L. Chapman, Ph.D.    Canton, Ohio.        May 5, 2012

The U.S. economy added 115,000 non-farm payroll jobs in April, and the unemployment rate fell to 8.1%.  We analyze what this means ahead of important weekend elections in Europe.

The Department of Labor’s Bureau of Labor Statistics released its April jobs report Friday morning.  Here are summary highlights:

(1)   Non-farm payrolls increased 115,000 in April (against consensus expectation of 160,000), marking the second straight disappointing month after three strong months from December-February that averaged 252,000 new jobs.  There were +53,000 in revisions to the prior two months (February revised +19,000 to 259,000, while March revised +33,000 to 154,000 new jobs).

(2)  The unemployment rate fell to 8.1% from 8.2% a month earlier, from 9.0% a year earlier, and from 10.0% two years earlier, in April 2010.  Unemployment for adult men and women averages 7.5% currently, but is 24.9% for teen-agers.   Since the trough of employment losses in February 2010, almost four million jobs have been created in the United States.    Private sector payrolls increased 130,000 in April (government jobs continued their slow but steady contraction, -15,000), led by gains in professional and business services (+62,000), education and health services (+23,000), manufacturing (+16,000), and leisure and hospitality (+12,000).  Other than government, transporation and warehousing (-16,600) were the only other notable categorical job losses.   

(3) The average workweek for all employees remained unchanged from March at 34.5 hours (and virtually unchanged from 34.4 hours a year ago), while average earnings for all for all employees on non-farm private payrolls rose by 1% to $23.38 (up +1.8% in the last twelve months).  This is below the consumer price index rise of +2.7% over the same period, indicating a decline in real wages per hour, and indeed, given the increase in weekly wages in the last year (from $790.17 to $806.61, or 2.1%), it is likely that even on a total cash compensation basis, per capita incomes have declined slightly (Table B, Establishment Data).  Hence we cannot agree with press reports indicating real wage gains in the last twelve months.

(4)  The civilian labor force participation rate is down to 63.6%, a 33-year seasonal low for April, and the lowest in any case since December 1981:   

Chart I. Civilian Labor Force Participation Rate (1948-Present)

This is down from the all time high of 67.3% reached exactly twelve years ago, in April, 2000, and down from 65.6% three years ago, in April 2009.    We called our friend Gary Steinberg at the Department of Labor in order to make sense of labor market developments of late.  Mr. Steinberg is a 20-year veteran statistician on the staff at the Bureau of Labor Statistics (BLS), the official “score-keeper” of employment data within the U.S. government, and he reminded us of the following:

i.  The Bureau of Labor Statistics has been collecting data in virtually the same format since 1948, and has a high degree of confidence in its time-series data comparisons as a result.  Further, BLS has precisely one political appointee, its director, and the organization prides itself on its impartiality.

ii.  The Household Survey is a panel data study conducted with 60,000 households across the United States every month, with the same set of households involved on a rotating basis.  The canonical unemployment statistic is derived from these surveys: the numerator is the number of people over age 16 actively seeking employment within the most recent four weeks (12.5 million in April), who have no labor income presently, while the denominator is the total civilian labor force (12.5 million unemployed + 141.9 million employed = 154.4 million).

iii.  The Household Survey unemployment calculation does not include “marginally attached workers”: these are persons who currently are neither working nor looking for work, but indicate that they want and are available for a job, and have looked for work sometime in the recent past year (just not in the past four weeks).  Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job even though they want one; the most common cited reason for not looking is their not believing any job openings exist for them.  In any case, there were 2.4 million marginally attached non-labor force job-seekers last month.

iv.  The Establishment Survey is a bigger effort for the BLS:  140,000 business establishments and government agencies are surveyed, totalling nearly 500,000 worksites.  Small businesses are well-represented in this sample as well as Fortune 500 enterprises, and the total job count changes (e.g., +115,000 in April) are derived from this survey.  The statistical inference work with this survey includes narrower confidence intervals because of the larger data sample; in practical terms, this number is given with more reliability, given the higher probability that it is closer to the “exact number” than the unemployment rate statistic derived from the Household Survey.      

The question arises, why is this recovery less robust, both in terms of employment as well as output gains, than the other deep post-World War II recession of comparable intensity (1981-82), or indeed, most recessions since 1950?  Economist David Malpass of Encima Global Advisors provides a likely hypothesis that well encapsulates current challenges:

U.S. growth has been held back during the recovery by several factors that discourage business investment in people, equipment, and structures. First, the U.S. tax code is deeply anti-growth due to its uncertainty, complexity, and high rates. Second, health-care costs continue to rise rapidly, and the current health-care legislation has created uncertainty and even higher future costs. This is discouraging businesses from hiring, and harming worker mobility. Third, the near-zero Fed funds rate and the Fed’s disruption of the bond market have subtracted materially from GDP due to low payments to savers and the re-channeling of credit away from dynamism. Finally, bank regulatory policy has been pro-cyclical (meaning that it has fed bubbles and worsened economic slowdowns). This has channeled credit away from small banks and small businesses…(in favor of big companies only).

 Mr. Malpass implicitly includes pending tax hikes scheduled to hit in 2013 when mentioning tax “uncertainty”, and this affects hiring and new job creation today. Reuters, for example, reported this week that the rate of start-up new venture creation hit its post-war low in 2010 (when 394,000 new businesses were formed, creating 2.3 million jobs), a figure that scares Robert Litan of the Kauffman Foundation, whose research shows that all net-new job creation in this country occurs in firms less than five years old.   

This “uncertainty” is also what is likely driving the consistent decrease in labor force participation in the last several years.  In the last three years, the rate has dropped from 65.6% to its present 63.6% — this represents 4.86 million workers who were in the labor force three years ago in spring 2009, but no longer are now – yet, they are also not counted in the ranks of the unemployed since they are not desirous of work now.  Theories abound as to why this is so: an aging baby-boomer workforce hitting retirement age is often one answer, along with the theoretical hypothesis from labor economics that higher levels of wealth beget a choice for more leisure and less labor in a substitution effect that swamps the income effect of higher incomes inducing more labor.

Yet the BLS’ Mr. Steinberg shared data with us that belies this thesis. In fact, the labor force participation rate for seniors (age >55) has increased in secular fashion, from 29-30% in the mid-1990s to around 40% in recent years.  Indeed, between April 2009 and April 2012, while total participation declined by those 4.86 million workers, a full two percentage points, the rate for those 55+ actually increased from 39.9% to 40.3%.  And working seniors are way up since the mid-1990s, when their participation rate had fallen to 29-30%, from around 42% in the late 1940s.

Rather, it is the age 25-54 group, whose participation rate had increased from 70% in 1948 to 83-84% by the mid-’90s, which has seen a drop involving the most lost workers, from 82.8% to 81.3% in the last three years.  Likewise, the age 16-24 age cohort, which had increased from the high 50s percentiles in the late 1940s to 65-66% by the mid-’90s, dropped dramatically since April 2009, from 57.8% to 54.4% today.     

What Does All This Mean for Investors in the Context of European Elections Now, and Then Longer Term?

(a) The implications for these changes are not good in the long run, and support the increasingly accepted view, from Mohammed El-Erian to the Federal Reserve Research Staff consensus to the CBO, that the United States is in a new secular era of diminished GDP growth potential (now seen to be in the 2-2.5% range from the long run average near 3.4%).  The labor market from March to April 2012 is a microcosm of our challenges now: while the number of employed people fell (-169,000), the number of unemployed people fell even more (-173,000), thanks in large part to those net new 115,000 jobs.  Adding the two together caused the civilian labor force to shrink (-342,000), and the new unemployment ratio came in at 8.1% (and, as the civilian population aged 16 and up grew in the United States by 180,000 between March and April, those not in the labor force grew by +522,000 in this same one month). 

These trends diminish the capacity of the U.S. to grow faster than its debt burden in the years ahead; the pending obligations in transfer and retirement obligations to America’s aging population are well known,  but cannot be shouldered if young workers especially are not in the workforce gaining skills and knowledge to allow them to become more productive in the future — in order to meet those obligations.   Indeed the “underlying math” on all this could soon become quite stark:  the age 16+ population has increased +9,600,000 since the onset of the late recession, but the labor force has increased only +447,000.  Meanwhile there are still roughly 5 million fewer jobs than there were 4 1/2 years ago, and 4.9 million more who are officially unemployed.

(b) Adding to concern about future employment to drive growth that would, in turn, cover government entitlement and transfer programs is the lack of investment or, as we like to refer to it by its proper name, capital formation.  The following chart tells an ominous story about the future of the U.S. economy, absent any dramatic changes in policy:

Chart II.  Real GDP and Real Capital Investment, 1948-Present (Log Scale, 2005 Dollars)

Indeed, what the graph shows is that capital investment has fallen dramatically since its 2006 (pre-recession) peak, and is now all the way back to levels first attained in 1998.  But the U.S. economy now is nearly 30% bigger, in real output terms, than it was 14 years ago.  The level of investment needed to create jobs to produce output (and incomes) that will cover incipient federal obligations is roughly $3 trillion greater than where it is now, according to economists such as the Independent Institute’s Robert Higgs, or Forbes analyst Louis Woodhill (in other words, real capital investment would need to be more than double what it is now, and on a growth trajectory above its historic growth path, to cover future fiscal gaps).

To say this differently, the classical economists’ distinction about “productive” and “unproductive” spending applies here: more of the former (long term investment in the capital stock) relative to the latter (consumption) is needed over time in order to create millions of new jobs.  But we have clearly gotten less investment as a percentage of GDP.  And as economist David Malpass notes above, there is little rational reason at the moment to pursue major new investment projects, given future policies that may well be strongly deleterious to growth, starting with major new tax increases in 2013.  We do not see evidence of investor cognizance of all this in current U.S. equity prices, but expect increasing “noise” about all this during the summer, and consequent market choppiness.    

(c)  The near-term elections in Europe (viz., France, Greece, Netherlands, the U.K.) may roil European bourses this month, and in turn, this is likely to have a dragging effect on U.S. (and global) market performance.  In France, especially, the election of Mr. Hollande as President will mean a harder Left political leadership there, and one more virulently anti-capitalist than when the Mitterands occupied the Elysée. France’s fiscal situation is more dire than that of the Mitterand era, however, so the brutal Hollande tax and business oversight schemes may in time not see the light of day.  Still, for our purposes, the Leftward tilt in Europe, including by-elections in the U.K. and a possible new government in Greece, will, along with the seemingly endless recession there, add to investor disquiet in the United States as much as the unwelcome jobs report for April.

The bottom line is, along with declining profit growth, there are reasons to be very cautious and expect a continuing sideways market, that may well include a mild correction this summer.  All of this, we continue to believe, portends a “QE3” by another name from the Federal Reserve, which in the short run adds to market buoyancy, and hence our seemingly dissonant belief in 2012 gains overall for U.S. equities.  Investors do need to understand that, taking a decade-long view from here, we are likely in an era of long market torpor now; the ’80s and ’90s are in the rear-view mirror; and, radical uncertainty is not an inapt description of the environment moving forward.  In such a world,  efficient global diversification and liquidity to co-opt special situation opportunities as they arise are of capital importance.

But having said all this, let us end on a hopeful note: the possibility continues to build that there will be better policies out of Washington moving forward — the Dow at 13,000, for example, does not anticipate anti-growth tax increases in 2013, when one models capitalized earnings and a modest growth rate.  Indeed current market valuation may well reflect an uncertainty discount from Dow 15,000, coupled with anticipated Bowles/Simpson-like tax reform that would otherwise portend Dow 11,000.  Again, liquidity and a skilled platform for diversification are tantamount to useful call options on a future currently hard to fathom.         

For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, John Chapman can be reached at The views expressed here are solely those of the author, and do not necessarily reflect that of colleagues at Alhambra Partners or any of its affiliates.

Click here to sign up for our free weekly e-newsletter.