Employment plunged by 735,000, the unemployment rate rose to 7.3%, and the labor participation rate dropped to a 35-year low, as 932,000 people left the workforce in October. However, the headline you probably saw claimed 204,000 new jobs were created. Unfortunately, in the crazy world of employment statistics, all of the above are correct. Why the mass media chose to trumpet the single positive data point is anybody’s guess.
Conflicting and confusing data is a mainstay of employment reporting, and most of it stems from the fact there are two very different reports issued on the same day. The number of new jobs comes from the “establishment survey” while the “household survey” generates the number of people employed, unemployed, in or out of the workforce, and the official unemployment rate.
The unemployment rate is typically the headline number each month, and in October the official U-3 unemployment rate increased for only the second time this year, moving back up to 7.3%. This was certainly worthy of a headline, yet the press release issued by the Bureau of Labor Statistics (“BLS”) failed to mention that the rate rose at all. Instead, the BLS chose to claim the “unemployment rate was little changed” in both its opening paragraph and in the main body.
Part of the 735,000-person drop in employment was government workers furloughed by the government shutdown. The October report classified these people as “unemployed on temporary layoff”, and the household survey indicated an increase of 448,000 people fitting this description. The BLS noted it believes the report understated this figure and is an example of what happens when “respondents misunderstand questions or interviewers record answers incorrectly.” That is presumably its way of addressing the 287,000 reduction still unaccounted for.
One area where the data was supposedly unaffected by the government shutdown is the number of people that are not in the labor force. This category also includes the unemployed who have become discouraged and given up looking for a job. According to the BLS, nearly a million people left the labor force in October. A decrease of 932,000 people in a single month is nearly incomprehensible, yet it is another key data point the BLS and mainstream media glossed over. As a result, the work force participation rate fell below 63% for the first time since March 1978, more than 35 years ago. You can read the full BLS report here.
The bond market also chose to focus on the one positive data point from the establishment survey, namely the 204,000 new jobs. Unfortunately, bonds do not like good news, so prices dropped and yields jumped in Friday’s trading. With job growth coming in so robust, the talk once again turned to speculation as to when the Fed would begin tapering its bond purchases. Given the contradictions in the October report, we’re aligned with analysts who believe the Fed requires more evidence of sustainable growth before tapering begins.
Results were mixed for the week, but Industrials finished on the upside and kept its #1 ranking. Technology was the best performing sector category and climbed two spots to grab second place. Technology’s rise pushed Consumer Discretionary down a notch. The Materials sector has been lagging most of the year, although it has been improving recently and this week climbed to fourth. Health Care halted its recent slide in the rankings and moved back into fifth place. Consumer Staples and Energy continue to hover below the midpoint. Telecom took a huge drop, moving from third a week ago down to eighth today, yet it remains in a firm uptrend. Financials and Utilities swapped places while continuing to lag the field. Real Estate resumed its negative trend, and the group sits about 14% below its May peak.
Large Cap Growth maintains its position at the top, and the Style rankings became extremely compressed. Only six points separate the top and bottom as the Style regime change continues to unfold. Small Caps have led the market rally for most of the past eight months. During that time, relative strength aligned itself with inverse market capitalization, putting Micro and Small Caps on top while Mega and Large Caps hugged the bottom. Strange intermediate results can occur during major transitions, and we noted such an anomaly last week when Large Cap Growth and Large Cap Value were at opposite extremes. Much of that is now resolved. Large Cap Value surged six places and Mega Cap climbed four, placing the four largest capitalization categories in the upper half. On a longer-term basis, Small Caps have outperformed Large Caps for the past four and a half years. It is too early to claim that run is over, as this could be just a temporary leadership change like what occurred in mid-2011.
Today’s Global rankings appear quite jumbled from a week ago, yet no region has been able to unseat Europe at the top. The U.S., benefiting from improved strength in the dollar, climbed two spots to second and is now poised to challenge Europe for the leadership position. The U.S. was in tenth place just a month ago, so even though this year’s rally is showing signs of fading, the U.S. is improving relative to other regions. Strength in the dollar means weakness in other currencies, and that contributed to the U.K.’s slide to third place. World Equity, EAFE, and Canada all moved up a notch as Pacific ex-Japan fell from third to seventh. Although the Pacific ex-Japan category consists solely of developed nations, the region’s fortunes are often aligned to those of developing countries, and this week they took a hit. Latin America fell hard enough to put itself into a negative trend and drug Emerging Markets down with it. China was able to insulate itself somewhat but still felt the pressure. Japan ignored the woes of the developing market categories and used the opportunity to climb out of its basement position and jump ahead of all three.
“The Fed will do “whatever it takes” and that will mean keeping a historically unusual amount of monetary stimulus in place and possibly providing more stimulus.”
Narayana Kocherlakota, Federal Reserve Bank of Minneapolis President (11/12/13)
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