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December 5, 2008 This is the grim economic news we woke up to this morning: The U.S. lost 533,000 jobs in November, the 11th straight month of declines, bringing the nation's unemployment rate to 6.7%. The decline was the largest drop in non-farm payroll jobs since November 1974 (34 years ago) and far exceeded estimates, which had predicted a loss of 350,000 jobs. The news accounts to this effect, and some far more shrill, appear to be so dire as to be deemed historically significant. But are they really? What are investors to make of this? The latest round of economic news is important, but the data presented are no worse than what we've been seeing. And the news may well be judged to be far better than what the media is reporting because the news is too technical for most journalists to understand. Let's all take a deep breath. It is time, my good friends, to apply the brakes of perspective -- and understand why this number doesn't signal the end of the world. First, See the Big Picture We must remember the words of the great algebraist Carl Jacobi, who said, "Invert! Always invert!" If we're going to look at how many people are unemployed, then we must also look at the number of people who are, in fact, employed. While it's true that the Bureau of Labor Statistics counts 10.3 million people as without jobs, the government also tells us that 145.0 million people remain employed. Even if you accept the 6.7% jobless rate, then more than 93 people out of 100 who are able to work have a job. Second, Compare the Comparison Say the Dow falls 40 points today. No one's going to be too impressed, right? Yet when that news hit Wall Street in 1929, people were quite concerned. So let's look at today's jobs report not in terms of jobs lost but in terms of percentage of work force affected. In 1974, the non-farm labor force was 78.3 million, and the 602,000 jobs it lost in November of that year represented 0.8% of it. But today we have nearly twice as many workers, and the loss of 533,000 jobs represents only 0.4%. Third, What is it We're Actually Counting Here? We should remember how unemployment numbers are calculated. They're not arrived at by counting people in soup lines, they're compiled using a national survey. Many in this nation are insured against joblessness and are supported with unemployment benefits. And while no one wants to be on the receiving end of an unemployment check for very long, these people aren't totally out in the cold, and many in Congress favor expanding these benefits. Losing a job may mean a bleak Christmas, but there are support networks in place to tide people over during their lapse from the payroll. Fourth, Consider the Future We must ask if these jobs are likely to come back. In many cases, they are. This tidbit might be hard for some reporters to find -- it was very effectively hidden all the way down in the fourth paragraph of the Department of Labor's news release: "Among the unemployed, the number of persons who lost their job and did not expect to be recalled to work increased by 298,000." In other words, 235,000 of the workers -- or 44.1% -- expect to get their jobs back sooner or later. They fully expect to be called back to work. That should remind us that some unemployment is natural, if only because people switch jobs. When there's no "give" in the employment level -- when it is what economists call inelastic -- then only one thing can happen: Employers must start paying more for workers. When this happens en masse, it causes inflation. In fact, full employment can be every bit as economically dangerous as unemployment. Given the two options, most would rather see unemployment's effect, a temporary pause in growth, than the dramatically higher inflation that full employment causes. Fifth, Look at the Raw Data Let's make sure that there is no statistical sleight of hand going on. I like to see if there are any "big numbers" that jump out and help explain things. And indeed, there are in this case. Here's a great barroom trivia challenge: Do you know who the largest group of unemployed people is? It's teenagers. Believe it: The Bureau of Labor Statistics reports that 20.4% of teens in the workforce, more than one in five, does not have a job. And if there was a silver lining, the unemployment rate actually declined by -0.2% last month. But the main point is that last month, the rate of joblessness among adult men was 6.5% and the rate among women was 5.5%. That adds up to an average of 6.0%, a little higher than the 5.8% the month before. But the overall number includes teenagers, which, because it is so high, skews the overall number upward to 6.7%. The actual unemployment rate among adults is only 6.0%. No one disputes that. So if full employment occurs somewhere around 4.5% and the actual level of unemployment among adults is really 6.0% -- then what's the huge problem? Times are tough; we knew that already. Sixth: Which Jobs Actually Got Cut? Finally, we must ask where the job losses came from. Here we need look no further than The New York Times' report, which says "... 70 percent of the job loss was in the service sector, particularly in retailing, temporary work and hotel and restaurant employment." In other words, unskilled labor represented most of the decline, which might explain why teens had an easier time of it last month. When unskilled jobs get more competitive, kids have an edge; you can pay them less and schedule them more flexibly. Is the unemployment number significant? To a degree, yes. But not to the "nth" degree. Yes, unemployment is rising. But it is not the end of the world as we know it, it is just part of the economic cycle. We survived November 1974, and we will survive November 2008. That's the benefit of a little perspective. The Last and Maybe Most Important Point Employment is usually a lagging indicator. The recession that was responsible for the massive job losses 34 years ago in November 1974, was over just four months later. The same is likely to be said of this one. And this will be very good news. You see, in 1974, the Dow capped a loss of -27.6%. But 1975 was one of the best years on record -- a +38.3% gain. The jobs will come back. The economy will recover. There's no reason the market can't see returns like that again in 2009.[http://www.streetauthority.com/includes/editor-profiles-ao.htm]
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