As many of you know, my colleagues and I at Hedgeye are fans of the legendary actor Clint Eastwood. We say this despite his less than stellar performance at the Republican convention. One of his most well known movies is The Good, the Bad and the Ugly. In terms of film genre, this movie is in the category of Spaghetti Western.
The title of the movie itself is likely the best description of the employment data today – which we will touch on in more detail shortly – but the genre of the movie probably best describes the manic commentary around this report. Republicans from Jack Welch on down are claiming there is some grandiose manipulation of the numbers ahead of the election.
Meanwhile, Democrats are using this as a data point that validates the Obama economic plan and justifies his re-election. Just as we should be a little reticent letting Italians make Westerns (or Canadians make operas for that matter), let’s take a look at this report outside of the partisan lens.
The headline unemployment is positive for Obama and perhaps positive on the margin for confidence (very marginally). This comes despite consensus misses across the board on month-over-month non-farm, private and manufacturing payrolls, but because the focus for much of the punditry is on the actual rate. On the positive, total employed did rise by 873,000 which is the first meaningful increase in three months (although 600,000 of these were part-time jobs).
At 7.8%, the unemployment rate is now the same as when Obama took office and down from the 8.1% rate of August. It also deflates, at least partially, a key refrain from Romney’s debate strategy which is to highlight that unemployment has been above 8% for the duration of the Obama Presidency. The political analysis from the manic media on the jobs report is as simplistic as can be expected with the headline on USA Today currently being a prime example:
“Political analysis: Jobs report boosts Obama”
We will go into detail shortly as to why this employment number is actually far from stellar, but the sentiment is what it is and this will marginally benefit Obama. This is already being reflected on Intrade where the Obama contract has rallied about four points from 65 to 69.
In the bad category, there are a number of favorable items that were one time in nature that may have made this number look better than reality. Specifically, the government uses a seasonal adjustment that we have touched on numerous times. As our Financials Sector Head Josh Steiner wrote last week:
“We've harped on seasonality a lot, but to again reiterate, we think the two charts below speak for themselves. They illustrate quite plainly that in the last three years, ALL improvement in both initial jobless claims and nonfarm payrolls occurs in the September through February period while March through August stagnates or deteriorates. This seasonality distortion will again be present this year and next year.”
The point is that there is some manipulation in these numbers. This isn’t a partisan fact, but simply something we’ve observed based on looking at this data for the past three years. So, this “positive” report shouldn’t surprise anyone or be considered a panacea of economic recovery. The chart below outlines this seasonality.
The ugly is related to not just this jobs report but the economic environment in the U.S. that has Americans leaving the workforce in mass. In the chart below we’ve adjusted today’s labor report for the 10-year average labor force participation rate (LFPR). Given this analysis, the unemployment rate in September would have been 10.8%. This would have been a decent improvement over the adjusted August number of 11.3%, but is still very elevated.
Interestingly, if you adjust the headline figure for the LFPR on Obama’s first day in office, the SEP unemployment rate would have been 11.1% – substantially elevated from the comparable 7.8% figure he inherited from Bush. What this suggests is that, over the last four years, President Obama has seen the U.S. unemployment rate tick up +330bps when accounting for all the disgruntled civilians who’ve completely given up looking for work since the president took over the leadership reigns of the U.S. economy. The first chart below shows the trend of the participation rate over the past decade, which is down and to the right.
In the short run, this report will likely be positive, at least for the President’s re-election chances. In the long run, U.S. employment remains solidly in the bad to ugly category.
Daryl G. Jones
Director of Research