9/3/2010
By Carlos Guillen, Semiconductor Analyst

While the unemployment rate result for the month of August did get worse, I think that just looking at the rate itself is not telling the entire story. According to the department of labor, the August unemployment rate clocked in at 9.6 percent, increasing from the 9.5 percent unemployment rate in July. Although the unemployment rate level is stubbornly high, it had been slowly improving, but now it appears to have taken a turn in the wrong direction. However, on a positive note, the unemployment rate result did land in-line with the economists' consensus estimates.

To analyze the dynamic of what occurred during August, let us begin by listing some facts. The number of people employed increased by 290 thousand, those unemployed increased by 261 thousand, and those labeled as not-in-the-labor-force decreased by 341 thousand. Of course, the sum of those that are employed, unemployed, and not-in-the-labor-force is equal to what is called the civilian-non-institutional-population, and this level increased by 210 thousand. So this month the job market was able to absorb the growth in the civilian-non-institutional-population, while also absorbing some of those that decided to rejoin the labor force, but not all. In other words, there were 290 thousand new spots, enough to satisfy the population increment of 210 thousand and part of the 341 that decided to come back to the labor force. I think this is certainly a good thing since it really means that there are more people out there working, contributing to the economic feed-back loop.

However, this perspective is not really reflected in the unemployment rate itself. At a first glance, I can see that the unemployment rate has made a turn for the worse. But the reason why the unemployment rate increased was not because there were more job losses. The reason why the unemployment rate increased was because there was a surge in the number of people that decided to rejoin the work force. This caused the growth rate of those unemployed to be greater than the growth rate of those employed, which in turn cause the unemployment rate to increase.

From another perspective, in looking at the nonfarm employment changes, I can see some mixed results. On the positive side, nonfarm employment in August decreased by 54 thousand, which less than the 120 thousand loss that economists expected. Moreover, July's nonfarm employment change was positively revised to a loss of 54 thousand from a loss of 131 thousand. On the negative side, nonfarm employment still decreased and has been in negative territory for three consecutive months.

One other point worth mentioning is that there were more people working part time for economic reasons than there were in July. According to the Bureau of Labor Statistic, people working part time for economic reasons are those who worked 1 to 34 hours during the reference week for an economic reason such as slack work or unfavorable business conditions, inability to find full-time work, or seasonal declines in demand. During August, the number of these part timers increased by 331 thousand to 8.86 million, flipping a three month improving trend. So what appears to be happening is that employers are lowering working hours below 34 for many, and at the same time they are hiring additional part timers. In essence, employers are taking advantage of the high demand for jobs to lower their labor costs, as the price to employ part timers is less than the price to employ full time workers. On the bright side, what this means is that the unemployment pain is being stretched thinner.

I think that to get a better measure of what has been occurring most recently, one has to look at the employment-population ratio, which is the percentage of the civilian non-institutional population that is employed. As it can be observed below, this ratio had been getting worse, but in August this ratio improved.

Looking forward, I am not that pessimistic about the job situation, and I expect the employment-population ratio to improve. The production-manufacturing work week has been increasing at a nice pace although it has had some sharp downturns; however, in general this is indicating that the probability of hiring is ramping up.

I don't see any miracles happening this year, and I expect the unemployment-population ratio to mildly improve for the rest of 2010, while the unemployment rate will likely inch lower, but still remain above 9 percent. The unemployment rate will likely decline into the 8 percent range by the end of 2011 and into 2012. The employment losses have been so massive that normal unemployment rates (between 5% and 6%) are not likely to be reached until the middle of this decade.

Carlos Guillen
Wall Street Strategies