Workforce Shrinks, Unemployment Falls – Say What?
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
1. The Miserable March Jobs Report
2. Why the Fed Can’t Help the Long-term Unemployed
3. Nevertheless, It’s “Full Steam Ahead” For QE
4. “Discouraged Workers” – Behind the Statistics
The Miserable March Jobs Report
Last Friday’s employment report showed that the official unemployment rate declined from 7.7% in February to 7.6% in March. The 7.6% figure was better than the pre-report consensus which expected the number to come in unchanged at 7.7%. That’s a good thing, right? Not after you look under the hood at the internals, which were terrible.
The Labor Department reported that the economy created a paltry 88,000 new jobs in March, down from a revised 268,000 new jobs in February and 148,000 in January. The 88,000 figure was less than half the pre-report consensus of 190,000. But the bad news didn’t stop there.
The unemployment rate dropped from 7.7% to 7.6% almost entirely due to a decline in the labor participation rate, as nearly half a million people decided to drop out of the labor force altogether. This was partly due to aging workers retiring, but largely because people have become so discouraged with the job market that they’ve just stopped looking.
The labor-force participation rate – the percentage of people eligible to be working or looking for work – fell to 63.3%, the lowest since 1979. Specifically, the report noted that 496,000 people left the labor force in March. No one expected a dropout rate that large, putting the labor force at its lowest level in 33 years.
March’s disappointing jobs numbers did not yet reflect much of the “sequester” – the across-the-board federal budget cuts that will slowly take effect throughout the year – resulting in less hiring and fewer hours worked by government employees. Nevertheless, austerity is already pinching job growth in other ways. The federal government shed 14,000 jobs in March, almost all of which were from the US Postal Service.
Meanwhile, the retail sector shed 24,000 jobs, likely an effect of the payroll-tax hike that was part of the “fiscal cliff” settlement at the beginning of the year. A weak labor market meant that average hourly earnings for private-sector workers rose by just a penny in March, to $23.82. Worker earnings have gained just 1.8% in the past year, not enough to keep up with inflation.
The economy has added nearly 5.9 million jobs in total since the job market bottomed in February 2010, but it is still almost three million jobs below its peak level of employment in January 2008. One reason for the drag has been austerity in federal, state and local governments, which have cut 605,000 jobs since February 2010.
Even the Obama administration couldn’t spin last Friday’s jobs report as positive, despite the fact that the headline unemployment rate fell from 7.7% to 7.6%. That alone tells you that the report was really bad!
Finally, the sequestration spending cuts that began on March 1 will continue to kick in each month this year. Most economists agree that these spending cuts will cause a further pullback in hiring at some point, and some forecasters think job growth could be even weaker for the next two or three months.
Why the Fed Can’t Help the Long-term Unemployed
The long-term unemployed – those who have been out of work for six months or longer – make up almost 40% of the total 11.7 million who are unemployed. That’s 4.6 million people and rising rapidly. Sadly, many will likely give up their job search altogether before long.
As I discussed in my March 26 E-Letter, Fed Chairman Bernanke hinted at his latest news conference on March 20 that the Fed may be considering reducing its $85 billion in bond and mortgage purchases this year, assuming economic data continues to look positive. After Friday’s dismal unemployment numbers, it is now widely assumed that the Fed will not cut back on its record QE bond purchases anytime in the near or medium-term.
Yet the question that has been out there for some time remains: How does QE help the long-term unemployed? The fact is, it doesn’t help these people much, if at all. Employers assume the longer people are out of work, the more they forget, and the more out-of-date their skills become. This may or may not be true, but there’s definitely a stigma against folks who have been unemployed for that long.
According to a study from the San Francisco Federal Reserve Bank last year, only 10% of the long-term unemployed find a job each month. This is much worse than the 30% of the short-term unemployed who are successful at finding a job each month. And the longer workers remain unemployed, the less likely they are to find a job, period.
One can argue that the massive QE by the Fed ($3+ trillion and counting) helped to reverse the free-fall in the housing market and certain other sectors in the economy. But the fact is that the economy has only been generating enough new jobs to absorb population growth in the last few years.
Many businesses prefer to hire those new to the workforce who they can train from scratch, as opposed to the long-term unemployed who may have old skills that must be unlearned. This is most frustrating for the long-term unemployed, and there’s not much the Fed can do about that.
Furthermore, businesses with 50 or more employees know that they will soon have to comply with Obamacare, but they do not know what that means or how much it will cost them. Thus, businesses just below 50 employees don’t want to hire anyone new, and some of those just above 50 employees are considering cutting back. The Fed can’t do anything about that either.
Nevertheless, It’s “Full Steam Ahead” For QE
No doubt Fed Chairman Bernanke knows that monetary policy, including “quantitative easing,” can’t correct the problem of the long-term unemployed. Despite that, several Fed officials vowed earlier this month that the $85 billion in monthly purchases of Treasury bonds and mortgage securities should continue indefinitely.
For instance, Federal Reserve Bank of St. Louis President James Bullard recently said the Fed is in no hurry to reduce its record bond and mortgage buying with inflation running below its 2% target. Speaking on Bloomberg Radio recently, Bullard stated, “It is full steam ahead right now. That is exactly what the committee is doing.” Bullard is a voting member on the FOMC this year.
Fed Governor Daniel Tarullo and San Francisco Fed President John Williams said earlier this month that it’s too early to begin slowing the pace of bond purchases. Tarullo, speaking on CNBC, said that while some economic data have exceeded expectations recently, he would like to see more consistent job growth before he can support curbing the QE buying.
Tarullo noted: “What I’d like to see is some good healthy peaks that have job creation well above the rate of new entrants into the labor market, followed not by valleys that take back some of that progress…”
Again, these comments regarding continuing the $85 billion in QE purchases were made before last Friday’s terrible jobs report. It now looks like Bernanke’s hint last month that the Fed might slow these purchases later this year is out the window. Like it or not, it’s full speed ahead.
“Discouraged Workers” – Behind the Statistics
I often discuss the statistics surrounding the long-term unemployed, just as I did in the above section. However, there’s another statistic that we frequently quote but don’t often analyze, and that’s the number of “discouraged workers,” which are defined as those long-term unemployed who have stopped looking for work.
In the most recent unemployment report, I mentioned that about half-a-million workers simply stopped looking for employment and, viola, the unemployment rate went down. I guess I could focus on the political realities of having the unemployment rate go down because workers become so discouraged that they stop even looking for a job, but I’ll save that for another day.
Instead, I want to go beyond the politics to discover who these people are, why they feel they can’t get a job and what it’s going to take to get them back into the workforce, if they ever do. Think about it for a minute – becoming so despondent after spending months or years unsuccessfully searching for a job, that you just stop trying. Yet you still need income and, for many, unemployment benefits have run out.
The first thing I want to do is state that discouraged workers are not necessarily the same as people who prefer not working. I think many of us have an immediate negative reaction when we hear about unemployed individuals not even looking for a job. The mindset that “you can always find a job if you really want one” is an engrained part of the American work ethic, but it’s not always true.
There are only so many store clerk and burger-flipping jobs available, and even these low wage jobs are hotly sought after. Many discouraged workers would love to be working, but they just stop looking. Why?
A number of reasons come to mind. Some discouraged workers stop looking because they have a spouse who is working and paying the bills, which makes us immediately think of the housewife. However, statistics show that there are more male discouraged workers than females, so the role of “house-husband” is a reality in many homes.
Others stop looking for jobs because they live in areas hit harder by the Great Recession, but want to remain in that geographical area, possibly because of relatives in the same area. In fact, relatives can often become sources of support as unemployment benefits and other sources of income dry up.
Some of those who stop looking for jobs do so because they start their own businesses. It may not be the preferred way to get off the unemployment rolls, but at least they consider themselves employed. Unfortunately, it has been estimated that 50% of small businesses fail within five years, and 57% have annual revenues of less than $25,000, so entrepreneurship isn’t always a ticket back to prosperity.
The vast majority of discouraged workers, however, stop looking for work because they feel there are no jobs to be found. The US Bureau of Labor Statistics lists the following top five reasons for workers becoming discouraged:
Since many discouraged workers have stopped receiving unemployment benefits and have burned through savings and retirement assets, where are these individuals turning for resources to live on? The answers might surprise you.
One source of income for those old enough is early retirement benefits from Social Security. Many discouraged workers who have reached age 62 are choosing to take early retirement benefits. It may not have been their original plan to retire at 62, but economic necessity may require that they seek out this source of income.
Unfortunately, those taking early retirement benefits from Social Security are limited as to the amount of additional income they can earn without these benefits being reduced. In 2013, for every two dollars in outside income earned over $15,120 prior to the retiree’s full retirement date, Social Security benefits are reduced by one dollar. This definitely puts a damper on working part-time to supplement early Social Security payments.
Other articles I have read indicate that Social Security disability benefits are becoming an increasing source of income for many discouraged workers. In fact, you may recall my July 24, 2012 E-Letter in which I reported that more workers joined the federal government’s disability insurance program in the 2Q of 2012 than got new jobs.
The number of Americans on disability insurance has increased for the last 16 years, and the total stood at a record 8.85 million people as of March, according to the Social Security Administration.
So how do discouraged workers suddenly become disabled enough to qualify for benefits? The answer is two-fold: First, some workers have disabilities but work through them while employed to keep from going “on the dole.” When jobs become unavailable, however, they can then qualify for disability income.
A second reason for the growing Social Security disability rolls is that it’s now easier to be classified as “disabled” due to a Reagan-era expansion of mental and physical problems that qualify for benefits. That, coupled with aging Baby Boomers and a weak economy have all worked to greatly expand the number of beneficiaries receiving disability payments.
In contrast with the temporary nature of unemployment compensation, disability and early retirement benefits under Social Security are much longer-term, lasting a lifetime in most cases, with taxpayers footing the bill.
There are also other federal and state programs for the long-term unemployed including food stamps, Medicaid, WIC (Women, Infants, Children) programs and others. There may be other governmental programs such as HUD housing assistance, the Dislocated and Laid Off Worker Program, Low-Income Home Energy Assistance Program and others that can help. I have provided a link to a good article from About.Com with these and other resources listed in SPECIAL ARTICLES below.
I’ll also provide a link below to a white paper produced by the Financial Planning Association (FPA) that deals with financial issues related to job loss. However, the best advice from the FPA goes right along with what I have written about in the past, and that’s to have a contingency plan BEFORE you become unemployed and find yourself among discouraged workers.
I’m sure if you asked many of the discouraged workers, they would say that they never thought they’d be unemployed, or unable to find a job if they were to be laid off. Just as you buy homeowners insurance to cover the contingency of a damaging event, you should also plan for the possibility of being unemployed before it happens.
How do you go about planning for the unexpected? One way is to call upon the resources we have here at Halbert Wealth Management in the persons of Phil Denney, CFP® or Spencer Wright at 800-348-3601. Besides being investment management professionals, they can also help you to plan for the contingency of losing your job. Even if you have done some preliminary planning on your own, it might be good to run it by Phil or Spencer just to get another opinion. Plus, their review is FREE and there’s no obligation.
Hopefully, you will remain employed and never have to call upon this plan, but it will be comforting to know that you have made financial arrangements just in case the unthinkable happens in regard to your career.
Lunch/Seminar With Hanlon Investment Management
Finally, we are hosting a lunch seminar in Austin on May 8th at 11:30 featuring Hanlon Investment Management, a Registered Investment Advisor managing apprx. $3.5 billion in assets. You may recall that I introduced Hanlon and its “Managed Income Strategy” in my January 8 E-Letter. With an impressive 11+ year track record of competitive returns with less risk, Hanlon’s Managed Income Strategy is an innovative approach with the potential to increase your returns with an eye on capital preservation.
If you live in the Austin area, or will be in Austin on May 8th, call Joanne at 800-348-3601 to reserve your spot. The lunch seminar will be at the Westin Hotel in The Domain at 11:30. This is also an opportunity for me to meet you personally – I always love to meet my readers and clients. Seating to this event is limited, so I urge those in the Austin area to reserve your spot as soon as possible. I hope to meet some of you there.
Wishing you stable employment,
Gary D. Halbert
Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.