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The November jobs report was clearly a disappointment, and it's further evidence of the lagged nature of the employment situation.

After the end of the last recession back in 1990-1991, the unemployment rate didn't peak for 15 months. A similar pattern seems to have emerged in the aftermath of last year's recession.

Moreover, with the average monthly loss in jobs at 18,000 thus far this year, the three-month average of a 13,000 loss suggests that the November decline was hardly a watershed event, especially since the decline occurred in the midst of a so-called soft patch for the economy.

The employment report, showing that the economy shed 40,000 jobs, looks odd when considering the recent data on initial jobless claims. Jobless claims have been falling steadily over the past two months and are now at a 21-month low. At 377,000, the four-week moving average is now well below the 400,000 threshold that generally marks the dividing line between gains and losses in the monthly jobs data.

One possible explanation for the divergence could be the survey dates for the respective data. The survey date for the jobs data ended on Nov. 16, whereas the survey date for the latest jobless claims data was for the week ended Nov. 29. If this is, in fact, the main cause of the divergence, then future employment numbers should improve.

Factory Jobs Plunge Again

The weakness in the payroll report can be traced to a number of industries, but two were the most influential. Specifically, the retail sector was weak, with 39,000 jobs lost. Some of that was probably a result of reduced seasonal hiring and perhaps the late Thanksgiving holiday. If there are indeed fewer workers hired for the holidays, then fewer people will be let go in January, and that should help boost the January tally, all things being equal.

The manufacturing sector, which lost 45,000 jobs, was also weak again. The beleaguered sector has lost roughly 1.7 million jobs over the past two years. Much of the loss in the factory sector came from a decline of 11,000 workers in electronics equipment and a drop of 11,000 jobs in aircraft manufacturing. The decrease in these categories fits with anecdotal news about both industries.

Temporary jobs fell by 23,000, but this leading indicator of employment has posted gains of 169,000 so far this year. The construction sector lost 4,000 jobs, but could be poised for gains next year if the recently passed terrorism insurance bill helps to stimulate nonresidential construction activity, which has fallen 20% year-over-year.

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Areas where jobs gained included mortgage banking, which added 5,000 jobs, and health services, which continued its strong trend, adding 27,000 jobs.

The rise in the jobless rate to 6% was unrelated to technical factors and appears to be consistent with the weakness in labor demand. The household survey is notoriously volatile and the behavior of the unemployment rate during the past few months is a clear illustration of this.

Job growth has been too slow to keep the jobless rate from rising; job gains must equal labor force growth of about 150,000 jobs a month to keep the jobless rate steady.

Won't Set New Course for Markets

Although the jobs data was worse than expected, the numbers need not turn this week's consolidation of the two-month gain in stocks and the selloff in Treasuries into a reversal. In other words, equities still look likely to rise and Treasuries seem likely to fall in the coming weeks and months.

Investors recognize that the jobs data tends to lag other data. For example, following the end of the last recession in March 1991, the jobless rate didn't peak until 15 months later and the economy grew at an annual rate of about 4% in the first half of 1992. Despite the continued rise in the jobless rate, the

Dow Jones Industrial Average

gained about 12.5%.

Aside from recognizing the lagging nature of the employment data, investors are also likely to speculate that the recent drop in jobless claims hints at a pickup in labor demand. In addition, the shake-up in the White House economic team points to a more aggressive approach on the economy at the start of 2003.

The rise in the jobless rate could well have hastened the departures of Treasury Secretary Paul O'Neill and White House economic adviser Larry Lindsey, but the enormous opportunity presented to the Bush administration following the Republican victories is likely the biggest factor.