Jobs Report Totally Disconnected From Markets

NEW YORK ( TheStreet) -- The markets are sending the struggling workforce a genial message: Thanks for the lift.

On Friday, April's headline unemployment ticked lower to 7.5% and nonfarm payrolls increased by 165,000, which boosted the Dow Jones Industrial Average and S&P 500 to historic highs. The problem, according to economists and investment strategists, is that there's disconnect between equity markets and the U.S. labor situation.

"The more active traders -- the ones that are more savvy and more actively involved in the market -- they understand the fact that unemployment doesn't move lockstep with the market" said Randy Frederick, managing director of active trading at Charles Schwab. "Generally what I find is when the market's moving higher, the unemployment rate lags about six to nine months behind."

Major U.S. equity indices popped Friday to milestone point averages as the Dow reached 15,000 and the S&P surpassed 1,600 for the first time ever.

Equities have soared in 2013, led by the Dow's 14% tear, the S&P's 13% gain and the Nasdaq's 12% jump.

A narrow spotlight on Friday's headlines may suggest equities and the labor market are correlated, but a dive into the rest of the employment situation reveals the slow transformation.

In April, hourly wages rose just 4 cents to $23.87, and the average work week showed a 0.2 hour dip to 34.4 hours. The seasonally adjusted U-6 total unemployed rate, which includes unemployed, underemployed and part time, rose to 13.9% from March's 13.8%. For broader context, the U-6 rate was 14.5% in April 2012.

"There has been progress in the last six months, in the last 12 months; it's just that it is achingly slow given how far away from full employment we are," Gary Burtless, a labor economist at Brookings Institution, said in a phone call from Washington D.C. "So if you're unemployed I guess there's no reason to break out the champagne."

The labor force participation rate -- civilians who are employed or actively seeking work -- remained unchanged in April at 63.3%, but has ticked lower from 63.6% in January. A peak at the Bureau of Labor Statistics's participation rate since 2003 reveals a deep decline in the participation rate, which continues to bode poorly for the unemployed.

A solid earnings season has fueled the markets this quarter as the 79% of S&P 500 companies that have reported first-quarter earnings growth of 5.1%, according to data compiled by Thomson Reuters.

Economic data has been mixed. Retail Sales for March declined 0.4% from the prior month and ex-auto sales dropped 0.1%. Housing starts in March reached about 1 million units, which was stronger than what economists had expected. March existing home sales dipped to 4.9 million, which came in below consensus. Durable goods plummeted 5.7% in March after a 4.3% surge the prior month. And gross domestic product for the first quarter slipped in at 2.5%, below a forecast of about 3%.

"A lot of investors have been very reluctant to buy into this market rally; a lot of retail investors remain on the sidelines," Sam Stovall, chief equity strategist at S&P Capital IQ, said in an interview. "Valuations, while they're not as attractive as they were a couple years ago, in my opinion they remain appealing."

Strong earnings don't necessarily translate into a burgeoning labor market, but taking a pulse of small business in the country may highlight a sector that slowly is pushing the country back towards the Federal Reserve's unemployment target of 6.5%.

Steven Raz of Cornerstone Search Group, a recruitment firm for the pharmaceutical and biotech sectors, says since a year ago there has been significant improvement in hiring.

"We also have relationships with some other firms in other industries, and really across the board we're hearing the same things from other firms too that everyone is pretty busy and there's definitely an uptick in hiring," said Raz, who is managing partner at Cornerstone Search Group.

Smaller businesses are hiring because many of them have already gone through years of cost-cutting and restructuring to the point where they must begin adding to payrolls in order to fulfill business operations, Raz said.

Micro businesses -- those that employ one to 19 individuals -- have been pushing up jobs data as many of them operate in growing services sectors.

Democrats and Republicans have remain muted about the slow labor recovery. The White House issued on Friday its boiler plate statement that employment is improving but "more work remains to be done."

Rep. Phil Roe (R., Md.), chairman of the House subcommittee on health, employment, labor and pensions, said the April employment report was promising because it showed labor growth despite the sequester. But Roe said he believes the labor situation would have been stronger had a Republican defeated President Barack Obama.

"I think if Mitt Romney had been elected you would have immediately -- businesses would have felt like the government wasn't their enemy, that the government was there to assist them," Roe told TheStreet in a phone interview. "I think perception has a lot to do with it."

Regardless, record earnings and Friday's all-time highs on the Dow and S&P starkly contrast the elevated unemployment rate, the dwindling participation rate and a nation that remains on shaky economic footing.

-- Written by Joe Deaux in New York.

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