The Bureau of Labor Statistics released a "head scratcher" of an employment report this morning showing an increase of 163,000 jobs in July while June's previous employment disappoint of only 80,000 jobs was reduced to just a paltry 64,000.   Nonetheless, the much stronger than expected jobs report took Wall Street by surprise ramping stocks higher.   

The reason I say the report was a "head scratcher" is that most other reports are showing just the opposite.  As we discussed in our recent report "Economic Reports Confirm Deterioration" we discussed that "The ISM index is not the only index to show declines in employment. Since January of 2012 the employment component of the:

• Chicago Fed National Activity Index (a composite of 85 indexes) declined from .37 to 0.00 in June.
• ISM Manufacturing Index fell from 54.30 to 52.00 in July
• ISM Non-Manufacturing Index slipped from 52.3 to 49.8 in July
• New York Fed Manufacturing Index (Empire) was 12.09 in January, rose to 20.48 in May and then plunged to 12.37 in June.
• Philadelphia Fed Manufacturing Index tumbled from 11.6 to -8.4 in July
• Dallas Fed Manufacturing Index has been sliding from its February 2012 peak of 25.2 to 11.8 in July.
• Kansas City Fed Manufacturing Index rose from 9 in January to 12 in April and crashed to 6 in July.
• Richmond Fed Manufacturing Index was climbed from 4 in January to 16 in May and then plummeted to 1 in July.
• National Federation Of Independent Businesses fell from 5 in January to 3 in June.

I created a composite index of these primary employment components to get a better picture of the overall trend of employment. Historically, when this index is at 10 or below the economy has been either very weak or in recession. The index is currently at 14.45 which does not indicate an immediate recession, however, it is important to notice that declines in this index can occur very rapidly once the peak has been completed (shown by red arrows)."

While surveys of businesses all around the country point towards declining demand, in terms of "poor sales", as witnessed by three straight months of declines in retail sales, and either current reductions, or expected reductions, in employment, the BLS prints a sharp increase in jobs.  How did that happen?

Seasonal Adjustments And Real Joblessness

First of all it is crucially important to remember that the employment numbers issued by the BLS are "estimates" that are derived from a one week polling of a sample group of individuals each month.  The responses from that sample group are then extrapolated into the population as a whole.  Then "seasonal adjustments" are applied to smooth out the effects of different times of the year when jobs are gained or lost due to holiday shopping seasons, inclement weather, etc.   As we reported earlier this year, these seasonal adjustments were adding jobs at a time when unseasonably warm winter weather was allowing individuals, who are normally shut in due to inclement weather, to continue working which skewed the numbers higher. 

In the latest report the actual change to total non-farm employees was a DECLINE of 1.2 million jobs.  That's correct - 1.2 million jobs were lost in the July period.  However, the BLS added 377,000 jobs, the second largest July adjustment on record, to account for individuals being laid of from auto manufacturers who typically shut down in the summers to retool for new lines.  The problem is that auto makers did not shut down to retool so numbers are once again being skewed.  But wait there's more.

The BLS then adds a another factor called the "Birth/Death Adjustment" which accounts for the number of businesses that are assumed to have been created (birth) or shut down (death) during the given month.  This adjustment added another 52,000 jobs in July.  There is much controversy over the birth/death adjustment as it is a complete guess, however, that is a discussion for another report.   

The combination of these "seasonal adjustments" pushed the employment level from 133,082,000 in June to 133,245,000 in July showing an increase of 163,000.  However, the non-seasonally adjusted decline of 1.2 million for the month dovetails with the data that we have witnessed from the recent spate of reports, as detailed above, showing reduced employment.  With this said employment is likely to weaken in the months ahead as August is the last month before the seasonal adjustments began subtracting jobs from the report.  In other words, if the economy continues to weaken we are likely going to see very weak jobs numbers between September and December.

Marginally Attached, Discouraged And Not In Labor Force

In order to be counted as unemployed by the BLS one must be unemployed, obviously, and have ACTIVELY looked for work in the prior 4-weeks AND are currently available for work.  If you do not fit that criterion you are not counted in the "official" employment report known as the U-3 report.  

Today there are obviously many individuals that do not fit the criteria and are not counted.  This is there the U-6 Report comes into play.  The U-6 report shows the total number of unemployed plus all workers that are marginally attached to the labor force as a percent of the labor force. These are persons who are currently unemployed, want to work full-time and have actively looked for a job in the past 12 months.  A "marginally attached" worker is not considered to be either employed or unemployed, so they are not included in the "official" unemployment number. The U-6 also includes those that are employed part-time because they cannot find full-time jobs.  In the month of July the U-6 unemployment rate rose to 15.0 percent of the labor force.  In the most recent report those persons considered "marginally attached" rose by 46,000 after a 60,000 in June while "discouraged" workers rose by 31,000.

Since 2009 the number of individuals who are working "part-time" jobs has risen by 1.585 million jobs while "full-time" employment is lower by 1.485 million.  This explains the 14.2 million person increase in food-stamp usage during the same time period.

In the latest employment report, "part-time" employment increased by 31,000 jobs while "full-time" employment fell by 228,000 jobs.

See the problem here?

Not In Labor Force

So now that we know who is effectively counted as employed or unemployed this leaves us needing to understand what constitutes the civilian labor force. The labor force measures are based on the civilian non-institutional population 16 years old and over. This means that all individuals who are under 16 years of age, or confined to institutions such as nursing homes and prisons, or persons on active duty in the Armed Forces are excluded.

In the BLS reports the "labor force," which is used for the unemployment calculations is made up of the those that are employed plus those that are considered unemployed as per the U-3. The remainder—those who have no job and are not looking for one—are counted as "not in the labor force." While many of those have historically been those that are retired or are going to school – since the financial crisis this number of individuals is swelling due to the inability to find work.  

During the most recent survey period the number of individuals considered "not in the labor force" swelled by more than 340,000.  There are roughly 10,000 people a month that are indeed retiring so it is quite obvious that there are large amounts of individuals simply disappearing from the count each month which is reducing the size of the labor force.  In fact, in the most recent report the labor force shrank by 195,000.   Just to put these increases of persons falling into the "not in labor force" category - since 1975 the median has been roughly 55,000 per month.  

Currently the unemployment rate, as reported in the most recent U-3 report, was 8.3%.  At the current rate of persons being moved to the "not in labor force" category it is entirely feasible that statistically speaking the economy will move towards full employment even at the current anemic levels of hiring.

Employment To Population

This idea of moving toward full-employment, one of the mandates of the Federal Reverse, by shifting more and more individuals into the uncounted masses is the most important, and least talked about, point relating to the future strength of the economy.  While the media, and politicians, certainly ran with the increase of 163,000 jobs today as a sign of economic recovery - the problem is that the working age population is growing faster.  This gap further exacerbates the "real joblessness" in America today.

In the most recent reporting period - the working age population increased by 199,000 leaving 36,000 without work.  Last month the population grew by 189,000 while only 64,000 jobs were created leaving another 125,000 without work.  Do you see the problem here.  On average, historically speaking, the economy must create in excess of 180,000 jobs every single month just to absorb the growth in working age population.

The problem, economically speaking, is that to foster strong economic growth persons must be employed to produce.  The lower the employment levels relative to the population the weaker the production becomes which in turn suppresses economic growth.  As shown in the chart - the employment to population ratio has declined to levels last seen in 1984.  Furthermore, the labor force "participation rate", those actually working, remains mired at 63.7%.  The difference is that in 1984 both of these ratios were rising, rather than declining, as they are today.

In order for the economy to reach "full employment", relative to the working age population, by 2020 roughly 250,000 jobs would have to be created each and every month between now and then.  The current low levels of employment, relative to the working age population, presents a serious headwind to economic growth going into the future.  However, this also explains the massive surges in disability claims, food stamps and student loans that are being used for consumption rather than education.

While the media, and politicians, jumped on the better than expected jobs announcement as signs of economic recovery it is easy to understand why there is such a disconnect between Washington, Wall Street and Main Street.  While Wall Street has yet to realize that the better than expected jobs number just put QE 3 off until the end of the year - the average American is simply struggling to find work or are worried about keeping it.  No wonder consumer confidence remains mired at recessionary levels.