Beneath the U.S. jobs data, signs of rot

David Rosenberg is chief strategist for Gluskin Sheff + Associates Inc. and a guest columnist for Report on Business

For those who hold to the consensus view and its rose-coloured glasses, it looks like we are on the cusp of a renewed job creation cycle in the United States.

How else to interpret the market's reaction to last week's headline payroll number?

While it's true that the pace of firings is dissipating, companies remain very cautious over the outlook for new hires, and wage growth is slowing down.

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Dig deeper still into those jobs numbers, however, and you will start to see that there are some signs of rot beneath the surface in the U.S. labour market - signs that should give one pause as to the sustainability of this nascent economic recovery.

While the market will always react to the wiggles in the economic data, it is important not to let the noise obscure the big picture of what the labour market should be doing in the context of all the stimulus in the system and where we are in the economic cycle.

If this were a normal post-recession recovery phase, we would be seeing 100,000 jobs created every month. (In fact, in the eight months following a bottoming in output, employment normally rises by a million - it is down by that amount this time around.)

And that is actually understating the situation.

If this were a normal monetary policy cycle, then we would be creating 150,000 jobs by now because that is what we usually get 2½ years after the Fed begins to ease.

More interesting still is to ponder what's normal after a quarter that saw a 5.9-per-cent bump in real GDP, which is what we just witnessed in the fourth quarter. On average, the two months following such a surge will see job gains of 215,000, rather than the average 31,000 decline we just saw in the January and February reports. Never before have we seen job losses in the two months after such a strong quarter.

The so-called household employment survey showed a decent 308,000 increase in February, which may have caught the eye of the market, but this number was less pristine than it appears on the surface. Working part time "for economic reasons" jumped 475,000 in February, or 5.7 per cent month-over-month - the steepest runup since last year, when everyone seemed to believe that the Battle of Megiddo was around the corner.

And, while the headline unemployment rate managed to stabilize at 9.7 per cent compared with the consensus view for a modest uptick, a more inclusive measure, the U6, which takes into account the overall level of underemployment in the economy, rose to 16.8 per cent from 16.5 per cent.

Staffing firms are experiencing a boom with temp agency hiring totalling 47,500 in February and this followed nearly 200,000 placements in the previous three months. Many commentators look at this as a leading indicator, but, given the lingering credit concerns out there, that may be a mistake this time around.

It could well be that businesses see what we see - a recovery that has been engineered by massive bouts of fiscal and monetary stimulus that is likely to be unsustainable. Against that backdrop, tapping a staffing firm rather than hiring full-time staff would certainly make sense.

Breaking things down by sector, it is certainly encouraging to see the revival of the U.S. manufacturing sector take hold. But health and education remain the secular bright spots, adding 32,000 jobs last month.

If you stop here to do the math, though, adding up what we have from temp agencies and health and education, you get less than 20 per cent of the employment pie generating 80,000 jobs last month. The other 80 per cent lost 116,000.

The jobs bill that has worked its way through Congress, at the margin, may entice some new hiring (especially the payroll tax relief), but estimates show this will end up adding just 300,000 to payrolls, which is the amount we have lost since October. What about the other 8 million plus who have lost their jobs since late 2007?

While there is improvement in the jobs market compared to where we were six and 12 months ago, I am concerned investors may be lulled into a sense that things are better than they really are, especially given the universally positive (I would venture to say hilarious) headlines in the media purporting that all is well on the jobs front.

Looking past the headlines, what I find myself pondering is that if the best the U.S. labour market can do is print modestly negative headline payroll reports at this stage of the cycle, what are the numbers going to look like when the government stops doling out all the cheques that are supporting demand?

Of course, the other question is what happens next?

Well, for the U.S. to get back to full employment, we will need to see 12 million jobs created (and remember, we are still waiting for the losses to come to an end). Until we get there, and it could take anywhere from five to 10 years, expect deflation to be the primary trend in the future.

Deflation in wages, rents and credit are hardly the hallmarks of a background conducive to anything other than lower bond yields, an obviously murky fiscal outlook and periodic gyrations in market interest rates.