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Analysis: Little to like about last week’s employment data

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Modern Money

Robert Barone

Horrible! That is the most accurate word that I can find to describe Friday’s employment report. The 69,000 jobs created in May as measured by the Establishment Survey shows the economy at stall speed because methodology used by the Bureau of Labor Statistics has a +50,000 upward bias to it.

The official (U-3) unemployment rate rose to 8.2%, from 8.1%, because labor-force participation — the denominator in the equation — rose by 422,000. While politicians will point to this as a positive — people are entering the labor force because they are more confident that they can find a job — let’s face it, it is May and college graduates are looking for employment. So, even this silver lining has a tarnish.

Worse yet, the March and April Establishment Survey reports were revised downward by 49,000, not an insignificant revision. So, employment has been much weaker than originally indicated for the past three months. Further, we’ve recently seen an upward pop in the weekly first-time applications for unemployment insurance.

The more comprehensive unemployment rate (U-6, which is the broadest measure of labor-market slack) rose to 14.8%, from 14.5%. We are seeing employers substituting part-time workers for full-time workers — again, a negative indicator.

Average weekly earnings fell 0.2% in May because of fewer hours worked, on average. This indicator has fallen in two of the past three months and is a harbinger of what we are likely to see in second-quarter consumption spending.

Construction employment, while up slightly in the actual number count, was negative when seasonal adjustment is applied. May normally shows positive hiring in the industry, but this May, hiring was significantly below expectations, thus the negative seasonally adjusted number. I suspect this is because of housing markets still struggling with falling prices and excess inventory (Nevada, Arizona, Florida and parts of California). Additionally, we have recently seen a fall in the number of building permits.

Downward revision to first-quarter gross domestic product, to 1.9%, from 2.2%, was mainly because of a weaker consumer. Given this poor employment report, second-quarter real GDP might barely be positive in the official reporting.

I have written about downward bias flaws in the reporting of official inflation indexes. That means real inflation is higher than what is reported. Those who buy gasoline and food already know this. The implication is that official real GDP numbers are biased upward. Think about that! If inflation is only 2% higher than that officially reported, then the recession that “officially” ended three years ago might be ongoing.

None of the above speaks to the potential future shock that might hit the U.S. economy from the fallout of the European banking and debt crisis and the deep recession unfolding there. Any contagion from Europe will only compound the issues identified above.

The only silver lining is that weakening demand so evident in the reports has pushed oil prices down precipitously. Thus, we can expect some relief at the pumps this summer. Otherwise, the report was abysmal.

Robert Barone is a principal of Universal Value Advisors (@UVAdvisors on Twitter) in Reno, Nev., a Securities and Exchange Commission registered investment adviser. Barone is a former director of the Federal Home Loan Bank of San Francisco and is a director of Allied Mineral Products in Columbus, Ohio; AAA Northern California, Nevada and Utah; and AAA Insurance, where he chairs the Investment Committee.