New Jobs… Familiar Feeling

May 09, 2012 | Eric Gaylord, CFA, Partner

On Friday, the U.S. Department of Labor announced that 115,000 jobs were created in April and the national unemployment rate fell from 8.2% to 8.1%. Though these data points showed improvement, their release prompted an immediate equity market selloff. So what gives? In this Chart of the Week, we consider an expanded view of the labor market to explain Friday’s reaction.

At the beginning of 2006, the U.S. private sector labor market was close to full employment, and more jobs were being created every month. Comparing today’s total number of private sector jobs to those pre-recession levels, the private sector has only 2% less total jobs. The chart above illustrates why the true situation is not as healthy as the headline unemployment numbers suggest: although the private sector has been adding jobs for a little over two years now, the job growth has been almost exclusively from small and medium sized companies. A recovery in job creation by larger companies and public sector jobs which, on average, pay higher wages has yet to take hold.

Despite the fact that we have seen job creation over the last two years, the total number of Americans employed as a percentage of the population has been stagnant: the new jobs that have been created are only enough to keep pace with population growth. The unemployment rate is falling mainly because the percentage of Americans who have given up seeking work (and are therefore not included in that calculation) remains elevated.

This challenge is no more evident than with young Americans. During the 90’s, an average of 77.2% of 20-24 year olds and 52.3% of 16-19 year olds participated in the labor markets. Today, those percentages stand at 70.6% and 33.8%, respectively. As long as the labor market continues to force young people to start careers later, start saving later, and start raising families later, the outlook for full recovery and long-term economic growth remains challenged. Friday’s negative reaction to sustained slow job growth shows that small improvements are no longer enough to satisfy investors’ concerns which are becoming increasingly forward-looking.