What the Rising Stock Market Doesn't Say About Jobs

If the stock market reflected the entire economy, then Americans could cheer the new annual highs in equity prices as a harbinger of good times ahead.

But the stock market reflects only the outlook for corporate profits, not the economy as a whole. Thus, the rising stock indexes are cold comfort for the millions of unemployed, temporary and part-time workers and self-employed who have seen their income decline and their prospects dim.

To get a clearer picture of the jobs picture in the U.S., let's look at some data on employment.

Anemic Growth in Private Sector Jobs

Part of why it's not easy to get an accurate picture of employment is that the highly publicized numbers comes from several reports that collect data in different ways. The Bureau of Labor Statistics (BLS) assembles the Establishment Survey from seasonally adjusted samples of actual payroll-tax collections and a model that estimates the birth and closure of small businesses, the so-called Birth-Death Model.

The unemployment number itself comes from the Household Survey, a phone canvas that asks people if they have a job, or if they're looking for a job. If you aren't employed but also aren't looking for a job, you don't get counted among the unemployed. Instead, you're a "discouraged worker" who no longer figures in the unemployment rate. If you worked even an hour or two that week, you're counted as employed.

Let's start by reviewing the Household Survey data for October 2010.

Two figures pop out: the number of employed people actually declined by 330,000 from the previous month, and the total number of jobs added since October 2009 was 819,000. Given that the civilian population rose by 1.98 million in that year, and the total number of officially unemployed (remember, this doesn't include "discouraged workers") is nearly 15 million, that's a modest increase in new jobs for a year when the economy is supposedly growing strongly.

Also noteworthy is the number of people who dropped out of the labor force: 462,000 in the single month from September to October. So even though the civilian population grew by almost 2 million people, the civilian labor force remained basically unchanged at 153.9 million.

Magic Numbers

The number of people "participating" in the economy as workers or job-seekers is the basis for the unemployment rate. If more people drop out of the labor force, then even if no jobs are created, the unemployment rate will decline.

For example, say the labor force is 100 people, and 20 are unemployed. The unemployment rate is thus 20%. If 10 unemployed people drop out of the labor force, that reduces the labor force to 90, and the unemployed to 10. As if by magic, the unemployment rate is now only 11%, even though the number of people with jobs remains unchanged.

Next, let's look at data from the ADP National Employment Report, a private sector estimate of total employment that breaks down the jobs data into small, medium and large businesses.

If we look at the data from July, 2008, just before the global financial crisis hit that September, the U.S. had almost 116 million nonfarm, private sector jobs. Two years later, in July 2010, that figure was almost 107 million jobs -- a decline of 9 million private sector jobs.

That means 7.75% of all private sector jobs vanished. Even though U.S. GDP is clocking in at a solid growth rate of 2.5%, the economy added only 221,000 private sector jobs in the six months from February to July 2010, according to the ADP data.

That's about half the annual growth estimated by the BLS Household Survey. But even the higher BLS estimate is nowhere close to the GDP's growth rate. If employment had risen 2.5% in the past year, the economy would have added 2.65 million jobs, not 819,000.

Turning to the Department of Labor's statistics on unemployment, we find good news and bad news. The good news is that the total number of people claiming unemployment benefits dropped in the past year from 10.3 million to 9.2 million. The bad news is the number jumped by 894,000 in late November -- not exactly evidence of a strong labor market.

Another way to assess the labor market's health is to examine trends in temporary and part-time work. The news here is also not encouraging. The number of workers stuck in part-time jobs for economic reasons -- that is, they were unable to find full-time work -- remains stuck at about 9.2 million. In a strong recovery, this number would decline as businesses boosted the number of hours worked and moved part-timers to full-time positions (chart courtesy of globaleconomicanalysis.blogspot.com).

By some accounts, temp work is becoming the New Normal in the private sector: Fully 26% of the new jobs counted by the Department of Labor in 2010 were temporary. In effect, temp jobs are no longer temporary, they're a way of life for many workers.

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Small businesses and the self-employed are struggling as well. Sales are down by 5% this year at companies with less than $20 million in revenue. According to the Bureau of Economic Analysis, proprietors' income -- the profits of unincorporated businesses such as partnerships and the self-employed -- is down nearly 5% from two years ago, while corporate profits have jumped 21% in that period.

This helps explain how the stock market can be soaring while the nation's 19.9 million partnerships and sole proprietorships can be experiencing lagging sales and profits. And the number of sole proprietors has dropped 2%, suggesting that the number of unemployed seeking to establish their own businesses is modest.

If the unemployed can't find jobs or can't start their own small businesses, then it's clear the rising stock market isn't reflecting the realities of the wider, noncorporate economy.