The Labor Market is Much Worse Than You Think

There’s a peculiar thing about numbers that people often tend to miss…

First off, numbers don’t lie, assuming that they have been calculated without error. Numbers are designed to present a quantitative perspective of a things; a particular state of reality transformed through a numerical lens. And that’s exactly what people tend to miss: people often mistake quantity for quality.

In other words, people often take a quantitatively-driven abstraction as a stand-in for the total (qualitative) reality that it represents. This habit of perception, or shall we say a weakness in thought, is particularly prevalent in the way most people consume economic data.

When it comes to economic data, not only do we consider the numbers an accurate representation of reality, we also tend to limit ourselves to that particular (numerical) narrative, as if it had the final say; an authoritative closing of the story. Take the latest jobs report.

Numbers are not designed to give you a qualitative picture of things...

The latest jobs report we saw on Friday was generally impressive. The US added 209,000 jobs, beating estimates of 183,000. And the unemployment rate was at 4.3%, the lowest since March 2001 according to a government report.

So when it comes to economic data, numbers can be particularly deceiving…

The general response among investors was upbeat and positive. As Tony Bedikian, head of global markets at Citizens Bank, states, “It's difficult to find anything really negative in the report... More people are coming into the labor force and finding jobs." David Verson, chief economist at Nationwide, calls it “an unambiguously positive jobs report.” As expected stock market futures rose upon the release of the report.

But numbers are not always designed to present various angles and nuances that often give a more accurate picture...perhaps one much closer to reality...

The only caveat, or what CNBC referred to as a “blemish,” in the jobs report is that the distribution of jobs took place within low-income sectors. Full-time jobs fell by 54,000 while part-time jobs gained by 393,000.

And according to the Bureau of Labor Statistics, the biggest boost in jobs for the month was provided by bars and restaurants (more bartenders), with professional and business services making up the rest.

So let’s give you a picture of what this latest jobs report really means...

Analyst Teddy Vallee, of Vedra Capital, came up with a brilliant indicator called Labor Market Breadth which was designed to “measure the aggregate health of the labor market by looking at its subcomponents.”

Labor Market Breadth measures growth across various industries to determine whether jobs increased across several industries, an indication of strength, or whether job growth was confined to only a few industries, a not-so-positive indication.

Although the jobs report presented an exceedingly positive outcome--209,000 jobs created, beating estimates of 183,000--we can see that labor market breadth fell to an exceptional low; indicating weakness in the labor market.

Retail jobs fell, perhaps attributable to online commerce, notably Amazon’s dominance in the retail space.

But what of the information sector? This too saw a sharp decline.

On a positive note, wholesale trade seemed to have picked up.

Durable goods also saw a slight rise.

However, these strengths were offset by weakness in real estate, which previously was a strong industry.

Strength in the labor market may also be offset by a slowing-down in the financial sector.

When you superimpose wage and salary data over labor market breadth, the latter indicates that wages and salaries too will move lower, perhaps in the next six months.

Economic numbers are designed to be reductive and minimal, providing only a few limited angles of a much larger picture.

If you were to view the other angles, perhaps they may modify your perception of the first, similar to the way labor market breadth may modify your perception of the jobs report numbers. Will this dismal reality manifest itself? Only time will tell.