Making Sense of Employment Data

Lot's of information is reported regarding "employment".  Data comes from the government's BLS and some private firms like ADP.  There's the "unemployment rate" or the % of people looking for work that can't find it--a figure that can really be misleading as the number of people "looking" for work can change depending on economic conditions and outlook.  To make more sense of the unemployment rate, one must also look at the "labor participation rate" which gives the % of "potentially available" that are actually working. Again, it can be misleading as people retire at different ages.  In addition, people "drop out" when employment conditions are difficult and "return" when finding jobs becomes easier.

Perhaps the most meaningful data is from the BLS and shows the total number of full time jobs. See chart below:

The "take-away" here is that employment is improving, but is still significantly below the 122 million in 2007.   Almost 5 million fewer full time jobs now than in 2007, despite a growing workforce and trillions of dollars spent to "stimulate" the economy.

How this affects markets is that it creates "slack" in the labor market
and depresses labor costs---resulting in higher corporate profits but lower corporate revenues.  This is exactly what were are seeing during this and previous earnings seasons.  My take is that people are having increasing difficulty dealing with existing prices of many products and services, causing demand to be restrained, but because of low costs, corporations are able to increase profits, even with lower than expected sales.

This is not a trend that is sustainable in the long term and is one more reason why I recommend being very selective in what segments and companies to own in your portfolio. I tend to prefer companies that provide "essential" and "necessary" products and services that are less "price sensitive".  Every product and service is subject to declining demand with higher prices or slower economic growth; but some are more sensitive than others. 

Part of the market sees a continuation of corporate earnings growth, primarily because they believe that demand will soon accelerate as we get back to and rise above 2007 levels of employment.
Others see that with present rates of employment growth, those levels will not be seen until 2016 and that this slow rate of growth does not justify current stocks prices for many "hot" segment and stocks.

My "take" is that we should expect growth, but that continued stock price increases will increasingly require corporate profits that grow along with increasing revenue.