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Just recently the April employment report was released by the
Bureau of Labor Statistics (BLS) which showed a surprise jump in
employment for the month of April of 165,000 jobs. The
general consensus for the report was 153,000 jobs so the
"better than expected" news was credited to the surge in
the financial markets.

There has been much analysis of the data since the report with
views that ranged from ebullient to dismissive. However,
the reality is that, despite better than expected numbers in the
report, employment gains to this point have been nothing more
than a function of population growth. The chart below shows
the 12 month average of the net change in both employment and
population. As you can see there have been very few
months since the turn of the century where employment has
exceeded population growth.

Street Talk
Live

This explains two things:

1) Why the employment to population ratio has plunged along with
the labor force participation rate; and

2) That employment gains, so far, have been a function of
businesses hiring only to meet the demand increases caused by an
increase in population rather than from a growing economy.

The latter point is very important and relates directly to an
issue that has been lurking silently in the background called
"labor hoarding."

Since the end of the recession businesses have been increasing
their bottom line profitability by massive cost cuts rather than
increased revenue. Of course, one of the highest
"costs" to any business is labor. One way that we
can measure this view is by looking at corporate profits on a per
employee basis. Currently, that ratio is at the
highest level on record. (Scale below is inverted for
clarity)

Street Talk Live

The problem that businesses are beginning to face currently is
that while they have slashed labor costs to the bone there is a
point to where businesses simply cannot cut further.
At this point businesses have to begin to
"hoard" what labor they have, maximize
that labor force's productivity (increase output with minimal
increases in labor costs) and hire additional labor,
primarily temporary, only when demand forces expansion.

The issue of "labor hoarding" also explains the sharp
drop in initial weekly jobless claims. In order to file for
unemployment benefits an individual must have been first
terminated, by layoff or discharge, from their previous
employer. An individual who "quits" a job cannot,
in theory, file for unemployment insurance. However, as
companies begin to layoff or discharge fewer workers the number
of individuals filing for initial claims decline. This is
shown in the chart below which shows the 4-month average of
layoff and discharges versus the 4-week average of initial
jobless claims.

Street Talk Live

However, the mistake is assuming that just because initial claims
are declining that the economy, and specifically full-time
employment, is markedly improving. The next chart shows
initial jobless claims versus the full-time employment to
population ratio.

Street Talk
Live

Furthermore, if we take a look at the 4-month average of net new
hires we see the same story. Net new hires is likely
signaling the peak of the employment for the current economic
cycle.

Street Talk Live

The issue of "labor hoarding" is an important phenomenon
that is likely obscuring the real weakness in the underlying
economy. Without an increase in the demand part of the
equation businesses are likely to continue resorting to further
productivity increases to stretch the current labor force farther
to protect profitability. However, as we may currently be
witnessing, businesses may be reaching the limits of what they
can do to continue increasing profits at the bottom line while
revenue declines at the top. The implications for the
financial markets going forward are clearly negative.

The "good news" is that for those that are currently
employed - job safety is high. Businesses are indeed
hiring; but prefer to hire from the "currently employed"
labor pool rather than the unemployed masses. The "bad
news" is that for those unemployed full-time employment
remains elusive and wages remain suppressed due to the high
competition for available work.

The current detachment between the financial markets and the real
economy continues. The Federal Reserve's interventions
continues to create a wealth effect for market participants,
however, it is unfortunate that such a wealth effect is only
enjoyed by a small minority of the total population - and it is
primarily those at the upper end of the pay scale that have jobs.