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Robert Stein is Chief Executive Officer of Astor Investment Management. Astor Investment Management provides investment advisory services and specializes in constructing portfolios of exchange-traded funds, available to investors through both separate accounts and mutual funds. To learn more about Astor, please visit www.astorim.com.


Behind the Unemployment Numbers: Demand, Wages, and Skill Levels

As all eyes, especially political ones, remain on the jobless numbers, the Employment Situation report for October, released on Friday November 4, held no upside surprise. The needle budged a hair, with a net gain of 80,000 people who found jobs during the month. The private sector added 104,000 jobs, while the government shed 24,000 of them. Overall, the unemployment rate dropped modestly to 9.0% from 9.1% in September, but did not move out of the range between 9.0 and 9.2 that we’ve seen since April 2011.

Although employment numbers are very important—and the direction in employment trends typically points to where the economy is going—we cannot lose sight of the fact that unemployment is really a symptom of much larger problems that need to be addressed: demand, wages, and skill levels.

For argument’s sake, let’s say that 1 million people find work, dropping the number of unemployed to about 12.9 million from just under 13.9 million currently, out of a total civilian workforce of some 154.2 million. Would the resulting unemployment rate of about 8.4% be the cure for all that ails us? What makes unemployment in the eights instead of the nines so significant? There have been periods in history when the American economy experienced strong growth with 9% unemployment. When I was in college, 6% unemployment was considered inflationary. The “good old days” when unemployment was under 5%, as we saw in the 1990s, was considered full employment—and was not sustainable.

The number isn’t as important as what drives it. In order for our hypothetical 1 million people to get hired, they need the right skills and experience to tap into the existing and future job demand. The educational attainment statistics (Table A-4) in the employment report should take no one by surprise: The lower the education level the higher the unemployment rate. In October, those who have less than a high school diploma had an unemployment rate of 13.8%; for a high school graduate, 9.6%; some college or associate’s degree, 8.3%; bachelor’s degree and higher 4.4%. As if we didn’t know it already, education and training matters—and yet the United States has a high school graduation rate of less than 70%.

Looking at unemployment by occupation (Table A-13) the rate is very low for management, professional, and related occupations at 4.4%, while farming, fishing, forestry, construction and extraction industries are all above 14% unemployment. Among the industries with the lowest unemployment rates are education and health services (5.6%), financial activities (5.8%), and information (6.6%). Construction tops the charts with a 13.7% unemployment rate.     This is the real story of employment in the United States, one that we can’t ignore any longer. The continued development of a skilled workforce will position Americans to take advantage of the jobs that are created here. The evolution in our economy, with basic manufacturing outsourced to countries with a comparative advantage in labor costs, has resulted in displacement of jobs (the textile industry in the U.S., for one). Nonetheless, it’s an economic scenario that cannot be reversed, even in the name of “saving” or “creating” jobs in the U.S. The economics simply don’t justify manufacturing here what makes more sense to produce over there. At the same time, landing a well-paying job in the U.S. requires workers to have the requisite education, training, and skills.

Two other factors that we cannot overlook are demand and wages. With productivity at high levels, having risen by 3.1% in Q3 2011, employers are able to realize more output per worker, which is a good thing. Increases in worker productivity means companies are more efficient; they are able to do more with less, which is one of the benefits of having gone through an economic contraction. (If you’re going to endure the pain, you better have a gain, right?) At some point, productivity will max out, and if demand continues to grow companies will increase hiring. So where is the demand?

We can’t blame “the economy,” which has become a blanket excuse, without being more precise. Consumers are still cleaning up their balance sheets. Before the recession, people consumed 10 years’ worth of stuff in five years. The problem wasn’t just overconsumption, but an inefficient use of capital–selling appreciating assets to buy depreciating ones.

Demand is not the only variable, however; the cost of labor is also a factor. During the recession, while the value of assets (stocks, real estate) declined, wages did not. The price of labor, while somewhat improved, remains high, which makes investing to hire new people a risky proposition for employers who are not certain about future demand.

Making a dent in the unemployment rate is everyone’s goal these days, from politicians to picketers, but it’s not simply a matter of getting companies to hire someone–anyone–as if there is this big unfilled pool of jobs that is being kept under wraps. Demand for goods and services must increase to levels that give employers the confidence that they can hire, particularly as the cost of labor remains relatively high. And the people who are seeking those jobs must have the skills and experience to assume them.

All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Past results are no guarantee of future results and no representation is made that a client will or is likely to achieve results that are similar to those shown. Please refer to Astor’s Form ADV, Part 2 for additional information and risks.  Analysis and research are provided for informational purposes only, not for trading or investing purposes. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information. There is no assurance that the Astor’s investment programs or funds will produce profitable returns, you may lose money.  500001-122

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