Devil in the Details of November's Disappointing Employment Report

The unqualified positive assessments of last Friday’s drop in the reported unemployment rate are misplaced. The 40 basis point decline in the consistently unreliable measure of the labor market, which fell from 9.0 percent to 8.6 percent, reflects that 315,000 Americans exited the labor force in November and that the labor force participation rate fell to 64.0 percent. On balance, this means that fewer Americans were looking for work in November, with exits from the job market concentrated amongst relatively low-skill workers for whom opportunities remain rather scarce.

November Job Creation Falls Short of Recent Trend

Turning our attention to more pertinent measures of the labor market and commercial real estate outcomes, employers added 120,000 net new jobs in November. That result falls short of the 2011 monthly average of 132,000 jobs. Controlling for the ongoing drag from cutbacks in public payrolls, private employers added 140,000 jobs during the month, below the private sector average of 156,000 jobs. While job openings are rising slowly from their 2009 lows, the translation of openings into hires has lagged, both on a gross and net basis, on account of skills mismatches and deficiencies.

Disaggregating the headline measure of employment, the balance of job growth drivers is mixed in its implications for the commercial real estate outlook.  Some of November’s strongest results were in the retail sector. Retailers’ expectations for consumer activity motivated an observable expansion in payrolls, with net employment climbing by nearly 50,000 jobs. The largest gains were reported for apparel retailers, which added almost 27,000 jobs on net.

While bricks and mortar spending on clothes has recovered to a greater extent than in categories that are rapidly losing market share to online competitors, increases in consumer spending have outpaced income growth. As a result, the savings rate has plummeted from its recessionary peak and deleveraging has fallen short of its potential pace. The current trend is unsupportable in the long run; for retail employment to sustain the last month’s improvement, job growth must accelerate in other areas. The same holds true for hospitality employment, where almost 33,000 jobs were added in restaurants and bars.

In occupations related to office-using employment, employment trends remain weak. Information and financial services employment were both practically unchanged during November. The former category has shed jobs over the last year while the latter has only added 10,000 net new jobs over the same period. Similarly, a relatively large increase in professional and business services employment was concentrated in temporary workers, reflecting the persistence of many businesses’ in deferring investments in new full-time staff.

Outlook Clouded by Macro and Policy Issues

With business profitability surpassing its pre-recession peaks, the basic calculus of the job equation remains unchanged in November. The outlook for demand and the uncertainties relating to the global macroeconomic and policy environment remain the dominant drags on employment trends. Even if the payroll tax cuts are extended, the potential for much stronger employment gains will remain largely unrealized so long as the macro and policy headwinds go unaddressed.