My Friend the Bear

A have come to know a fellow who does fixed income for a living. He can't write about it. He works for a name firm and  moonlighting is "frowned upon". The reason for this policy is that one man's opinion may not be the published opinion of the firm. So my friend is kept in the dark. Sort of. His interesting thoughts on the NFP today. Also a strong recommendation on how to play it.


A quick look at the data this morning, and an attempt to quantify the Labor Force Participation Rate:

This is one of the first KEY data above expectations in quite a while, so it’s a good start, but 33 months after the recession started, we’re still LOSING jobs… so take the number into context.

Overall though, the data is good – note the revisions to prior month:

Bonds should / will read into potential inflation on the MoM Hourly Earnings data at 3x expectations…

Two key factors I look at in this monthly report are Avg Weekly Hours Worked (as a clue to direction of future hiring) and Labor Force Participation (to make sense of the Headline UE number).

…hours worked was steady after an upward trend since late 2009 – not too much to read into; will reserve judgment til next month…


Labor Force Participation bounced up to 64.7% from 64.6%.... though on its own it has a negative effect on the Headline UE, it’s a good sign overall…

To put this Labor Force Participation drop into perspective, let’s look at the raw numbers in UE Rate (all numbers SA)….

The fact of the matter is that we have more folks working this month than last:

July: 138.96mil Aug: 139.25mil Change: +290k

…but we also have more people unemployed (‘counted’ as unemployed, that is):

July: 14.60mil Aug: 14.86mil Change: +260k

…and let’s look at that in the context of the Labor Force:

July: 153.56mil Aug: 154.11mil Change: +450k


UE July: 14.6/153.56 = 9.50%

UE Aug: 14.86/154.11= 9.64%


so, obviously, jobs are “better”, but the UE is “worse” due to more participation in job searching… what to believe?

I’ve mentioned many times in the past that the UE Rate is a faulty data point to consider in a debt deflationary cycle as the participation rate skews the data too much. (Actually, a case could be made that it is a contrary indicator at the turns)

What’s been happening is that while the Civilian Population has been growing, the declining Labor Force Participation has not captured that in the UE Rate. Both the Labor Force and the number ‘counted’ as unemployed has leveled off to participation.


Since Aug 2009, from the BLS Report:

Civilian Population: +2.01mil

Civilian Labor Force: -316k

Number Employed: -183k

Number Unemployed: -133k

While that bottom line looks ok, it is also precisely the problem: there exist many more people who are out of a job but have given up looking, so they are not counted as part of the Labor Force. As a result, it looks like we’re improving in the numbers of unemployed.


And as a result, we’ve seen headline UE in the 9.5-10% range since mid-2009:

Aug 2009: 9.6%
July 2010: 9.5%
June 2010: 9.5%
May 2010: 9.7%
April 2010: 9.9%
Aug 2009: 9.7%

That looks steady, perhaps a base to build upon, but notice that this is exactly when Labor Force Participation Rate dropped off:

To give better perspective, let’s quickly look at what would the jobs picture look like this month without the drop-out rate in Labor Force Participation:

As seen in the chart above, current Labor Force Participation is at 64.7% having fallen off in the last 18months or so, from a baseline of 66.0% in 2008. Assuming that baseline held, we’d have a Labor Force of 157.145mil today (from current 154.11mil). Said differently, using this math around 3mil people left the Labor Force in the last year (reported BLS numbers are around 2.3mil). Using the Aug number of Total Employment (139.25mil), we calculate that the number counted as Unemployed would be 17.9mil today (up from the ’official’ 14.86mil).

Hypothetical Aug UE at 66% Labor Force participation: 17.9mil / 157.145mil = 11.4%

Here is that same exercise, using a hypothetical 66% Labor Force Participation Rate, and the real BLS data for Population and Number Employed, for the last few months and last year:

Aug 2010: 11.4%
July 2010: 11.5%
June 2010: 11.3%
May 2010: 11.1%
April 2010: 10.9%
Aug 2009: 10.5%

So the August data really was better, but adjusted for drop in Labor Force Participation, the past year has been brutal; in stark contrast to the Headline UE Rate. Again, I’m going to put off concluding a trend for this month. At some point we will begin to run out of jobs to lose, so perhaps we’re getting there… I will say a “V”-shaped recovery this is not.

From here I’ll let you draw your own conclusions on where we’ve been and where we’re going. While most of you know what I think, if you do not, I’ll just say I think it’s a great day to buy long duration, positively convex hi-grade paper. 8-15yr Agency bullets and even USTs are particularly out of favor at the moment….