Last week the United States Department of Labor dropped the September jobs report, the results of which were much to the dismay of anyone with a stake in the United States economy. With the competing ebb and flow of positive and negative information since the end of the Great Recession in the 3rd quarter of 2009, it is somewhat difficult to know what economic indicators such as unemployment actually mean for credit risk. Below are a few highlights of the most recent job numbers, and the relevant takeaway for lenders:
142,000 jobs were added in September
At first glance, this seems like a positive, but when compared to the 198,000 estimated average jobs added per month in 2015 prior to September (and a monthly average of 260,000 jobs added in 2014), it is clear that September was a punch in the gut for job creation. This comes on the verge of the retail sector typically ramping up its workforce in advance of the busy holiday season, and on the heels of what is usually a favorable seasonal effect on job creation. Even more striking, August 2015 jobs-added, which were originally only lukewarm at best, were revised downward by 21% (from 173,000 to 136,000).
The Unemployment Rate Held Steady at 5.1%
Finally some good news, right? Well, on its face, 5.1% remains a favorable unemployment rate, but a different narrative emerges upon a deeper examination of the numbers. As we all learned in our first college Macroeconomics course, the denominator of the unemployment rate calculation only counts those that are considered in the “labor force”. The “labor force” is defined as total number employed plus the number of unemployed who are actively seeking work. In September, the labor force participation rate, dropped from 62.6% to 62.4% from August. No big deal, right? That’s far less than a 1% drop in folks looking for work. However, when comparing it to July 2009 (the official end of the Great Recession), the labor force participation rate has decreased from 65.5% to 62.4% (in other words the labor force is 5% smaller than it was in July 2009).
While the unemployment rate has decreased from 9.6% to 5.1% during that period, adding back the percentage of workers that dropped out of the labor force (3.1%) to the current unemployment rate (5.1%) results in an apples-to-apples adjusted unemployment rate of 8.2%. This leaves one to wonder if the unemployed have actually gotten back to work, or just given up on working all together?
Involuntary Part Time Workers Fell
Continuing a trend observed throughout 2015, part timers that would prefer to be full timers decreased by 447,000 in September. This seems like a “win” when comparing it to the rest of the data, as part-time employment has been cannibalizing full-time work for close to a decade now. While this cannibalization is still a major drain on the U.S. economy (with 6 million workers still counted as “under-employed”), the prospects for the “under-employed” have shown signs of life.
While it is not all gloomy (in other words, “Hey, at least we’re not Greece!”), and a report based on one month’s unemployment should not serve as a giant “stop sign” for lenders, it does serve as a good reminder of the importance of understanding and identifying the factors that comprise default risk. Without a crystal ball, forecasting the future of lending and credit requires the utmost understanding of economic indicators such as employment, economic growth, and their relationship with risk factors central to a borrower’s default risk. For example, quantifying the relationship between credit union charge-offs and unemployment has been studied and reported on by the Filene Research Institute (estimated to be a 16.2% increase in charge-offs for every 1% point increase in unemployment), but it would also interest lenders to understand the magnitude to which a drop in the labor force would affect charge-offs, or perhaps the likelihood of a sustained economic growth rate of 3.9% (which is what was measured in Q2 2015).
Even 6 years later, it remains to be seen if the Great Recession was the isolated result of an inevitable market correction, or a sign that a “new” economy has emerged and is here to stay. In any case, for an economy to work, it requires growth. In turn, economic growth requires an increase in production opportunities, and production requires a ready and willing labor force. Above all else, and much more importantly to this blog, a lender requires repayment. An understanding of risk faced by the lender from each and every one of their outstanding loans based on current economic conditions is imperative to forecasting loan performance, formulating lending strategies, and serving the members that need (and deserve) it most.