Is Jobs Engine Running Out of Steam?


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After experiencing optimism earlier in the year, there are signs that the U.S. jobs engine might be slowing. Certainly, the turmoil experienced in China, Europe, and the Middle East are finally starting to drag down the economy.  Then the lack of robust business investment is especially problematic.  Unless that turns around soon, we might be approaching recessionary status.

The Bureau of Labor Statistics released its jobs report for September and it showed a steady unemployment rate of 5.1 percent with an increase of 142,000. Labor force participation rate continues its steady trickle downward to 62.4 percent, though the employment to population ratio showed a modest tick up to 59.2 percent.

Even though the unemployment rate remains steady, the rate of job growth has slowed. Over the last three months covering July-September, we have experienced an average of 167,000 jobs. That is almost a 30 percent decline from last year’s rate.  With construction, manufacturing and wholesale trade showing little change, that offers a hint that this downward trend could continue as we head toward winter.

It is troubling that business investment hasn’t followed suit with consumer spending.  Though household spending has been relatively healthy at 3.2 percent over the last year, we cannot say the same for industry.

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Even though some of that can be attributed to uncertainty from various political and global events, it will be difficult to maintain a robust economy without further investment.  Both shipments and new orders of core capital goods have shown negative growth over the last year.

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Another issue is that wages remain stagnant.  Over the last year, wages have grown at a 2.2 percent pace, which is well below what we experienced pre-recession.  Until we see wages approach the 3 percent clip, it will be difficult to imagine a more robust economy in the future.

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Is this the beginning of a downward spiral?

 

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Are We Seeing Weakness In U.S. Jobs Market?


March job numbers were disappointing.  Even though the unemployment rate was unchanged and this marked 61 months of positive job growth, job gains of 126,000 was the lowest since December 2013.  Though one should not overreact to data over a month’s period, we are seeing evidence of a disturbing trend.  Here’s the quarterly job rates over the last four quarters:

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Certainly, the last quarter of 2014 performance was strong, but the first quarter saw a decline of 39 percent and this was despite low gas prices that you would think boost consumer spending.  However, that has not occurred.  It is possible that a stronger U.S. dollar and Middle East turmoil might be finally filtering to U.S. employment figures.  A stronger dollar makes U.S. goods relatively more expensive than foreign goods, so that would lead to lower sales and dampened expectations for job growth.  Then factor in troubled spots throughout the global economy and that also diminishes outlook for U.S. exporters, who have gained greater influence over the overall economy.

So is this temporary or a precursor to further decline?

Most industries witnessed little growth, though there were some modest exceptions.  Retail trade employment rose at a similar rate to last year.  There are also steady gains in the health care industry.  Even though there were job gains in professional and business services, its rate of increase was less than last year.  However, there was not much growth in any other sectors.

Despite these concerns, there are some positive trends to note.  One, the unemployment rate is falling and the labor force participation rate is starting to stabilize a bit.  There has been little change in the labor force for over a year.  We can see this from the Atlanta Fed graph below.

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Another encouraging sign is that long-term unemployment continues to fall over the last year.  Over the last year, the percentage of long-term unemployment has fallen from 35.3 percent to 29.7 percent.  Due to this improvement, a broader gauge of unemployment (U-6) has fallen from 12.6 percent to 10.9 percent since March 2014.

On the other hand, there are troubling signs that appear to be on the horizon.

  1. Manufacturing activity is falling.
  2. Retail sales, excluding food, have fallen over the last couple of months.

With falling gas prices, one would think that it would loosen the pocketbook of consumers, but that has not come to fruition yet.  Retail sales have fallen below expectations over the last few months, which suggests that they are not pocketing this new-found wealth back into the economy.  A recent slowdown in manufacturing activity may mean that firms are not expecting robust growth this year.  That is consistent with a survey of CEOs, who are predicting modest growth that will fall below the 3 percent threshold that would point to good growth.

In summary, it appears that the downside risk outweigh the upside risk, so do not be surprised if turbulence returns to the labor market.

Recent Job Reports Charting Success


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The February jobs report was released by the Bureau of Labor Statistics on Friday.  It paints a relatively rosy picture with solid job growth of 295,000 and a declining unemployment rate that reached 5.5 percent.  Wall Street Journal’s Real Time Economics provides an informative snapshot of the recent job trends in employment.

Chart 1:  Year-to-year job gains are steadily rising.

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Chart 2:  Unemployment rate continues to fall.

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Chart 3:  Labor force participation rate continues to fall which is not good, but employment to population ratio is rising, which is good.

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Chart 4:  Even though the type of jobs are improving, we are still seeing more part-time jobs than full-time jobs.

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Chart 5:  Unemployment rate is falling for all levels of education.

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Chart 6:  Long-term unemployment rate has steadily fallen, suggesting that the job market is improving.

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Chart 7:  While length of unemployment remains higher than pre-recession period, it is also falling.

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Chart 8:  While long-term unemployment is still above pre-recession levels, short-term unemployment is below it.

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Chart 9:  Even though average hourly wages remain relatively stagnant, the number of hours worked is rising, which is driving up average weekly earnings over the last quarter.

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Chart 10:  Recent surge in employment suggests that we might be near full employment.

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When evaluating labor markets, it is more useful to evaluate them over an extended period.   Most of these ten charts suggest that the U.S. labor market is headed in the right direction.

 

 

Can monetary policy address U.S. long-term unemployment?


My latest contribution to Global Risk Insights examines whether monetary policy alone can cure the problem of chronic unemployment.  Key points include:

  • Can infer that new Fed Chair Janet Yellen will maintain current monetary policy due to continued labor market weakness, even though the unemployment rate is falling.
  • Impact of U.S. monetary policy can have negative consequences to emerging markets in Asia, Africa, and South America.
  • Questionable whether monetary policy can effectively address long-term unemployment.
  • Fiscal policy should be tailored to specifically address the needs of the low-to-medium skilled worker.

Global Risk Insights

With Janet Yellen newly confirmed as Chairman of the Federal Reserve, investors are now parsing her testimony to gain insight on the future direction of interest rates.  

One particularly interesting piece of her testimony involved the persistence of long-term unemployment and a high number of part-time workers: “These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the U.S. labor market.”

This statement is significant because previous Fed Chairman Ben Bernanke identified a threshold of 6.5% unemployment rate as a starting point for reversing bond purchases aimed at stimulating employment. Currently, the U.S. unemployment rate is very close at 6.6%, but it now looks as if the Fed is hedging its bets.

By continuing to purchase long-term bonds even if it is at a slower pace, the Fed will drive down the interest rate of the 30-year Treasury bonds. Since mortgage rates and…

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Unemployment Rate Falls, But Prospects Are Dimmer


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The March job report was deceiving.  While the unemployment rate fell from 7.7% to 7.6%, there was only modest job growth and a contracting labor force.  Even though job growth was 88,000, it was far less than projections ranging from 125,000 to 160,000 and just a little more than a third from last month’s rate of new jobs.  In fact, the only reason why the unemployment rate did not rise was due to people dropping out of the labor force.

There are a few ways to quantify the extent of the shrinking labor force.  The traditional measures include the labor force participation rate and the employment-population ratio.  The labor force participation rate answers what portion of the non-institutionalized adult population is either working or actively seeking work.  Even though it would not count individuals who are incarcerated or institutionalized with mental illness, it would include those who are happy to not be working, such as a homemaker or retiree.  The employment-population ratio is similar, but only focuses on those working in relation to the non-institutionalized adult population.

There are somewhat mixed signals with the labor force participation rate falling, but the employment-population ratio remaining stagnant.  Over the last year, the labor force participation rate has fallen from 63.6% to 63.3% over the last 12 months, but the employment-population ratio was the same at 58.5% after adjusting for seasonal factors.  However, a closer look shows that the labor force participation rate trend more accurately reflects the labor market.  From the Bureau of Labor Statistics, Table A-16, they show that of the 90,483,000 people not in the labor force, 6,399,000 million want a job.  That is an increase of 358,000 from last March.

If enough people are dropping out of the labor force, then a falling unemployment rate can be misleading.  Here is a quick example to demonstrate why.  Assume that there are 10 people in the labor force with 8 working and 2 not working. Since the unemployment rate is the number of unemployed workers divided by the sum of workers and unemployed workers (labor force), we would show an unemployment rate of 20% (2 divided by 10).  Now let’s assume that one of the unemployed workers dropped out of the labor force due to diminished job prospects.  Then that will change both the number of unemployed workers and the labor force.  The new unemployment rate would be 11.1% (1 divided by 9). Even though the unemployment rate fell, it was due to a worsening job market not a better one.

Ironically, a falling unemployment rate shows a picture dimming, rather than brightening.