America’s jobs report – The Economist (blog)
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America’s monthly job reports this year have been so predictable that they have started to become boring. Today, the federal government reported that non farm payrolls rose 214,000 in October from September, the ninth consecutive month above the 200,000 mark. Economists, who tend to extrapolate the latest trend, had actually expected a bit more; on that narrow grounds, the report was a disappointment (though revisions added 31,000 to prior months’ growth) and market reaction was subdued.
But stepping back for a moment, today’s numbers are anything but boring. Demographic trends suggest that to keep up with the long-term underlying growth in the labour force, payrolls need only grow 50,000 to 60,000 per month, Morgan Stanley reckons. America has been consistently creating jobs at four times that rate this year. The steadiness of the gains – this is the 56th straight month of private sector job growth – belies the fact that they have also been accelerating. This year’s average of 228,000 is up from 194,000 in 2013 and 186,000 in 2012. That demonstrates increasing cyclical economic momentum. That is also evident in the unemployment rate which continued to drop in October, to 5.8%, another six-year low, from 5.9%. It has now fallen 1.4 points in the last year, one of the fastest 12-month drops in 30 years.
If the underlying economic momentum is so strong, why doesn’t it feel that way? As the drubbing voters handed to Barack Obama’s Democratic party in Tuesday’s midterm elections show, most Americans don’t feel like the recession is over or the economy is getting much better. There are several reasons for this. One is that while the duration of the job streak is impressive, the magnitude is not; overall, cumulative job growth since the previous peak remains substantially weaker than in previous cycles. Moreover, the drop in the unemployment rate has been helped by a coincident fall in the labour force participation rate as aging baby boomers retire and some of the long-term unemployed give up the search for work. Both those trends, however, seem to have stopped getting worse. Participation ticked up slightly in October, to 62.8% from 62.7%; it has hovered around that level all year. And the U-6 unemployment rate, which includes workers who have given up looking for work because they believe jobs aren’t available, and those working part time who would prefer full time jobs, plunged to 11.5% from 11.8%. Both those figures suggest that while the unemployment rate still understates labour market slack, that buffer of hidden unemployment is steadily shrinking.
Another reason that the average American’s feelings do not match the story these numbers tell is weak incomes. Hourly wages for all workers were up only 0.1% in October from September and 2% from a year earlier, in line with the same sluggish pace that has prevailed since 2009. The weakness of wages is in great part due to the continued slack in the labour market, which has limited workers’ ability to win larger wage gains. This is the number one reason the Federal Reserve has been reluctant to conclude the economy is ready for interest rates to start raising from zero. But there’s another, less remarked upon reason: poor productivity growth. Between rising payrolls and a lengthening work week, total hours worked are growing impressively; but total output, measured by slightly better than 2% real gross domestic product growth, is not. That is why productivity is up only 0.9% in the last year, lower than the 1.3% average recorded since the recessoin, itself none too impressive. Weak productivity growth generally holds back real wages gains.
Both weak pay and productivity might be related to the sorts of jobs growing the most; Steve Blitz of ITG reckons almost 70% of this month’s private sector job growth were in temporary work, health care and restaurants. Manufacturing and construction both rose, but by slim numbers.
For the Federal Reserve today’s report contains cross cutting currents. The sluggishness of wages is consistent with continued slack in the labour market. But poor productivity means weak wage gains are not as disinflationary as they appear. Meanwhile, with participation steady and broader measures of underemployment dropping, the economy is fast closing in on full employment. Indeed, Ian Shepherdson of Pantheon Macroeconomics says the headline unemployment rate will fall into the Federal Open Market Committee’s estimated range of the natural unemployment rate in the next few months, “a year earlier than the FOMC expected in its latest forecasts.” That all suggests that the Fed is on track to conclude, by mid-2015, that the economy has healed enough that interest rates should start to rise – even if the median household and voter doesn’t feel that way.
America’s jobs report – The Economist (blog)