U.S. Labor Market Still Not Firing on All Cylinders

October 22, 2013

After expanding by 208K per month between September 2012 and March 2013, non-farm payroll job growth slowed to 182K per month in the second quarter and 143K per month during the summer quadrant of the year.  Since the economic recovery began in mid-2009, there hasn’t been a decent summer yet from a labor market perspective.  Employment contracted by 265K per month in 3Q09 and 55K per month in 3Q10, then rose 145K per month in 3Q11 and 152K per month in 3Q12.  In September 2013, jobs rose 148K.

A broader examination of employment growth highlights an under-performance that’s more than a decade old now.  Jobs grew by 2.1% per year over the twenty-five years between mid-1950 and mid-1975 and by a similar 2.2% per annum in the ensuing twenty-five years to mid-2000.  Since mid-2000, however, jobs have risen at a minuscule annualized pace of 0.3%.  Since the current business upswing began in mid-2009, jobs went up 1.0% annualized, half the pace between 1950 and 2000. 

Real GDP growth has slowed but not quite as dramatically as jobs growth.  Real GDP climbed 3.7% per year from mid-1950 to mid-1975 and by 3.5% per year from mid-1975 to mid-2000, but the trend has been halved to 1.7% in the 13 years since mid-2000.  Since the beginning of the post-Great Recession upswing, real GDP expanded 2.2% per year.  This shift has persisted long enough to constitute new and substantially softer long-term growth trends in both GDP and jobs.

Unemployment has receded far more slowly than it went up.  September’s 7.2% jobless rate was the lowest since November 2008.  Unemployment increased 1.8 percentage points in the year between October 2007 and October 2008 and another 3.5 percentage points in the following twelve months to a peak of 10.0% in October 2009.  The subsequent down slope lopped off 0.5 percentage points by October 2010, 0.5 percentage points between October 2010 and October 2011, another 1.1 percentage points to 7.9% in October 2012 and 0.7 percentage points over the past eleven reported months. 

The labor market is tightening less sharply than the decline of unemployment seems to suggest.  Just 58.6% of the adult population worked last month, the same ratio as in August and even 0.1 percentage points less than in September 2012.  The labor participation rate of 63.2% is also lower than a year ago.  Hourly wage earnings ticked just 0.1% higher last month and rose by a subdued 2.1% over the past year.  The broad measure of unemployment plus under-employment is at 13.6%, still substantially into double-digit territory.  Workers by an large didn’t reap the benefit of above-average growth in labor productivity during the latter nineties and most of the naughties. 

The U.S.  labor market’s immediate prospects do not inspire optimism, because the drag from the government slowdown has not yet been felt.  Analysts, who were so sure that Fed tapering would begin in September 2013, are revised their view to no sooner than next March, and a hike of the Fed funds rate is commonly considered delayed into 2016. 

Fed policy is caught in a trap.  There are critics who say Fed quantitative stimulus is the problem rather than the solution that’s preventing the economy from growing more robustly, and they recommend that the FOMC take a leap of faith and jump into the deep end of the pool. That experiment’s been tried already in Japan, and the lesson there is that tighter monetary policy can’t be simply willed because it’s the ideological correct thing to do.  Interest rates haven’t returned to “normal” levels in the United States, Japan or the euro area for that matter because those economies cannot handle the shock.  One can hope that a time will come when normalization can be tolerated, but it isn’t now.

In response to today’s Labor Department jobs report, the euro rose to $1.3780, its strongest level since November 14, 2011.  U.S. manufacturers could use the boost in competitiveness.  Only 2K U.S. manufacturing jobs were created last month.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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