unemployment

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Bernanke Cautions

Today’s speech by Ben Bernanke has caught quite a bit of attention. So it should. His basic argument is that it far too soon to declare victory in this recovery. Job growth is way too small each month. Moreover what growth there has been is more a function in the reduction of firing than in a surge in new hiring. The economy is simply not generating new jobs at anywhere near fast enough a pace for us to get to sustainable growth any time soon.

We are seeing a significant pick up in activity attributable to a release in pent up demand. That is normal and points to greater confidence on the part of consumers. But it is not enough to fuel a fully fledged recovery with GDP growth sufficient to close the gap between potential activity and our actual activity. That means there is a pool of idle resources sitting around unused, with much of that being unemployed labor.

Bernanke was firing a shot in what appears to be the early stages of a fight against the austerity crowd’s next attempt at retrenchment. The economy is simply not strong enough to carry the burden of cuts in spending. We only have to look at the damage being wrought across Europe to see that the entire notion of austerity driven growth is a complete farce. We, that is to say you and I, never thought it was possible to create growth by cutting spending. Unfortunately there are those, many in very significant jobs, who believe in such nonsense. The Euro experience of the past two years has thoroughly debunked growth austerity, but it clings on due to its ideological strength: it supports a far right economic agenda and works very well in the rarified atmosphere of orthodox economics models. But a cut in spending is a cut in spending and so shrinks the economy. The supposed offsetting surge in confidence, which, in turn, triggers a surge in investment and consumption, hasn’t turned up anywhere where true austerity has been enforced.

Still, Bernnake is concerned enough about the state of our politics that he deemed it necessary to fire this shot across the bows of those who might imagine that the economy is now recovered enough to take a battering.

He is right.

We remain far short of our goal. This is not the time for cuts. Indeed it is more a time for a another dose of medicine.

That we won’t get.

So all we can do is cling on to what we have and make sure the hawks don’t ruin it for us.

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Jobs Market: Continued Improvement

This morning’s jobs report from the Bureau of Labor Statistics makes for some quite dull reading. The headline is that the economy added 227,000 new jobs in February, which is slightly more than analysts expected, but is not a terrific burst of growth either. Indeed, so much the same as January’s report is February’s that whoever writes it had to resort to a variety of tricks to avoid repeating the words “essentially unchanged” in every single paragraph. Thus we were treated to “showed little or no change”; “little change”; and “about the same” in order to spice things up a bit. Even then I count that three of the first seven paragraphs include the dreaded “essentially unchanged” phrase.

Oh. And at 8.3% the unemployment rate is not “essentially” but actually unchanged.

So it appears that the economy is generating jobs at a steady if unspectacular rate. Good.

But also bad.

At this rate we will still have unacceptably high unemployment for well over the next two or three years.

That’s the dull part of today’s news release.

The more interesting part is the divergence between the two surveys that constitute the sum report.

As I have mentioned before the two surveys are one of households, this is the one from which the unemployment rate is calculated, and one of business establishments which is the one where we find the payroll increases and decreases. Sometimes, in fact more often than not, the two send out different messages. That’s why we stick to one or the other in order to track month to month changes.

February’s quirk was that the survey of households shows an increase in the number of people claiming to be employed of 428,000. The equivalent increase in January was an enormous 847,000. Likewise in February the household survey tells us that 310,000 people dropped out of the workforce, whereas in January 1,177,000 people joined. These huge swings are what makes using the household survey difficult as an indicator of the underlying trend in employment. Further, in February 48,000 additional people reported themselves as being unemployed, while in January there were 339,000 fewer people reporting that way.

Clearly underneath the top line numbers is a seething to and fro that only manifests itself over the longer term. It is better therefore to ignore the month to month gyrations and focus on those trends.

What can we make of those trends?

If we keep within the household survey – the one that relies on what people say when they are interviewed – we can identify a sea change in the job market. The number of people responding that they are employed has risen by a whopping 2.3 million in that last six months. That’s a monthly gain of 385,000. That’s the best growth the economy has seen for a decade, since 2000 to be specific, and represents a radical departure from the gloom during the collapse during the crisis.

Evidently conditions are much healthier, which is why we are also seeing improvements across the board in other indices such as confidence and spending.

But they do not constitute a total recovery.

The point to recall is that the depth of the recession was so huge that these rates of recovery, while always welcome, are not sufficient to get us back to where we would have been had the bubble, our banks, and household indebtedness conspired to throw us over the cliff. There is a very long way to go. And there are still very large risks lurking that could stop the recovery in its tracks.

With a temporary respite in the Euro crisis – and I think it is only temporary – and with a modicum of sense prevailing in the West’s attitude towards Iran there appears to be no immediate shock likely to emanate from either quarter. That leaves our banking system as the risk factor most likely to knock us off track: the rate and quality of credit creation, the level of capital, and the continued over subsidy of the industry – and the consequent liability it represents to taxpayers – all are very significant factors to watch carefully over the next few months. Boxing the banks into a smaller corner is the single largest policy step we can take to ensure a smooth, sustainable, recovery. The national debt and the budget deficit do not come even close.

So.

All in all a dull but nice jobs report. Don’t make too much of it. But don’t underplay its significance either.

I give it a solid “B”.

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Jobs – Where to Next?

This week we will get our next insight into the employment outlook. Today’s ADP employment report – they tell us about the number of people added or subtracted from all they private sector payrolls they process for businesses – gets us off to a good start.

ADP managed payrolls added 216,000 new jobs last month. That’s a lot better than the consensus forecast of 170,000, and a significant step up from January’s revised 173,000. It brings the three month average to 223,000, which compares with last year’s monthly average of 156,000, so clearly things have improved. It is also the twenty-fifth straight month of job growth, and reinforces the overall impression that the economy is enjoying a solid, if unspectacular, period of growth.

The expansion was spread across the economy, so growth appears to be well balanced: small business accounted for about half of the new jobs; the service sector added 170,000, while manufacturing added 46,000. It is this balance that suggests the recovery is sustainable at least as long as events in Europe or the Middle East fail to disrupt it.

With this is mind it is useful to reflect on how the job market might develop through the year – an election year no less.

One issue that immediately comes to mind is that much of the improvement so far has not come from the addition of new jobs, so much as from the steady decline in the elimination of existing jobs. In other words it is a decrease in the rate of firing that is driving the increase in payrolls. As we all know, even in good years businesses are busy both hiring and firing, it is the balance between the two that matters. For the current improvement to continue at the same rate we need to see a shift from an emphasis on fewer firings to an increase in new hiring. That will depend a great deal on business expectations for sales in the upcoming months. That, in turn, will depend on the outlook for wages, and the continuance – or lack thereof – of the debt reduction households were forced into by the banking crisis that started this whole cycle. Unfortunately the prospect for sufficient activity translated into sufficient spending is less bright than we need. So I suspect that the current rate of improvement will falter somewhat as the year progresses. We will still be adding jobs, but nowhere near the rate needed to bring the unemployment rate down to a respectable level. It will be a few years before the economy has restored an unemployment rate within the bounds of normality. That is as long as nothing crops up to ruin the recovery.

One factor that will play a key role in the next few months of job creation is the productivity rate. Much of the initial spurt – such as it was – in growth came not from job creation but from businesses squeezing extra output from current payroll and capital levels. This showed up as an acceleration in productivity. Today we heard that the productivity increase for the fourth quarter was revised up to 0.9% bringing the year as a whole to 0.4%. This is the lowest rate of growth since 1995, and way below 2010’s 4.1%. This suggests that sustained growth in business will now have to come from increasing workforces as it appears businesses have squeezed that last drop out of the current workforce.

Tellingly along side this productivity slow down is a rise in labor costs. There was a sharp spike in the hourly wage rate in the fourth quarter, most likely driven by an increase in overtime pay. The first estimate of fourth quarter unit labor costs had shown an increase of 1.2%. This has now been revised to 2.8% and brings the annual increase to 2.0%, the fastest rate since 2008.

This brings us back to business expectations. With the current workforce fully utilized 0 as suggested by the declining productivity numbers and rising labor costs – the stage is set for a round of new hiring. This would be the best case, and would support a continuance of the current rate of job growth. It is my view that business still has a relatively pessimistic outlook – the various indicators of business confidence are improving but not that rapidly – that drives my forecast of a slight weakening from that current pace rather than a continuance of it.

All this could be cast aside later this week when we hear from the Labor Department. The current best guess seems to be that overall payrolls, both private and public, added slightly less than the ADP figure – in the 200,000+ range. That is decent, but insufficient. The unemployment rate may drop a little, but not by much. This could be the new trend that extends through the summer. We can discuss that Friday.

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Getting Trendy

The economy is all about trends and tendencies. We have to watch data over longer periods in order to identify where it is headed because short term or one-off bumps and leaps can mislead us easily.

In that context we should pay attention to today’s news that new claims for unemployment assistance dripped 15,000 to 358,000. Not only is that a good week-to-week improvement it helps bring the four week moving average down to 366,250, which is the lowest it has been since 2008.

Couple this news with last week’s employment report and all the anecdotal information we are receiving about hiring, and there is no doubting that the economy has entered a new and more optimistic phase.

Thing are looking up.

But.

Given the depth of the crisis we need to pause a moment and dwell on another trend: continuing claims rose 64,200. There is a dramatic bifurcation taking place in the unemployment roles. The short term unemployed are getting back to work much more easily, and fewer are being added to the rolls. Yet the longer term unemployed are having greater difficulty finding work, and many are simply leaving the workforce. It is easy to overplay the drop in workforce participation which has shrunk markedly through the crisis, but it is something we need to watch carefully. We need to make more effort to ameliorate the effects of long term unemployment via re-training and other measures. This will stop the erosion of skills that prevents the long term unemployed from returning to work.

That and we need to stop vilifying them as being lazy, unskilled, and living off our largesse. Only right wing economists and way out right wing politicians believe that the unemployed are naturally indolent who need to accept their fate and take low wages in order to get the job market back humming again.

Speaking of which Charles Murray’s new book ‘Coming Apart, and the Culture Myth’, has received far too much attention. Its central premise is that our long term problems are due to a drop in social values. Were our workers only to become good church goers, to stay happily married, and to keep away from temptation, our economy would hum once more, just like it did – in Murray’s mind anyway – way back when.

This repulsive and shallow analysis is simply a regurgitation of late Victorian and early Edwardian upper class twaddle. It recalls the dusty years of a fading empire when the elite realizes that its formula is no longer working. Since elites have a hard time coming to terms with the illusions upon which they imagine their success to be built – they routinely mistake the causes of success, and imagine their superiority is based upon exceptional values or work ethic rather than good luck – they then begin to preach to the unwashed. Murray has fallen down the same hole. It is naive and counter productive to think that social values will magically transform our economy, allow us to compete with global competitors, and re-balance our debts all with one deft sweep of the arms. It will be harder work than that. Work that begins with getting working wages to grow and not languish in the gutter.

That and eliminating an economic theory that argues all unemployed workers must value leisure more than work, and thus all the unemployed must be voluntarily so. There are a few economists I can think of who I wish, for a while, could test that stupid theory empirically. Now that would be a trend in the right direction too.

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Jobs – Lot of Them

Today’s employment report was very positive. It is difficult, even for a conformed skeptic like myself, to find much to gripe about – we will get to my caveats in a moment. If this keeps up the election this November takes on a totally different tenor. More importantly, a whole bunch of people will be newly employed. About time.

According to the report the US economy added 243,000 jobs in January. Virtually all of this was in the private sector and was well distributed across the economy – no one sector or industry dominated, so this was a broad based gain. Of note was the 50,000 new jobs on manufacturing, and the gain in retail stores which was a little patchy but nonetheless strong. The retail sector lost 14,000 jobs in specialty clothing stores as places like The Gap retrenched, but this was more than offset by gains elsewhere, such as the 19,000 pick up in department stores. Overall retailers have added 390,000 jobs since the end of 2009, which suggests that demand is filtering back and that business confidence is growing.

The manufacturing gain was particularly strong in the durable goods sector, which reflects the increase in investment we have seen over the last year. Overall durable goods manufacturers have added 418,000 jobs in the past two years.

One of the caveats we need to note: construction id reported to have added 21,000 new jobs in January, after having added 31,000 in December. We should be cautious here. The unusually warm weather may have allowed firms to hire earlier than they normally would. Plus the seasonal adjustment may be giving a positive skew to the data. Let’s see if this trend keeps up further into spring.

The service sector contributed the most to the overall gain. Firms providing professional services led the way by adding 70,000 new jobs, with almost half that coming in the employment industry itself. Clearly the workplace is changing for the better if the employment bureaus feel the need to staff up to cover the volume. Other notable gains were in accounting, 13,000 new jobs, and architecture and engineering, with 7,000 new jobs. Elsewhere in services, health care continued to add jobs – 31,000 in all – with a notable contribution being made by the businesses affected by the new health care reform, which clearly did no harm to the private sector.

Lastly we should note that the hospitality industry, including restaurants and other eating places, is recovering well. It has added 487,000 jobs since the low reached for that industry in February 2010, with 44,000 coming this January alone.

This stronger job growth is reflected in the unemployment rate which dropped 0.2% to 8.3%, and is now down 0.8% since last August. Within the demographics, the unemployment rate for adult male and female workers is now the same at 7.7% – the rate for male workers fell in January. Teenage unemployment remains very high at 23.2%, while the unemployment rate for blacks fell to 13.6%.

The number of people who are marginally attached to the workforce – to use the rather dry term tossed about by the government – remained about the same at 2.8 million. These people are those who are wanting to work, have looked for a job in the past year, and are still without a job. This group consists of about 1.1 million discouraged workers – people who have given up looking for work currently because they don’t think there is anything out there; and about 1.7 million who have not looked for work in the past four weeks – usually because of things such as school commitments and so on.

This leaves the total of unemployed workers at 12.8 million, down from 13.1 million in December 2011, and 13.9 million a year ago. Obviously progress is being made.

What do we make of all of this?

First an additional caveat: the Bureau of Labor Statistics annually changes its estimate of the population. This year it added over a million people to its estimate. That alters the proportions favorably when we are discussing unemployment. I don’t think this alters the trend at all, but it does give the appearance of a more dramatic gain than might be real.

With that in mind, this is a good report. Jobs are being created across the board – except in the government sector which has lost 276,000 jobs in the last year, but didn’t change much in January. There is now a noticeable recovery in the private sector which added about two million jobs in 2011. Most of that growth has been in the last six months alone. The rate of job creation in manufacturing is now at a six year high. The flip side of job creation measured by the new claims of unemployment assistance has dropped to a new, and much lower, level. So the tone of the labor market has improved markedly.

Things are definitely looking up. There is no denying the progress being made.

Now back to my normal grumpiness: this is not enough. An unemployment rate of 8.3% this far into an erstwhile recovery is mediocre at best. Even at January’s pace of job creation we will have unusually high levels of unemployment well into 2014, which is absurd and painful given that we all knew how to avoid the problem.

Which brings us to politics: the recent steady improvement in the employment situation will start to have a knock-on effect in the presidential election. If, and it is still a big if, the unemployment rate gets below 8.0% during the summer, and if, also a big if, growth chugs along above 2.0% all year, then Obama’s re-election chances will surely rise dramatically. It would also take away the primary line of attack from whichever Republican he is running against. I wonder how long it will be before we hear of conspiracy theories surrounding the government’s supposed rigging of the numbers. I guess mid-summer.

But that is speculation.

What is real is this improvement in the labor market. Let’s applaud and hope for more.

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