The market is not impressed with the bigger-than-expected December jobs gain and the decline in the unemployment rate. The decline in the unemployment rate is indeed overstating the health of the labor market (see below for details), but I think the market is not fully appreciating the significance of the growth in jobs.
The decline in the unemployment rate has been driven not so much by the growth of jobs as it has been by the decline in the labor force. As the top chart shows, more than 5 million people appear to have dropped out of the labor force, so discouraged about their job prospects that they have given up looking and are thus no longer counted in the labor force. As the two top charts show, the labor force for many years has grown about 1% a year, but beginning in 2009, growth ground to a halt. The bottom chart shows the labor force participation rate—the proportion of the population that is in the labor force—and it has dropped two percentage points since 2009. 2% of the 322 million U.S. population equates to about 6 million people, confirming the implication of the top chart. If you added 5-6 million people back into the labor force (as unemployed looking for jobs), the unemployment rate would be 11-12%. Something happened starting in 2009 that resulted in many millions of people deciding to "drop out" of the labor force; the only question at this point is whether they have permanently given up or whether they could be enticed to return. In the meantime, they have been the cause of the sizable decline in the unemployment rate, rendering it fairly meaningless as an indicator of improving economic health.
But: the jobs gains we have seen in the past two years are a legitimate indicator of a slowly but steadily improving economy. The most important thing is not the level of employment, or the participation rate, but the change in employment on the margin, and that is decently positive. As I mentioned in the previous post, both the household and the establishment surveys are registering similar rates of growth (1.7% annualized, or about 160K per month on average), and that has been the case for several months now. These jobs may be "low quality" jobs, but they are still jobs.
The economy is growing and things are improving, even though we would probably be doing much better by now if it weren't for the huge increase in government spending since 2008 (which wastes the economy's scarce resources), the huge increase in regulatory burdens (which make it more difficult and expensive to start and run a business), the huge increase in the deficit (which increases the expected burden of taxation), and the Fed's massive increase in the monetary base (which creates tremendous uncertainty about the future of monetary policy and the stability of the dollar).
Off of the early 2010 bottom employment is growing at 1.1% annualized just 0.3% above population growth. Not good.
ReplyDeleteSome 200K+ baby boomers are retiring each month. That is going to reduce the size of your labor force, no matter how booming the economy might be.
ReplyDeleteHere ya go:
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"As the year 2011 began on Jan. 1, the oldest members of the Baby Boom generation celebrated their 65th birthday. In fact, on that day, today, and for every day for the next 19 years, 10,000 baby boomers will reach age 65."
At 10,000 per day, that actually translates into more like 300K per month. If we assume, for the time being at least, that 1/3 of them will delay retirement for various reasons, we still get 200K new retirees per month. That's 2.4 million per year. The only thing that could possibly overcome such huge numbers would be a massive wave of new immigrants.
The market may be unimpressed with the jobs data but I think it's certainly impressed with Alcoa's lousy numbers, Boeing's failure to get a lot of big contracts and the continuing collapse of the Euro.
ReplyDeleteI don't doubt that boomers are beginning to retire in increasing numbers, but I seriously doubt that this can explain the rather sudden decline in the labor force participation rate and the flat-lining of the labor force that began in 2009.
ReplyDeleteAs you point out, we would be well-advised to significantly expand our immigrant visa quotas. Without more immigration the ability of the US economy to continue growing will come into question in the next few decades. More people would be a win-win for everybody.
You might also want to read Calculated Risk's recent 2-part series called "The Kids are Alright":
ReplyDeletePart I
Part II
Basically, a lot of the rest of the decline in labor force participation comes from young women going to college. Let's hope they're majoring in something worthwhile.
Scott,
ReplyDeleteI agree that we must do more to encourage immigration if we're going to offset our declining birth rates. Our politicians here in Georgia have done a great job scaring off immigrants with new laws aimed at punishing folks who are willing to work hard at jobs that residents refuse to do. As a result, our farmers are really hurting as is our economy.
According to the chart in "The Kids are Allright," the labor participation for those 50 and older has increased every five years since 1990. Therefore, baby boomers are not retiring, they're adding to the equation. Which means the 5 million drop in participation is coming from those under 50.
ReplyDeleteBesides, saying that 10k new boomers reach retirement every day is meaningless. You have to know (and then subtract) how many pre-boomers were retiring just prior to that and look at the incremental. Anyway. that's only if they were retiring as it appears they're not.
Those going to school only seems to represent a small portion of the five million. "In the last two years, the number of women ages 18 to 24 in school rose by 130,000, compared with a gain of 53,000 for young men." - total 183k for 2 yrs for category.
Some points:
ReplyDelete1. Boomers are not retiring as already pointed out. How do you want to retire with average savings of 20k or so and with social security entitlements kicking in later and later?
2. To report GDP more fairly, we need to go to GDP per capita or GDP per active worker as in most countries the number of people and thereby GDP will shrink sooner or later. Just think of Japan which is not only experiencing shrinkage in the work force, but also population by now (I think). To demand a change in immigration laws only to crank out higher GDP numbers is absurd IMO.
It would seem that these discouraged workers account for the record increase in the number of people on welfare. We have 50 million or so on medicare now. Related costs have increased by 100's of billions. So they're not working and it would seem that won't change any time soon as they're apparently not looking for work.
ReplyDeleteWith the economy teetering on Japan-style deflation, why is the Fed dithering?
ReplyDeleteWill the Dow ever top 1999 highs?
I'm sorry, but the notion that *all* boomers have bankrupt or tiny retirement funds and thus cannot retire is ridiculous. Sure, many do and therefore can't retire. But a lot do have sufficient funds and *can* retire.
ReplyDeleteIn many ways, the employment situation in America is irrelevant, as is growth and inflation/deflation -- what is interesting is that the economic devastation across America is creating "buy" opportunities of a lifetime -- now is the time to convert earnings and savings into the best dividend and rent earning equities money can buy -- those suffering in America will get by somehow -- in the meantime, now is the time to buy great stocks and real estate at a discount -- those who participate in the equity sale occuring in America today have a good chance of achieving incredible returns in the next 15-25 years!
ReplyDeleteIf only we could take a meat axe to the more than $500 billion/yr in procurements,otherwise known as corporate welfare.
ReplyDeleteNon-farm private sector jobs non- seasonally adjusted from Establishment Table B-1 since the dip in September:
ReplyDeleteOct’10 to Oct’11 plus 1,833,000 jobs
Nov’10 to Nov’11 plus 1,853,000 jobs
Dec’10 to Dec’11 plus 1,932,000 jobs (plus 79,000 vs. the headline 200+)
If two million more jobs can be created in 2012 there will be lots more people to help support those not working.
There are roughly 75 million Baby Boomers. They are just now reaching retirement age. I worked at Dean Witter as a stockboker for many years in a very middleclass town. From my experience a large majority of Boomers will have to work well into their retirement years. Boomers, as a group, have been terrible savers/investors, opting instead to spend, spend, spend.
ReplyDeleteIn fact, IMO, much of the so called "struggling" America is self imposed profligate borrowing and spending well beyond responsibilty. America became to rich to fast and as a consequence has lost all reason as to responsible personal money management.
As I look around, I don't see it changing much either.
Those Boomers who will retire at the normal age or even before are those working for the government, whether at the federal, state, or local level.
Bob
I put up a chart of the seasonal pattern on my web page.
ReplyDeleteNo seaonal adjustment. No birth-death model. No dropping out of the work force.
Demographics doesn't explain much here. Labor force participation is rising for older workers and falling drastically for younger workers. Part of the explanation is the necessary and temporary fall in construction which employs young and low-skilled men. Another part of the explanation is 99-week unemployment benefits combined with rapidly escalating costs of employing low-wage, low-skilled workers. Finally, government policies are discouraging investment.
ReplyDeleteRE: immigration to solve our economic problems of slow growth
ReplyDeleteGreat Idea! Lets import tens of millions more people from south of the boarder who won’t be paying income tax. In fact, current residents of the U.S. can fund even more to the Federal & States Departments of Education, Health & Human Services, Medicaid, law enforcement, the judicial system, etc., as an incentive for them to come here.
Sarcasm aside, it is apparent there is no known way to have a good economy without population, inflation, and debt growth.
Besides, who is going to pay for my social security check and Medicare bills if not for the immigrants and their children since we were too self adsorbed to bear enough children to support us in our retirement. Oh, right, I forgot. It was an environmental and social matter to have less children.
Buy of a lifetime?????? Debt to GDP is > 100% with no hope for reversal and our hopelessly hate filled "leaders" are still on a war path leading to a US ratings downgrade. It's a new economic era and you're still living in the old one.
ReplyDeleteCharles- good points.
Hi Lara, I agree that debt is a bad buy right now -- however, dividend and rent-earning equities are on sale everywhere (the good stuff) -- additionally, world-class skills are selling at a premium on global markets (surgeons and computer scientists are experiencing wage growth) -- yes, those without earnings or skills are living in hard times -- however, those with money (from savings or earnings) and skills are living in a window of opportunity -- that's what I see -- I weep for those suffering in America today, truly -- but, I am most excited about the fantastic investment opportunities that are appearing across the nation right before our eyes -- my advice to everyone is acquire world-class skills and sell those skills for a premium while investing those earnings into dividend and rent-paying equities -- investment horizones should be focused on 15-25 years out -- avoid all debt (bills, bonds, and notes) like the plague -- those with earnings can "eat" their way to financial independence in today's economy...
ReplyDeleteDemographics doesn't explain much here.
ReplyDeleteReally, Charles. Review the CBO. Demographics explains most of the secular decline since the labor force participation rate (LFPR) peak in 2000 at 67.3. The business cycle merely exacerbates the LFPR decline. The NBER cycle peak was 67.3 in March 2001, bottoming at 65.8 in January 2005. The NBER cycle peak was 66.0 in December 2007 and may have bottomed at 64.0 in December 2011.
Grannis is just reiterating his false talking point memos without counterfactuals. If government didn't do this, blah, blah, blah.
Good Morning William, I respectfully disagree that equities or higher education are good investments right now. If anything, I'd sell equity holdings and seek work not education.
ReplyDeleteThe cost of a college education along with student loans have sky rocketed this past decade. Outstanding U.S. Student loan debt exceeds $800B, with little hope for repayment with no job market. It's just another bubble waiting to burst. The sub-prime mortgage bubble was about $1.3T when it burst and it at least had a tangible asset attached to it unlike student loans.
When the sub-prime market burst, it sucked about $10B out of US equity markets.
Student loans are only a part of the remaining debt bubble.
correction....
ReplyDeleteWhen the sub-prime market burst, it sucked about $10 trillion out of US equity markets.
The current reality for some.....
ReplyDeletehttp://www.youtube.com/results?search_query=burn+your+worthless+college+degrees&oq=burn+your+worthl&aq=0&aqi=g3&aql=&gs_sm=c&gs_upl=455l3088l0l5863l16l10l0l3l3l0l477l477l4-1l1l0
Are there any studies that estimate the size of the underground economy? I imagine that it is not very significant, but I'm curious since tough economic times tend to drive more people into that "sector".
ReplyDeleteI was wondering if Scott would like to comment on the impending Baby Boomer retirement situation particularly with regard to underfunded pension liabilities especially as many funds have a mandated return of around 8% yet are sitting in cash/bonds/treasuries earning close to zero in inflation adjusted terms. Also the baby boomer retirement situation in Japan where things look even more precarious with the high govt debt/gdp, low birth rate and the diminishing support for JGB. Any rise in the JGB interest rates could send the Jap Govt broke
ReplyDeleteI certainly agree with William McKibbin regarding the current value of US equities as a long term investment. Scott has pointed out numerous times that they are priced for an Armageddon type outcome, a scenario difficult to accept based on his excellent analysis and commentary. Once the Eurozone fiasco is sorted, then potentially some of the trillions sitting in "safe havens" will return to the markets as fundamentals not fear take over. At the moment, US blue-chip equities are concentrated in "strong hands" and unlikely to fall substantially further as the pool of marginal sellers has been greatly reduced. Share buybacks and quite accumulation by savvy fund managers during panicked sell-offs has seen to that. Corporations have repaired balance sheets, reduced staff numbers, refinanced at record low levels via corporate bond issues and are have global exposure and mountains of cash. If you believe that life will continue, that people will still need essential health and food items etc. then today is an excellent buying opportunity. Put up your hand if you wish you had bought say Apple or McDonalds stock at the depths of the GFC!
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