Jobs report not so impressive

Markets cheered today's September employment report. Job gains were higher than expected (+248K vs. +215K), the weak August gain (+142K) was revised up to a more moderate gain (+180K), and the unemployment rate fell to a new post-recession low (5.9%). But overall, the jobs pictures hasn't changed much, and the outlook for economic growth is still moderate. This is disappointing to those looking for economic growth to rev up, but it also alleviates the concerns of those who worry that weaker growth in the Eurozone and in China could drag down the U.S. economy.

As the chart above shows, one reason that jobs growth has been unimpressive in this recovery is that the public sector suffered a substantial loss of jobs. That's not really a bad thing, however, since a bloated public sector was a drag on the rest of the economy. Trimming government jobs is actually a good thing. I prefer to focus on private sector jobs, since that is the ultimate source of growth and prosperity.

When analyzing the jobs data, it's important to bear in mind that the numbers are often revised up or down by a significant amount (as happened to last month's number). So it's important to look at the overall trend before deciding whether labor market conditions have changed meaningfully. As the chart above shows, monthly jobs growth has been averaging just over 200K a month for years.

The chart above shows the 6-mo. annualized change in the monthly private sector jobs numbers. Here again we see that the current growth rate of jobs is not meaningfully different from what it has been for the past 3-4 years, and it's not much different from what we saw in the last business cycle expansion. If private sector jobs grow just over 2% a year and productivity averages its historical 1% a year, then the result is real economic growth of maybe 3% per year. Unfortunately productivity gains have averaged only 0.7% in the past two years. In any event, it's not unreasonable to think that the current growth rate in jobs could give us overall economic growth of 2.5-3% going forward, which would be a modest improvement from the 2.3% annualized growth of the past four years.

The one bright spot to emerge in today's numbers was the big jump in the ISM services employment index, which registered a new, post-recession high (see chart above). This is encouraging because it reflects an increase in business confidence in the future.

The enduring, unique, and depressing characteristic of the current business cycle is the meager growth in the labor force, shown in the chart above, and that didn't change in September. Upwards of 10 million people or so have elected to "drop out" of the labor force, either because they have retired or have given up looking for a job.

The slow growth of the labor force is reflected in the declining labor force participation rate, shown in the second of the above two charts. As the top chart suggests, it is perhaps not a coincidence that the labor force participation rate began to decline meaningfully right around the time that transfer payments (money given to individuals by the federal government for things like unemployment insurance, food stamps, medicaid, welfare benefits, social security and disability benefits) surged. When you give more money to people who are not working, don't be surprised if they prefer to remain unemployed. And it continues: transfer payments hit a new high of $2.6 trillion in the 12 months ended August—a record 72% of total federal spending over the same period—and the labor force participation rate hit a new post-recession low of 62.7% in September.

So the September jobs report on balance was a positive, but not by much. Economic conditions are probably improving a bit on the margin, but not by leaps and bounds.