Friday, December 4, 2015

Slow, steady jobs growth is good news

The November jobs number was marginally better than expected, and with upward revisions to prior months it adds up to ... pretty much the same kind of growth we've seen in recent years. There's nothing to get excited about—unless, that is, you were worried that the economy was slowing down and at risk of deterioration given that the Fed is almost sure to begin raising short-term interest rates in 12 days.

The charts above show the monthly change and the year over year rate of growth of private sector jobs. Jobs have been growing at slightly more than 2% a year for a number of years.

We're still mired in the "weakest recovery ever," given that real GDP is about $2.6 trillion below its long-term trend, but as the chart above shows, the private sector has created a lot more jobs in the current business cycle expansion than it did in the prior one. The net gain in jobs since late 2007 is now 5 million, which tops the 4 million rise in jobs from late 2000 through late 2007. From the low in early 2010, the private sector has actually created about 14 million jobs. That's not so bad, and it at least makes you question why so many continue to moan and grown about how terrible the economy is. Sure, we could and should be doing a lot better, but there is no denying that we have made considerable progress despite all the headwinds (e.g., high tax burdens, huge new regulatory burdens).

If there is one important point here, it is that this is NOT a fragile economy. It's an economy that has been growing at a slow but relatively steady pace for over six years, and there is no sign yet of any deterioration. When the Fed raises the interest it pays on excess reserves later this month to 0.25%, the impact on the economy is going to be de minimis. In fact, it might even be positive, if for no other reason than markets might become a little more optimistic about the future now that the Fed is demonstrably less worried.

As the chart above shows, the price of 5-yr TIPS (using the inverse of their real yield as a proxy for price) and the price of gold have been slowly declining for some 3 years. It take that as a sign of declining pessimism, since both these assets have unique qualities that make them "safe" investments. This tells us that markets are slowly losing the fears that built up in the wake of the Great Recession and the PIIGS crisis.

As the chart above shows, the equity market has been periodically upset by flare-ups in "worry," for which I use the ratio of the Vix index to the 10-yr Treasury yield as a proxy. The market gets very nervous from time to time, but then worries subside and equity prices rise. It's hard to get real worried when the economy demonstrates, as it has over the years, an ability to overcome adversity and just keep on chuggin' along, albeit slowly. As I've been saying for years, avoiding recession is all that matters when short-term interest rates are near zero.


Benjamin Cole said...

As usual, excellent insights and summary from Scott Grannis. You know, sometimes you start to take this stuff for granted...but if you are old enough, you remember the pre-Internet days, and coverage like this was had only at a price, and was still hit-and-miss.

I still suspect the Fed is making a mistake, but it could also be said the interest rate is a bit of a sideshow when the Fed pays 0.25% IOER, and has conducted $300 billion in its mysterious "reverse repurchase agreements" programs. There might be several dozen people in American who understand the Fed's $300 billion reverse repurchase agreement program and what it has accomplished, but probably I am not one of those several dozen.

Yes, cut taxes and regulations. BTW, the worst economy-sapping regulations in America today? I am beginning to think local property zoning.

Everyone believes in free enterprise and highest and best use of land...except in their neighborhood.

We have met the enemy and he is us.

Dave said...

Outstanding commentary. Thank you Scott!

Houston Advisor said...
This comment has been removed by the author.
Houston Advisor said...

Scott, couldn't it be that your $2.6 trillion estimated loss is subject to extrapolation bias? Doesn't a strong growth rate extrapolate into a Large Number problem. I know we are supposed to be Exceptional but....

Benjamin Cole said...

BTW, I just did an informal survey of the central banks of China, Japan, Europe, and India. They are all easing, and actively involved in quantitative easing programs.

The US dollar is already taking off like a rocket. I think if the Fed tightens now, it will just have to reverse course--- but it will be reluctant to do so, due to institutional hubris.

Not pretty.

Thinking Hard said...

I agree Benjamin. Maybe the U.S. can buck the trend, but maybe not.

"In the seven years since the world's central banks responded to the financial crisis by slashing interest rates, more than a dozen banks in the advanced world have tried to raise them again. All have been forced to retreat."

As Benjamin also points out, a majority of the top 5 central banks in the world are actively cutting rates and easing! The dollar continues to climb, hurting U.S. exports. Please see

Maybe the U.S. and the Fed is different, but probability says otherwise. The Fed has already effectively tightened 298bp from the shadow rate bottom in May 2014 of -2.99 to the current shadow rate of -0.004. ( This is also indicative that the bond market is close to pricing in a rate increase. The probability of a Fed rate hike in December is fairly high, but it is still a mistake at this stage in the cycle.

Employment is a lagging indicator.

Scott Grannis said...

Houston: The $2.6 trillion GDP shortfall that I estimate is measured against the long-term trend rate of growth of US real GDP, which is 3.1% per annum. It may be the case that this trend growth rate is no longer operative: that the economy now longer has the potential to grow at that rate going forward. Demographics would argue that the rate is somewhat slower. In any case, my estimate is only an estimate, but it does reflect how much the economy has underperformed in this recovery relative to past recoveries.