Friday, August 5, 2016

A strong jobs number doesn't mean the economy is stronger

Today's July jobs report was substantially stronger than expected, as I suspected it would be, but it doesn't mean the economy is getting stronger. You simply can't make much of any one month's number—you've got to look at multi-month trends in order to draw any meaningful conclusions from the jobs data.

Over the past year or so the rate of jobs growth has decelerated modestly. In other words, the strong numbers of the past two months have not quite made up for the extremely weak May report. There is still no sign of a recession on the horizon, but the slo-mo nature of the current business cycle expansion remains firmly in place. This is just not a very exciting economy, but neither is it terrible or getting ready to collapse. It's steady and slow as she goes.


The outlier in this chart is not the last data point, it's the zero growth reported last May. It would take at least another two or three much-stronger-than-expected jobs reports to get us back on the trend that was in place until about a year ago. 


On a year over year basis, the growth of private sector jobs has slipped from a high of 2.6% in late 2014, to 1.9% in the year ended July.


One good piece of news is that the growth of the labor force is picking up, albeit slowly. More and more people are being enticed to either work or look for work. But despite the recent improvement, the labor force is still over 6% below its long-term trend (i.e., about 10.7 million workers have "disappeared"). Baby boomers retiring accounts for a portion of that shortfall, but there must be other factors at work as well: very high marginal tax rates, heavy regulatory burdens, and maybe even the recent wave of minimum-wage hikes. When unskilled labor becomes artificially expensive, businesses have a strong incentive to replace labor with robots, no?


I've shown the charts above off and on for the past year or two, because I think they illustrate yet another reason for the shortfall in the growth of the labor force: huge increases in transfer payments. In the year ended last June, the federal government sent out checks totaling almost $2.8 trillion to people for not working. That represents about 20% of disposable income (and a whopping 73% of total federal spending), and that is very nearly a record high. When so much is paid to so many for doing things other than working it's bound to have a perverse impact on the jobs market. The only good news here is that the growth of transfer payments appears to no longer be exceeding the growth of incomes—we're at a plateau of sorts. At the same time, the labor force participation rate appears to have bottomed. On the margin, in other words, the damage done by transfer payments is not getting worse. But we're going to have to tackle the entitlements problem in a big way, or else transfer payments relative to incomes will continue to climb, the labor force will continue to grow in a tepid fashion, and the federal budget deficit will rise to unsustainable levels. We're not there yet, but this threat looms large on the horizon.

So it's nice to know that the very weak May jobs number was most likely just an artifact of bad data. But the recent strong numbers do not tell us that the economy is getting any stronger.

I doubt this report will result in any immediate or unexpected tightening action on the part of the Fed.

7 comments:

Adam said...

Scott,

It looks like a new cycle of delinquencies is on the rise.

https://fred.stlouisfed.org/series/DRBLACBN#0

Thanks for any comments.

Scott Grannis said...

It could well be the case that delinquencies are starting to rise for C&I Loans, but the latest data we have on delinquencies only cover through March '16. The delinquency rate for all bank loans and leases was still declining as of last March, and was very close to an all-time low (2.17% vs all-time low of 1.5% in early '06.

So we may well be at or near the top (in a good sense) of the credit cycle and things could begin to deteriorate from here. But we're still in the very early stages, so I would argue it's premature to panic.

Benjamin Cole said...

Nice post.

Taxing productive behavior is always a bad idea.

endzeit14 said...

Scott,
have you read the analysis about the job numbers on ZH? "Jobs Data Nowhere As Strong As Headline" - Analysts Throw Up On Today's Seasonal Adjustment
http://www.zerohedge.com/news/2016-08-05/jobs-data-nowhere-strong-headline-analysts-throw-todays-seasonal-adjustment

Since I couldn't find any other sources, claiming that the seasonal adjustment had such a huge impact, I took a look at the BLS numbers myself.
What I found, was the contrary: seasonal adjustments for July even reduced the numbers. Since ZH usually makes an excellent job to offer a different perspective, I am not sure, if I looked at the right numbers:

http://www.bls.gov/news.release/empsit.t09.htm
For example first line:
TOTAL, 16 years and older:
Column: July 2016 Not seasonally adjusted: 152,437
Column: July 2016 Seasonally adjusted: 151,517


Also full time workers show a lower number after seasonal adjustment.

Am I missing something?

Scott Grannis said...

The BLS numbers you link to are from the Household Survey of employment. The Establishment Survey is entirely different and is the one that most people refer to. The two surveys tend to track each other over time but in any one month can be completed at odds with each other. All surveys suffer from two problems: their methodology, which samples only a tiny fraction of the population, and the seasonal adjustment factors, which can occasionally be wrong.

Hans said...

"I think they illustrate yet another reason for the shortfall in the growth of the labor force: huge increases in transfer payments. In the year ended last June, the federal government sent out checks totaling almost $2.8 trillion to people for not working. That represents about 20% of disposable income (and a whopping 73% of total federal spending), and that is very nearly a record high. When so much is paid to so many for doing things other than working it's bound to have a perverse impact on the jobs market. The only good news here is that the growth of transfer payments appears to no longer be exceeding the growth of incomes—we're at a plateau of sorts."

Thank you, Mr Grannis, for noting this fact! Last weekend, I had the opportunity to
speak with two small business owners, whom both stated the difficult of hiring
summer helf; as young people today had no interest in toiling as labors or as
non executives.

ALL economists, whom report on employment figures - should take a closer
look at the quality of these hiring.

Perhaps, the B(L)S should hire baseball statisticians, as they can
differentiate between a single and a home run.

Hans said...

Again, for those whom wish to look beyond the phony MSM
headlines, please link to this article.

Remember, you will never get the plain truth from
most economist, as they are predominantly Socshevikes.

http://economics21.org/html/black-clouds-behind-sunny-jobs-data-2000.html