Jobs growth continues to slow, but it's not a problem

For the past several months, I've observed that the growth rate of private sector jobs was slowing. Today's jobs report—which was much weaker than expected (96K vs 150K private sector jobs) only confirmed that. It's not a cause for concern or a precursor of a recession, however. Most likely it just reflects the fact that it's getting harder for employers to find new workers.

Chart #1

Chart #1 tracks the monthly change in private sector jobs. It's pretty clear from this that jobs growth has been decelerating since last January. It's also true that jobs growth has decelerated prior to the last two recession. This time, however, things look very different. Unlike the runup to prior recessions, to date the Fed has not restricted liquidity; real interest rates are very low; credit spreads are very low; and systemic risk is very low. The only other sign of a recession is the inverted yield curve, but as I explained in a prior post, today's inverted yield is a sign of risk aversion, not a sign of an economy struggling under the burden of tight money.

Chart #2 

Chart #2 shows the 6- and 12-month rate of change in private sector jobs. I think this is the only reliable way of judging whether jobs growth is accelerating or not. Monthly numbers are way to volatile—and subject to huge revisions—to come to meaningful conclusions. What we see now is that jobs are growing at something like a 1.3-1.6% annual rate. That's down quite a bit from the 2.0% rate which prevailed around the end of last year. But it doesn't condemn the economy to a recession or even to an uncomfortably slow rate of growth. For the first six months of this year, labor productivity surged to an almost 3% annual rate. Slower growth in jobs has been accompanied by faster growth in the average worker's value added. There's nothing wrong with that, especially since productivity has been rising for the past several years after having been dismally weak for most of the current expansion.

Over the past year, productivity rose by almost 2%. Thus, a relatively weak 1.6% growth in jobs in the past year generated real GDP growth of 2.3%. If productivity continues to pick up (thanks in no small part to Trump's deregulation efforts), then a measly 1.3% growth in jobs could deliver 3% real growth or more.

Chart #3

Chart #3 tracks first-time claims for unemployment, which typically begin to rise in advance of recessions as businesses sense a deterioration in their business outlook and attempt to shed workers and cut back on expenses. That's certainly not the case today! The worst that can be said about claims is that they have been flat for the past 12 months, averaging 217K per week.

Chart #4

Chart #4 divides unemployment claims by total payrolls. By this measure, unemployment claims are much lower than they have ever been before. This is a virtual "jobs nirvana" since it means that the chance of the average worker being fired is lower than ever before. And on top of that, wage growth has been accelerating: average hourly earnings rose 3.2% in the past year, and that's up significantly from the 2.0% pace that prevailed in 2014 and the 2.6% pace of 2016.

Chart #5

Chart #5 compares job openings with the number of persons unemployed but looking for work. There are more jobs available than people looking for jobs, and that's been the cast for over a year.

Slow jobs growth these days is not a sign of a deteriorating economy, it's a sign of a healthy labor market that continues to seek out new hires, only to find it difficult due to a shortage of people willing to work.