Friday, September 7, 2012

Jobs growth is disappointing, but it's better than none at all

Today's employment report was not encouraging at all—only 103K private sector jobs created, vs. the ADP estimate of 201K—but neither was it cause for increased concern over the health of the economy.  The economy is still growing slowly, and it is still way below its growth potential. However, it remains the case that it is improving on the margin, and that is the most important thing at this point, because the market is priced to a deteriorating economy. You can see that in the S&P 500's forward PE ratio of 13.3, which is well below the long-term average PE: the market expects earnings, which are currently close to all-time record highs, to decline significantly. You can also see that in today's 1.6% 10-yr Treasury yield, which only makes sense if one has dismal expectations for future economic growth (think Japan). The market has been expecting another recession, and instead we're getting slow growth, and that's good news in a relative sense.

A few things to note in the above chart of private sector employment: The big gap that opened up between the household and the establishment survey early this year has narrowed significantly. I thought there was a chance that the establishment survey could be telling us that the economy was doing much better than most realized, but now that hope has faded. Judging from these surveys, jobs have been growing at about a 1.2% annualized pace over the past six months, or about 110K per month on average. If the productivity of labor equals its long-run average of 2% per year, then the current pace of jobs growth will give us real growth in the economy of about 3% per year. That's about average, but it will never close the current output gap, which I estimate to be at least 12%. The economy is not going to improve enough before the November election to make a difference.

The only reason the unemployment rate has come down is that there are more than 5 million people who have dropped out of the labor force since 2009.

The public sector continues to shrink, but mostly at the state and local level. Mark Perry has some interesting numbers: "From January 2009 to August 2012, there has been a loss of 533,000 local government jobs, a loss of 149,000 state government jobs and a gain of 27,000 federal jobs."


steve said...

I'll bet anything that on the F before the election, the unemployment rate will fall to a 7 handle. the average dumb american voter will be mollified.

brodero said...

The business cycle rules over all and in the end is all powerful....all this political fascination makes
for poor investment decisions...

NormanB said...

Annualized employment growth over the last six months (580,000 private jobs added) is only 0.9% not even enough to cover new entrants.

Anonymous said...

Thought experiment:

I recently learned Australia hasn't had a recession since the early 90's. Not even in 2008-09 did they enter one (though no doubt they had a slowdown).

This got me thinking: Will the slow pace of the US recovery mean we also will avoid a recession for the next 20 years? I'm wondering, if there is no boom, there will be no bust.

Bill said...

Hasn't Australia boomed because they have been providing minerals to China for its boom? I wonder what would happen to Australia if China had a hard landing.

Gloeschi said...

So how would the employment situation look like without $4+ trillion in fiscal deficits 2009-2012? Of the $2trn increase in Fed's balance sheet since 2007, $1.5trn came back as excess reserves. Only 500bn made it into the real economy. Of course, it allows the Federal government to sell more debt at lower interest rates. But what good does this do when we have reached zero marginal utility in terms of additional GDP over additional debt?

Scott Grannis said...

Ever since early 2009 I've argued taht the stimulus spending and huge deficits would be a drag on growth, since the government usually spends money inefficiently. We would have been much better off without it, leaving the money for the private sector to spend. The Fed did what it had to to accommodate the world's intense desire for risk-free dollar liquidity. That desire might not have been so strong if the federal government hadn't spent so much money along the way. And actually, only about $100 billion of the Fed's balance sheet expansion has "found its way into the economy" since that is the increase in required reserves in the past four years.

Debt doesn't stimulate. Government spending doesn't stimulate. Stimulus happens when the government gets out of the way of the private sector and when the incentives to work and invest increase.

L.A. said...

Horrible report with almost no positives imo.

Benjamin Cole said...

Australia has avoided downturns through excellent monetary policy, and yes, some luck.

Why the US Fed is laboring about inflation when we see microscopic inflation rates, and huge amounts of slack in the economy, is mystifying.

Obama deserves to lose, but not for the reasons readers of this board will likely imagine. Obama appointed many to the Federal Reserve, and they have sat on their hands or dithered.

Interestingly enough, Romney may bring in a more-aggressive, expansionist, rules-based monetary policy. I hope so.

Other elements of Romney's economic plan (mostly worn out rhetoric they may not implement) are less important.

Benjamin Cole said...

Re federal job growth.

Here is a list of largest federal employers, by agency. It is a list that Paul Ryan will never, never, never ever show you.

Federal Employment By Agency

Defense 772,601
VA 304,665
Homeland Security 183,455
Justice 117,916
Treasury 110,099
USDA 106,867
Interior 70,231
H&HS 69,839
Transportation 57,972
Commerce 56,856
State 39,016
Labor 17,592
HUD 9585
Education 4452