Tuesday, October 22, 2013

September jobs report more of the same

The headlines say that the September jobs report was weaker than expected, but the reality is that nothing much has changed: the economy continues to add jobs at a fairly unremarkable pace. The one notable feature of the report was a significant decline in part-time employment which invalidates the popular narrative which claims that the economy has only been adding part-time jobs this year. 

As the two charts above show, the gain in private sector jobs (+126K) was well within the range that we have seen in recent years and during the mid-2000s, even though it was weaker than expected (+180K). It's a disappointing number, but it's not a scary number, and nothing out of the ordinary.

 The chart above shows the level of private sector employment according to two survey methods. It's quite apparent that the economy continues to add jobs, and that it won't be long before the number of jobs reaches a new post-recession high. It's been an anemic recovery, but nonetheless definitely a recovery.

As the chart above shows, the unprecedented decline in public sector jobs has likely come to an end. The economy has gotten rid of a significant amount of public sector bloat since the end of the last recession, and this bodes well for the future since it means the economy is fundamentally more efficient.

According to the household survey, part-time employment dropped by 828K since its all-time high last July. As I noted here, the rise in part-time employment that we saw in the July report was most likely statistical noise, and today's report confirms that. We now see that the number of part-time jobs hasn't changed much at all for the past four years. Relative to total private sector employment, part-time jobs have fallen to their lowest level since the recovery started. This recovery has seen relatively more part-time jobs than previous recoveries, but it's nothing extraordinary.

Although the September employment gains were a bit disappointing, there is no reason to think that the labor market fundamentals have deteriorated. Indeed, the surge in part-time employment that we saw earlier this year now appears to have been a statistical mirage.

I don't see any new implications for Fed policy coming from this report. The economy is slowly but surely progressing, albeit in a disappointingly slow fashion. If anything, it's hard to find much justification here for the Fed to continue its extraordinary Quantitative Easing policy. QE doesn't create jobs, it mainly satisfies the world's demand for risk-free assets.


Benjamin Cole said...

There seems to be a left-wing meme, and a right-wing meme, making the rounds right now, both to the effect that traditional economics is koo-koo.

The left-wing says markets are dangerously irrational (hence bull and bear markets, or "bubbles'), and the right-wing says sophisticated investors are selling very liquid, riskless, yielding US government securities to move into cash (incredibly irrationally).

Gee, I think I will stick to my guns: Markets are mostly efficient and rational, and investors usually are rational too (excluding members of my family).

There is no reason to sell a very liquid riskless yielding US government bond to move into cash. If anything there is slight increase in credit risk (some banks, like IndyMac, failed, and lost money for depositors) and no yield.

The only reason to sell a US government bond is to spend the money or invest in something else.

The foundation of the "people sold bonds and moved into cash" argument is softer than fresh cement. Mixed by a chintzy contractor.

Another angle: The Fed has done about $3.7 trillion in QE but bank reserves rose about 2.2 trillion---so there is $1.5 trillion somewhere.

The arguments against QE have run the gamut.

1. It is hyperinflationary.
2. It is inert.
3. It makes bubbles.
4. It creates a jobless recovery (capital costs are lower, encouraging investment in machinery v labor)
5. It only helps rich, by raising asset prices
6. It is contractionary, by pulling collateral (US bonds) out of the economy.
7. Once you start QE, the markets are hooked like crackheads and need constant QE forever.
8. The Fed will end up with a big balance sheet.

Amazing how a single individual with simple logic---Milton Friedman---could always defeat battalions of critics.

And still is. Friedman was among the first to support sustained, target-oriented QE, in this case of Japan.

I'll put my money on Friedman.

Scott Grannis said...

Benjamin: the bonds the Fed is buying are much riskier (duration risk, the risk of rising interest rates) than the bank reserves it is using to pay for the purchases. It is perfectly rational for the world to be happy to sell risky bonds to the Fed in exchange for riskless reserves which pay more interest than T-bills.

The Fed's QE purchases total about $2.67 trillion, and bank reserves have increased about $2.3 trillion. The difference is explained by increased issuance of currency (the Fed creates currency in exchange for reserves).