Friday, September 6, 2019

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.


randy said...

Scott, I don't follow the math. I'd bet on it being my lack of understanding.

"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, then a measly 1.3% growth in jobs could deliver 3% real growth or more."

If 1.6% growth in jobs only yielded 2.3% GDP growth, how much higher must productivity growth be to make 1.3% growth in jobs deliver 3% growth?

Benjamin Cole said...

Another thinking man's post about the economy. Great charts, and no hysteria.

I hope Scott Grannis is right about hiring slowing due to worker scarcity. My own bias is nations with "labor shortages" are happy countries, where employees sense upward mobility, professional and economic, is a possibility. I hope for generations of "labor shortages" in the US.

Wages have been sluggish, up about 3% annually at latest read, not enough to provoke inflation, due to offsets from productivity.

About 245,000 jobs were created monthly during the Clinton years (a GOP Congress, btw) on a smaller employment and population base. When people say 100,000 net new jobs monthly is tapping out national supply of employees....well, give me the salt shaker.

Tight labor markets and big profits should have some "virtuous" results---more investment in plant & equipment, and higher productivity.

Count me in for rising real wages and higher corporate profits. I think it can be done.

steve said...

African american unemployment at all time lows BUT manufacturers holding back on spending due to tariff "uncertainty". Which one "trumps" the other? As I've said ad nauseam, DT can end this nonsense and get the economy back on track-but his ego will not allow him to admit he's wrong.

randy said...


Worthy interview with Kevin Hassett in the Atlantic. Maybe ass covering, but thought provoking coming from him. He recognizes the short term damage but thinks it's worth it. For my part, even if one agrees that theft of IP is very serious and worth the pain, it's not clear that tariffs are the best tool. And Trumps arguments for the tariffs are not coherent. Maybe if he properly explained the coherent goal (IP theft and spying concerns) and honestly explained that there will very possibly be short term pain, but it's a patriotic sacrifice, then it would be better received. But he's all over the map with his trade deficit ridiculousness, and claiming trade wars are easy to win, etc.

Benjamin Cole said...

BTW, the employment-to-population ratio is still below the levels of late 1990s-2000.

steve said...

I absolutely disagree that for ANY reason trade wars are "worth it". If you're truly concerned about IP theft upgrade your technology to prevent it. Furthermore, it is all to obvious that DT's true motivation is to just stop trading with China. He actually believes we would be better off just making everything in the US. The CONSUMER should determine where goods are made, not governments. I thought the GOP stood for FREEDOM in all forms?

I own a Mercedes. Do I have to buy an American car now? Admittedly, my 34 year old son is bound and determined to get me into a Tesla-but it ain't gonna happen. Freedom of choice and lowest cost per unit of quality should be the sole determinant in purchase and the US government should get the HELL out of the way in that determination.

Benjamin Cole said...


I feel about property zoning the way you feel about international trade.

Unknown said...


Very curious on your thoughts re: Andy Kessler's article in the WSJ today. Seems to be right along some of the lines you have discussed re: the demand for dollars in times of high risk aversion.

Thank you for the continuous stream of informative, thought provoking, expert posts!


steve said...

Benjamin, I believe you live in CA? If so, you have ZERO chance of any change in zoning while with DT gone there is a good chance of the elimination of this nonsense trade war. BTW, with his reelection it will embolden him to escalate it. Of course, the probable alternative is worse!

Benjamin Cole said...

Steve--- sadly, you are correct, there will be little reform of property zoning in California or anywhere else no matter who is President.

I contend that property zoning is the largest structural impediment facing the US economy today, perhaps 10 to a hundred times as important as Trump's trade tariffs on a single trading nation, that is China.

Beyond that, where in the Constitution does it say that the state can control how you develop your own property?

But I concede that I am fighting a lost cause. And a lonely cause, too. At least you have some company in your viewpoints.

There are no atheists in foxholes and there are no Libertarians when neighborhood property zoning is under review.

minnesota nice said...
This comment has been removed by the author.
Henry H said...

Any chance of negative interest rates that Trump is asking for? Would we be able to refinance the federal debt?
The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term. We have the great currency, power, and balance sheet.....
....The USA should always be paying the the lowest rate. No Inflation! It is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing. A once in a lifetime opportunity that we are missing because of “Boneheads.”

The Cliff Claven of Finance said...

"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 ... "

Jobs growth strong = good news

Jobs growth weak = good news" (not a cause for concern)

Must feel good to be 100% optimistic, 100% of the time.

randy said...

"Sen. Elizabeth Warren is proposing new taxes on high-income Americans for the Social Security trust fund, making her the latest Democratic presidential hopeful looking to tap the coffers of the nation’s top earners to extend the life of the program."

I've tried re-reading several times, and other websites. I still cannot get a clear picture of what she is proposing. In particular... what is the proposed cap that will be taxed on the combination of net investment income and earned income - if there is any.

Maybe doesn't matter, it's clear that's just one of the many new proposals to pick pockets so that those with assets "pay their fair share". An extra 2% here, 2% there, changing income thresholds on who pays and doesn't. I thought reducing corporate taxes was great, but wasn't really in favor of Trumps tax cuts on personal income. I doubt reducing personal taxes did much but increase deficit. But now it's easy to see in a few years, "wealth" is going to be taxed like we haven't seen in a long time.

steve said...

DT and Warren; two peas in a pod.

Ataraxia said...

What's your take on the Repo market activity Scott?

steve said...

No one will ever convince me that economic growth is slowing due to the Fed vs DT's idiotic trade policy;

Scott Grannis said...

Ataraxia, re the repo market craziness. I think what Brian Wesbury says sounds about right:

In essence, 2008-era regulations slapped on banks are creating the problem.

Ataraxia said...

Thanks for the paper Scott. I've always wondered about the mechanics of "monetary policy" behind the scenes. The models I learned in Money and Banking in college did not include IOER so controlling the FFR was different then.

Seems to me a complicated messy puzzle as your paper explains... Changing the rules and regulations as usual can create perverse incentives and unintended consequences... Or maybe as the paper points out it's actually exposing some unsound individual bank management.

Scott Grannis said...

UPDATE on repo market "madness:" Bloomberg is now publishing data for what is now called SOFR (Secure Overnight Financing Rate). This is meant ultimately to replace LIBOR as a measure for the cost for high-quality borrowers to borrow funds overnight on a secured basis. As of yesterday's close (9/23), the rate was 1.85%, which is in line with the current Fed funds rate. Conclusion: this was a temporary period of dislocation which now appears to have passed without incident.