Jobs continue to post 2% growth

The April jobs report released today handily beat expectations (+288K vs. 218K), but it doesn't alter the big picture: private sector jobs have been growing by about 2% per year for the past several years. That's enough to give us 2-3% overall growth, but not much more.

The private sector has been creating about 200K jobs per month during non-recessionary periods for quite a long time. 

This works out to a growth rate of about 2% these days, which we have seen on average since early 2011.

The great disappointment is the ongoing decline in the labor force participation rate, which hasn't been this low since 1978. This needs to turn up if we are to enjoy robust growth conditions. That probably awaits better policies out of Washington. Businesses are not very eager to create new jobs, and those who are unemployed are not very eager to seek out job opportunities. We need to revive the economy's "animal spirits" by increasing the incentives to work and invest. That could be done by simply reducing marginal tax rates, which in turn could be paid for by reducing the massive amount of deductions, subsidies, and loopholes in our seriously-bloated tax code. Once again, the solution to slow growth is to get the government out of the way of those who want to make money.

The good news is that the private sector of the economy has created some 9.2 million jobs since the post-recession low of early 2010. The bad news is that there should be many millions more jobs now that we are in the fifth year of job expansion. It's a bit disappointing that the economy is no longer shedding public sector jobs, which have been relatively flat for the past year. As I argued in an earlier post, the huge expansion of government intervention in the economy has been one of the main causes of the sluggish recovery. We'd do better to keep shrinking the public sector, but again, that requires a change in the way Washington thinks about the world. Government can't create productive jobs nearly as well as the private sector can.

Part-time employment has been relatively flat for the past 5-6 years, and has been declining relative to total employment. This is nothing unusual.

The unemployment rate fell mainly because of a large reduction (806K) in the labor force. This is not real progress.

Today's numbers look good

Lots of numbers out today, all of which show the economy remains on a solid—albeit relatively slow—growth track, after slumping in the first quarter of this year under the burden of bad weather.

No sign of deterioration in the labor market. Corporate layoff activity remains at a very low level.

The ISM manufacturing index rebounded solidly from its weather-induced slump earlier this year. Conditions in the manufacturing sector are consistent with overall economic growth of 3-4%. Second quarter GDP growth in almost certainly going to be at least 3-4%.

Weak exports were one of the main sources of weakness in the first quarter GDP statistics. The ISM export orders index jumped in April, a good sign that things are back on track, and that overseas economies remain relatively healthy.

The ISM employment index also jumped in April, a welcome sign that the weakness earlier this year was only temporary.

The Eurozone continues to slowly improve, and this reinforces the outlook for improvement here.

Swap spreads are one of my favorite leading indicators, and they have done a great job of predicting the improvement in the Eurozone economy (and the U.S. economy also). With Eurozone swap spreads continuing to decline to more healthy levels, it is likely that manufacturing conditions in the Eurozone will also continue to improve. Healthy financial markets are always a good indication that economic fundamentals are in good shape. U.S. swap spreads remain very low, another good sign.

The personal consumption deflators are the Fed's preferred measure of inflation. Late last year they were trending below the Fed's desired minimum of 1%, but now both the headline and the core measure show inflation approaching the 1.5% level.

The principal source of low inflation pressures comes from the durable goods sector, where prices have been falling since 1995. That year marked the beginning of China's huge manufacturing and export explosion. If inflation is "too low" for some tastes, it's mainly because we are the beneficiaries of cheap manufactured goods from China. That's just plain old good news, not something to worry about.

Monetary conditions remain very accommodative, as the chart above shows. Real short-term interest rates are decidedly negative and the yield curve is still very steep. There is no indication here at all that the Fed's ongoing tapering program is causing a shortage of liquidity. A recession is therefore highly unlikely for the foreseeable future.

I don't usually pay much attention to spending, since as a supply-sider I prefer to focus on production and investment—if those are strong, spending is likely to be strong as well. But it's nice to see a significant pickup in real consumption spending. Of course, it's still relatively weak from a long-term historical perspective, but on the margin things look to be improving.

Taking the measure of our discontent

The Great Recession of 2008-2009 wasn't your typical recession. In every other recession in postwar history, the economy rebounded within a few years to return to its long-term growth path. But not this time, and it has nothing to do with the rich getting richer or the alleged increase in inequality. Instead, it has to do with the average person and the average family not making the kind of progress to which they've been accustomed. Understandably, people are upset.

The chart above compares the actual growth of real GDP (blue) with its long-term trend of about 3% per year. Never before has real GDP fallen below its trend by so much for so long—and still, as we are about to enter the sixth year of recovery, there is no sign of a true recovery. The current "gap" between actual GDP and its long-term trend is about 10% by my calculations. That translates into a national income shortfall of roughly $1.7 trillion.

This is the measure of the country's discontent: $1.7 trillion in missing income.

The chart above compares the actual growth of a subset of retail sales (which excludes certain volatile categories) to its long-term trend. These are the expenditures made by ordinary folk, not the mega-billionaires. This helps dramatize just how radically things changed beginning in the latter half of 2008. Retail sales by this measure would have to increase 16% overnight to get back on their long-term trend path. This is the measure of how much middle class families are hurting.

After growing for decades at about a 1% annual pace, the labor force suddenly stopped growing in late 2008, as the chart above shows.

If one thing stands out in these charts, it is the abruptness and the severity and the persistence of the divergence from long-term trends that began in 2008. Something REALLY BIG happened; what was it?

It was not demographics, since demographics change at glacial speed. The population didn't suddenly got older and start to retire en masse in late 2008.

It was not monetary policy. The Fed was arguably slow to launch its QE efforts in late 2008, but since then they have been working overtime to make sure the economy is not starved of liquidity and interest rates are as low as possible. (I could be persuaded that the persistence of extremely low interest rates has been a problem for savers, and that this has led to weak investment, but corporate profits have been setting records throughout the recovery.)

The one thing that changed in a really big and durable way, starting in 2008, was fiscal policy. The Bush administration launched TARP in late 2008, and the Obama administration followed up with ARRA in 2009. Then came Obamacare in 2010, which purported to restructure fully one-sixth of the US economy within the space of a few years. Then came the Dodd-Frank super-regulation of the financial industry. Beginning in 2013, top marginal tax rates were increased.

As the first of the above two charts shows, massive fiscal "stimulus" increased the federal government's debt from $5.34 trillion in June '08 to $12.45 trillion as of this week. As the second chart shows, that surge of borrowing doubled the federal debt burden, raising it from 36% of GDP to 72% of GDP in a mere four and a half years. The only other time something of this magnitude happened with fiscal policy was WW II.

The federal government borrowed $7.1 trillion over the course of five and a half years and handed most of the proceeds out in the form of various transfer payments. Our leaders in Washington did this in the belief that this would stimulate spending and that would convince businesses to create more jobs. The federal government restructured the entire healthcare industry in the belief that this would lower costs and give everyone healthcare insurance coverage. The federal government rewrote the rules for the entire financial industry, in the belief that a more-highly-regulated banking system and greater consumer protections would restore confidence and optimism. And to top it off, the federal government increased taxes on the rich, in the belief that this would benefit the middle class by more fairly distributing the fruits of progress. But it didn't work. Spending wasn't stimulated; job growth didn't surge; healthcare costs continue to rise, the vast majority of the uninsured are still uninsured, and millions are now losing what coverage they used to have; banks are reluctant to lend and consumers are reluctant to borrow; consumer optimism remains relatively weak; and the middle class has taken it on the chin.

If anything, the massive growth of government intervention in the economy since 2008 looks to be the Occam's Razor explanation for what caused the weakest recovery in history.

If there is a reason for widespread discontent, it is our federal government and its overbearing and intrusive ways. Thanks to all the government "help" that has been heaped upon us in the past six years, we have the weakest recovery in history. And the bill for all this is a staggering $1.7 trillion per year and counting.