Friday, March 07, 2014 - Jobs Report Friday and Aiming Higher

Jobs Report Friday and Aiming Higher

by Sinclair Noe

DOW + 30 = 16,452
SPX + 1 = 1878
NAS - 15 = 4336
10 YR YLD + .05 = 2.79%
OIL + 1.00 = 102.56
GOLD – 9.50 = 1341.90
SILV - .51 = 21.03

This is a jobs report Friday. Here’s what you need to know. The economy added 175,000 net new jobs in February; this topped estimates of 150,000. The unemployment rate moved higher to 6.7%, up from 6.6% in January. After two months of very bad jobs reports, we returned to just below average levels of 189,000 per month; not a great showing but not ugly. The December and January reports were revised higher by 25,000 jobs. So why did the unemployment rate go up?

The labor pool got bigger; more people were looking for work. The ranks of the short-term unemployed declined by 61,000 to 2.3 million, while the ranks of the  long-term unemployed jumped by 200,000 to 3.85 million, and the labor participation rate held steady at 63%, just above the generational low of 62.8% in December. That seems to be a discrepancy, but the unemployment rate is based on a separate survey of households from the one that tracks hiring by employers, and the household survey showed an increase of 264,000 in the labor force. The participation rate is still well below the range of 66% to 67% where it had been for the past 20 years or so.

The unemployment rate went up slightly because that 264,000 gain swamped an increase of 42,000 in the number of people who were employed in the survey, but was positive over all because it showed more people are looking for work. And in the age group of people we expect to be working, the 25 to 54 year olds, participation rate increased in February to 81.2% from 81.1%, and the 25 to 54 employment population ratio was unchanged at 76.5%. 

Last month 10.5 million people were unemployed; including 3.8 million who have been out of work for six months or more; while 5.5 million have moved to retirement, intentional or not; and 3 million are disabled and the number of people applying for Social Security disability benefits has spiked in recent years. Even though February saw more people returning to the labor force, the percent of the population working or looking for work remains near a 30-year low due to millions of dropouts during the recession. One of the consequences of long-term unemployment is the loss of job skills, or for younger workers, they never really develop job skills and may face a lifetime of lower wages.

Most of the jobs, 162,000 were in the private sector. State and local governments have been doing a bit of hiring, adding 19,000 jobs last month, while the federal government continues layoffs, cutting 6,000 jobs. Private sector payroll employment has now posted gains for 48 consecutive months and with businesses adding about 8.7 million jobs over that time, private sector payroll is almost back to the previous peak back in January 2008; just another 130,000 more to go; although that does not account for population growth. So, there’s a good chance private employment will be at a new high next month. And total employment will probably be at a new high before the end of summer.

State, local, and federal government had 32,000 fewer jobs than one year ago. This marks the 56th consecutive month, going back to July 2009, that government employment was down on a year-over-year basis, excluding the temporary jobs added for the 2010 census. If you count them, the string is 43 months, going back to August 2010. Still, by a wide margin, this is the longest string of government job cuts since the end of World War II. Governments now employ 15.9 percent of all Americans who have jobs. That is the lowest proportion since 2001.

The one area of improvement in government jobs seems to be coming from state governments because their finances are improving. While local government payrolls are holding steady, state-level payrolls have increased for seven consecutive months, pulling the number of jobs back up to 2011 levels. The main sources of new jobs have been education and healthcare.

An alternate measure of employment, the U-6, includes underutilized workers; the U-6 came in at 12.6%, down from 12.7%, and the lowest level since November 2008. There are still 7.2 million people working part-time for economic reasons; because they can’t find full-time employment or their hours have been cut back.

Once again the report highlighted the deeply uneven nature of the recovery in the jobs market. The unemployment rate for white people was 5.8%, for African Americans it was 12%, and Hispanics 8.1%, and unemployment for teenagers was 21.4%. Of the 175,000 new jobs last month, 99,000 went to women. Over the 12 months through February, women’s nonfarm employment rose by 1.07 million jobs, half of the total US gain of 2.16 million. A couple of years ago, women accounted for just 37% of annual job gains.

Here is the full breakdown of "young vs old" jobs since December 2007: those 55 and older have gained 4.9 million jobs. Those under 55 are still some 3.1 million jobs below their December 2007 level.

The quality of jobs has been a big concern for some time, however in February, white-collar professions including accounting, bookkeeping and consulting led the gains, as the professional and business service sector gained 79,000 jobs. Here’s the catch; one-third of the professional jobs were temporary jobs.  Blue-collar hiring was more muted with the manufacturing sector adding 6,000 positions and construction gaining 15,000. Retailers cut 4,100 jobs as a 12,000 gain in food and beverage stores was offset by a 12,000 decline in electronics and appliance stores. The leisure and hospitality sector added 25,000 jobs.

Average hourly earnings rose 0.4%, or 9 cents to $24.31 per hour; bringing the year-over-year gain to 2.2%; not much but a gain. The average workweek fell to the lowest level since January 2011, which might be due to the bad winter weather, but the weather-sensitive construction sector added 15,000 jobs last month. We know that the household survey took place during a week of storms in the northeast. The Labor Department also reported that 601,000 people in the household survey said they could not get to work because of the weather last month, nearly double the number who typically said that in February on a historical basis. So, weather had an effect, but at some point we just move beyond the weather excuse.

One interesting point about hours worked and hourly wages is that we can try to normalize this data by looking at average weekly earnings. In February, this number dropped slightly to $682.65 from $683.74. So, hourly wages were up  very slightly and hours worked were down a little, and it might be easy to explain this as weather related, but then we look  at average weekly earnings over  the past year, which would not be weather related, and earnings grew just 1.3%, which is the weakest earnings growth in 5 years.

The 175,000 net jobs added in February extrapolates to a pace of 2.1 million jobs a year, squarely within the long-term range. So we have a tepid jobs recovery; just enough to call it a recovery, not enough to call it a good recovery, not enough to instigate action to make it better, and not enough to see the virtuous cycle of job growth that feeds on its own strength.

It will likely be good enough for the Federal Reserve to put taper on auto-pilot. They will continue to trim back monthly bond purchases by $10 billion at their next FOMC meeting later this month. Yesterday, William Dudley, president of the Federal Reserve Bank of New York, suggested that it would take either a recession or an economic miracle to shift the Fed from its course.

Back in December, then-Fed head Ben Bernanke justified the taper as a program that was intended to foster job growth and that job growth was on track, so the work of QE bond buying was accomplished. Many Fed policymakers are still concerned about inflation, even though we’ve had more disinflation of late; and their thinking is they need to be properly positioned to raise rates if they need to battle inflation; before they could raise rates, they want to be out of the bond buying business.

Since the last quarter of 2012, nominal hourly wage growth has increased from 1.5% to the current 2.2%, while inflation has decreased from just under 3% to about half that pace now. That means that most regular workers were losing ground as price growth exceeded hourly wage growth; that seems to be changing now; wage growth is just a little more than inflation. That’s good but then we consider weekly earnings growth, which is around 1.3% annualized, workers are still losing ground to inflation, or at best – flat. So, this is not a reason to fear inflation, nor is it a reason for the Fed to raise interest rates.

The Fed’s target for unemployment is 6.5%, which doesn’t really sound like full employment. It wouldn’t be bad to do better; to get the unemployment rate below 6.5%; we really shouldn’t worry about the inflationary pressures of a tighter job market, in part because we haven’t seen any inflationary pressures, even though we are getting close to the target. Of course, the Fed may have limited ability to help on the jobs front. It would be nice to see more fiscal policy aimed at creating jobs. Inflation has not been an issue at all. The public debt has also not been an issue at all, and attempts to cut spending have been completely counterproductive and damaging to the short and long-term health of the economy.

Real wage gains for low and middle income workers would be a good thing. If people can start to get ahead, just a little, from their hard work, they are likely to take a more active role in the economy and that might mean we could eventually see some momentum in the economy. In other words, we still need to aim higher.