Tag Archives: job growth

Is Our Economy Really Moving Foward?

After a rapid three months to start off 2014, we can finally look back to analyze where we might be headed for the rest of the year. According to The New York Times, there was an “addition of 192,000 jobs last month, all from private employers.” The weather did not seem to slow down the rise in jobs. However, it is also true that the level is still far below what is needed to fully accommodate the millions of people who have joined the work force since the recession. Those who still have been jobless must be accounted for as well. Does this mean that there is still room for a lot of improvement? Or will the number of jobs added in April slow down?

Jed Kolko, chief economist at Trulia, mentions in The Wall Street Journal that there were improvements in construction jobs and that young-adult employment is slowly making its way back to ‘normal’ levels.

That’s it? All I have heard is that there is little doubt the housing market has cooled yet, but I am not very convinced that we are being led in the right direction.

Although we are reaching the point we were at when the down turn of jobs began during the Great Recession, our government needs to step on the accelerator and move the economy forward. Dallas Federal Reserve Bank President Richard Fisher accused U.S. politicians on Friday about their inability to cooperate and “accused them of impeding jobs growth.”

“If the U.S. had the right fiscal policy,” Fisher added, “the country would have an ‘incredibly fast-moving economy.’”

Has U.S. stepped on the brakes and let the economy play out?

Fisher backed himself up adding that “the U.S. Federal Reserve must avoid being locked into calendar-based policy commitments and instead ensure its forward guidance is flexible enough to allow it to respond to changing conditions.”

I believe that we, in fact, should be worried that predictable commitments are unsound policy, which can lead to false complacency and market instability.

We even found the market’s sensitivity to be true when Fed Chair Janet Yellen commented that an interest rate hike could follow six months after the central bank ends its bond-buying stimulus. Stock, bond, and currency markets took a hit from this very instance. I believe we are witnessing a pause on our economy from here on out. We cannot afford any time wasted moving forward, but with our government lacking the ability to be able to work together, we may find ourselves at a standstill throughout the summer months. Our government cannot implement one plan and think it will work everything out for the next couple years. They have to work with the present times and implement plans while the economy improves as well.

 

Labor participation rate decrease is more complicated then some let on

One of the most striking things I noticed while writing my previous post about Friday’s unemployment numbers was the persistent decrease in worker participation rate over time. The graph, taken from bls.gov, looks like this.

fredgraph

The common explanation for the shape of this graph is that the baby boomers are retiring, and so we will see that the workforce participation rate falls as a large portion of the workforce retires.  Currently we see a reading 62.8%, the lowest it has been since the late seventies.  The fact that this chart is decreasing is not very concerning; it is more of a demographics issue then anything else.  But with it accounting for so much of the decrease in unemployment, there has to be something more going on here.  It was 7% in November, 6.7% in December; .3 per cent of the workforce didn’t retire last month.  Young people staying in school longer also can’t explain it away either,  as many of them most likely haven’t entered yet.  Consider this next chart, from calculatedRiskBlog.com, that considers the percent of individuals employed in the demographic of 24-54 years of age, shown alongside their participation rate for that demographic.  The important difference between the two numbers is that the employment –population ratio includes people that are not actively looking for work, stay at home moms, retired/rich individuals, etc.  It counts everyone in its employment figure.

EmployPop2554Aug

As it would any demographic group, periods of recession are harmful, as can be seen by the step downturn in the red curve in the blue shaded areas.  At the far right of the graph we see a bit of a difference developing compared to the previous recoveries.  The relatively flat 75-76% employment rate we see among 25-54 year olds means they aren’t finding work as quickly as their counter parts in decades past.  If it is in fact these individuals who are the discouraged workers we see giving up, their choice may indicate an increase in the natural rate of unemployment, which could have far reaching consequences with regards to future productivity.

Daniel Sullivan, from the Federal Reserve Bank of Chicago, presented (this) in June of 2013.  In it, Sullivan mentions that older workers have actually started “bucking the trend” and are working longer then previously anticipated.  While this does not infer that the older workers are crowding out younger workers (lump of labor fallacy), it does support the idea that more then just baby boomer retirement is driving the decrease in the workforce participation rate.  However, the picture is just as depressing for 25-54 year olds, perhaps more so.

prespic

The green line indicates the labor force trend in general.  The red and blue lines represent the actual data on labor force participation for the given demographics.  It is clear that since the recession, both men and women 25-54 are one of the causes of the downward trend.

Blaming the significant decrease in the labor participation rate on the retirement of the baby boomers is more then an over simplification.  The dearth of good jobs for 25-54 years olds is something that is holding the US recovery back, and will no doubt have effects on future productivity for a country soon to be full of retirees and people who wanted to start careers.

Inflation vs Unemployment

Empirical data speaks to an inverse relationship between unemployment and inflation.  The FED has made no secret of its targeting the unemployment rate for an increase in the federal funds rate (announcement here) .  Setting a barrier of 6.5%, it has made clear that it will consider increasing the federal funds rate when unemployment falls below the barrier.  Although many indicated that this barrier probably wouldn’t be violated until sometime in 2015, Saturday’s Wall Street Journal (article here) reports that unemployment has fallen to 6.7% in December, down from 7.0% in November.  However due to the nature of the decrease, there is reason to believe that the FED may not even consider increasing the rate should the unemployment drop below 6.5%.

On the surface a .3% decrease in unemployment would seem to be a good thing, but in this case the cause for the drop is not due entirely to workers finding jobs.  Most of the decline can be attributed to many people just giving up and dropping out of the work force.  This can be seen in the steady downward trend in the graph of workforce participation over time.  Should this phenomenon repeat itself next month, the FED could potentially find itself with a tough decision. On one hand, unemployment has decreased, and some would have reason to believe that the economy could handle and should receive a rate increase.  On the other hand, the decrease in employment was achieved through an anomaly in the way unemployment is measured, so the economy really isn’t as healthy as the measure would indicate.  Perhaps we can get an idea of what the FED will do in this increasingly likely event by examining one of the FED’s own research reports.

In an economic commentary article published December 4th 2013, Edward Knotek and Saeed Zaman look to answer the Question “When might the Federal Funds Rate Lift off?” (report here) The authors predict that such an event would most likely occur sometime in 2015, with the third quarter having the highest probability.  According to these predictions published last month, we should be happy the economy is making a recovery but the economies growth isn’t ahead of schedule.  This commentary did not take into account that discouraged workers would drop out of the work force. The commentary goes on to indicate that the rate may very well remain low even in the case of a break below 6.5% because of low levels of inflation, going so far as to say targeting a floor of 1.75% inflation could cause a “considerable delay” in the increase of the rates, from their 2015 prediction.  This provides strong evidence as to the attitude of the federal reserve as to potential role of inflation in their thinking.

If the above commentary is any indication of what the FED is thinking about doing, a rate increase shouldn’t be anticipated  even if unemployment crosses the 6.5% barrier because inflation would not be high enough to support such a decision.  Despite data that suggests recovery and a decreased unemployment reading, the interest rate may continue to be low for the foreseeable future due to a lack of inflation and the deceptive nature of the measurement of unemployment.

Friday’s Job Report

The announcement of the jobs report on Friday was definitely one of the most important events on recent economic calendar. Just before the release of the job report, economists were quite optimistic about the economic recovery in 2013. It was reasonable that economists tend to make positive forecasts because the market keeps sending good signals even at the last moment: the 238,000 jobs increase in the last month of 2013 in private sector and the unemployment rate had returned to about 7% (http://www.adpemploymentreport.com).  Some of them even predicted in recent Wall Street Journal survey that the monthly increase of jobs in 2014 could be almost 198,000 given the fact that the average of current increase since September 2013 is 193,000 (http://www.fxindexmarket.com/news-center/forex-news/item/1195-201401021012.html). If the economy recovers as they predict, it would only take six or seven months before the market completely closes the 9 million jobs gap left by the recession and returns to prerecession job levels.

 However, the Job Report on Friday turned out to be quite disappointing. The payrolls increased by only 74,000, which was much lower than expected 200,000. It is natural that everyone would have a question: what cause the decrease in job growth?

Right after the release of the job report, people start to think about the reasons behind the enormous decrease. In the article, “5 Takeaways From December Employment” Kathleen Madigan, the author of this article, summaries 5 factors that could lead to the decease in payrolls. One of the important factors could be the extreme bad weather. Lots of people were able to work outside or even go to workplace because of the weather, which would directly affect the industries such as transportation and construction. According to author, there was a direct decrease of 16,000 jobs because of bad weather. Another important factor is that a large number of unemployed people left the labor market, which explained the strange phenomena that the unemployment rate decreased while the job growth declined. Other factors mentioned are revisions, smaller income gain and cut of health-care sector (http://blogs.wsj.com/five-things/2014/01/10/5-takeaways-from-december-employment-report/). Although there were several reasons for the decrease, it seems that these problems would last for a long time and the situation could become better in January.

The economists in Citigroup provided the most precise prediction of 125,000 for the job increases in December. However, even their closest forecast almost doubled the 74,000 in reality. The ironic figures on the job report would be a good lesson for some economists. The huge difference between the real fact and the result of predictions would probably make them think thoroughly before making any comments next time.

 

Employment is on the rise, but is it the employment we want?

On Friday, the Labor Department is expected to release its December employment report, and there are likely to be some reassuring numbers in it.  Moody’s Analytics has already reported that December brought in more private jobs than November, which recorded an impressive increase of 203,000 private, non-farming jobs.  Given the seemingly never-ending recovery our country has experienced since the Great Recession, back-to-back months of strong job growth should be reassuring.  Indeed, the Conference Board notes that consumer sentiment about the labor market is at its best since the Great Recession (http://blogs.wsj.com/economics/2014/01/08/after-adp-forecasters-now-expect-200000-jobs-gain-tomorrow/).  As a college senior about to enter the labor market, this is promising data; it suggests that for those of us graduating this spring, finding a job should be easier than we thought.

Sadly though, a closer look at the labor market reveals that this relatively strong growth is not as encouraging as I initially thought – unless, of course, I want to work at the lowest end of the job market.  EMSI, a firm specializing in economic modeling, found that low-wage jobs (those paying less than $13.83 per hour) account for nearly 40% of all jobs added in America since 2009.  In fact, as of now, nearly two-thirds of the country works low-end jobs that are more focused on basic services, such as personal care, than hard-core mental computing, like consulting or physics (http://www.theatlanticcities.com/jobs-and-economy/2013/09/uneven-growth-high-and-low-wage-jobs-across-america/6937/).

Understanding that the majority of jobs being added are low-end jobs that do not require significant brainpower, I am presented with a rather pessimistic question: Why bother getting a college education?

If you talk to my mom and dad, you’ll learn that it costs them nearly $50,000 per year to send me to the University of Michigan as an out-of-state student (God bless them for their support).  And while I’m getting a degree from one of the best universities in the world, is it really worth $200,000?  Will this $200,000 ensure that I leave college as part of the 1/3 of Americans with a high-end job?  The data seems to suggest that I’d need to be very luck to join this elite group.  Rather, it seems more likely that $200,000 is buying me an all-expense-paid, four-year vacation before I enter the low-end labor world and become an extremely overqualified manager at my local Olive Garden who knows way more about economics than any customer cares to hear about.

Given the opportunity cost of my time, wouldn’t it have made more sense for me to forgo a college education and to start working in a low-end job straight out of high school?  At least then I would have had four years of pay under my belt.  Yet while economic data may suggest that working straight out of high school would have been a good idea (after all – I can always go back to college if the distribution of jobs begins to reverse and high-end jobs start to take over), I continue to believe that going to college was the best career decision of my life.  And who knows why?  Maybe it’s because my parents brainwashed me.  Maybe it’s because I believe in the American Dream.  Or maybe it’s because I’m reluctant to accept the economic data revealing such a sad job market.  Whatever the reason, the rapid growth of low-end jobs has me worried about this country’s future and the implications this asymmetry has for future income inequality and quality of life.