Here’s Why August Job Growth Could Be Strong

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Yes, the United States is $93 billion short of a real economic recovery. That deficiency represents the difference between the annual wages of jobs lost during the Great Recession and the pay of jobs gained during the subsequent economic recovery. The United States Conference of Mayors — a nonpartisan group comprised of the head officials for the 1,400 cities across America with populations of more than 30,000 — found in a recent study that the average annual wage in industries that lost jobs during the recession was $61,637, but the average for new jobs gained through the second-quarter of 2014 was a little more than $47,000, meaning that although the country has regained the jobs that were lost during the recession, those jobs pay 23 percent less on average than they did prior to the recession. That accounts for more than $93 billion in lost wages, the lion’s share of which has been transferred to the top percent of United States income earners. The study provided an important analysis of the widening income gap in the country and growing inequality.

That data must be factored into the narrative of the ever more positive jobs recovery. Sure, Americans worry about job security, lower wages, the possibility of reduced hours or benefits, but the important fact is that fewer than one in five United States full- and part-time workers currently worry they will be laid off in the near future, a 29 percent increase from last August. That decrease marks a return of worker confidence to levels last seen in the years prior to the 2008 financial collapse. At the same time, Americans’ economic confidence is oscillating in moderately negative territory, with assessments of current conditions coming in slightly higher than future economic outlooks. To Gallup, the minor variations in sentiment are still indicative of a common theme of improvement, especially when considering other economic indicators as well. For example, last month, Gallup’s Job Creation Index reached a six-year high.

Wage stagnation, mediocre but stable economic confidence, growing confidence in job security, and job creation weave together the backstory for the Department of Labor’s key emerging unemployment data and payroll growth figures.

On Thursday, the Labor Department’s Bureau of Labor Statistics reported that initial applications for unemployment benefits dropped to 298,000, a 14,000-claim decrease from the previous week’s upwardly revised figure of 312,000. By comparison, weekly jobless claims stood at 338,000 in the same week of 2013.

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If the past five weeks can be taken as the beginning of a new trend, then weekly first time applications for unemployment benefits are evidence of stabilization; the number of Americans filing jobless claims for the first time has dipped below 300,000 — a the key benchmark of labor market health — three times in the past five weeks. Even if the past five weeks are merely an abnormal strong moment in the job recovery, the generally downward course charted by application numbers is evidence of ongoing healing in the labor market. “The job market is doing well right now, there’s no doubt about it,” noted RBS Securities economist Guy Berger in an interview with Bloomberg. Labor market optimism is not exclusive to “right now.”

TD Securities strategist Gennadiy Goldberg told The Wall Street Journal that he sees “potential for further improvement in this [emerging unemployment] indicator as momentum remains to the downside,” meaning the analyst believes that labor market data and economic indicators suggest initial jobless claims will continue to decrease in the near future. Historical evidence indicates the take-up rate — or the percentage of Americans who are eligible for and take advantage of unemployment benefits — should continue to fall as the average duration of unemployment shrinks and out-of-work Americans become more confident in their ability to find employment quickly.

Last month, as U.S. employers added 209,000 jobs, the unemployment rate dipped to 6.2 percent. While economist still consider the current levels of joblessness historically high for this point in the recovery, the headline unemployment rate has dropped 11 percentage points over the past months. July also marked the sixth consecutive month in which job creation surpassed the key benchmark level of 200,000. Alongside these job creation numbers, American workers have grown more optimistic about employment growth; Gallup found in July that the percentage of workers who are witnessing hiring in their workplaces has reached a new high of 28 percent, just above the 26 percent recorded at the beginning of 2008, which was not an especially good time for job creation.

Thursday’s jobless claims data is especially noteworthy because the week ended August 16 is what is known as the Labor Department’s survey week. The Labor Department relies on a mid-month survey of households to tabulate the number of workers receiving pay for the week in question and determine the unemployment rate, while job creation is calculated by questioning public sector employers and private companies. Given last week’s sizable decrease in emerging unemployment, the Labor Department’s August Employment Situation Report will likely reflect strong job growth. “The claims data would be consistent with another solid gain in payrolls in August,” Barclays economist Dean Maki told the Journal.

However, the decrease in weekly jobless claims was accompanied by an increase in the four-week moving average. Jobless claims provide the first look at the employment situation for any given month, but since the weekly figures can be volatile, economists use the four-week moving average to understand wider trends in employment, which are far more telling of labor market health than weekly readings. Last week, that key measure rose 4,750 to 300,750. Comparatively, several weeks ago, that measure stood at the lowest level recorded since February 2006. Meanwhile, the number of workers continuing to draw unemployment benefits — a measure reported with a one-week lag — decreased by 49,000 to 2.5 million in the week ended August 9, a new recovery low. Over the past 12 months, continuing claims have fallen by 481,000.

Jobless claims — which serves as a proxy for layoffs — fit within the strong recovery narrative crafted by job creation in the past several months. Although employers added fewer jobs than in the previous several months, July saw solid growth. As recent jobless claims numbers prove, emerging unemployment, as compared to long-term unemployment, is returning to acceptable levels. Or, in other words, fewer Americans are being laid off, even if long-term unemployment remains elevated and the labor force participation rate stands near record lows — the dual concerns of Federal Reserve Chair Janet Yellen.

At the end of last month, highlighting the continued stabilization of the labor market, Federal Reserve policy makers announced their decision to further taper the central bank’s monthly asset purchases, even though “a range of labor market indicators suggest that there remains significant underutilization of labor resources,” as the Federal Open Market Committee noted in a statement, meaning there is still much slack in the market. Yellen told Congress earlier last month that despite the positive turn the economy has taken, she remains concerned about that “slack,” which manifests itself in low labor force participation and sluggish wage growth. Making a case for keeping the central bank’s benchmark interest rate at a near-zero level, the Fed Chair noted that the “strengthening” jobs picture still shows long-term unemployment at “exceptionally high levels.”

The Fed continues to have no plans to raise interest rates, even though the central bank acknowledged economic growth has “rebounded” following the Department of Commerce’s announcement that gross domestic product expanded at a 4 percent rate in the second-quarter. The connection between job growth and economic output seems relatively simple. When more people are employed, consumers have more cash at their disposal, meaning more money is being spent and businesses hire more employees to keep up with the greater demand. However, when and how gross domestic product and job growth are measured complicates their relationship. Indeed, relatively solid job growth toward the end of the first-quarter prompted, in part, Department of Commerce economists to upwardly revise growth from a 2.9 percent contraction to a 2.1 percent contraction.

But it is important to remember that the headline GDP number is not a leading indicator, rather it reflects growth through a rear-view mirror. This means a high growth rate can be the result of one-time factors, while low growth could hide underlying strength. With GDP growth remaining choppy and inconsistent throughout much of the past five years of recovery, the link between the United States’ employment situation and its economic output has been loose. But the economy is correcting that disconnect.

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