July Job Creation Slows, But Is Economy Doing What It’s Supposed to?
It’s a bore-the-pants-off-you, the economy-is-doing-what-it-should-be sort of reports w/ a slight edge of weakness the media will overstate.
— Justin Wolfers (@JustinWolfers) August 1, 2014
Labor market: Business as usual As Brookings Institution’s Justin Wolfers wrote Friday morning following the Department of Labor’s monthly Employment Situation Report, the U.S. economy is “doing what it should,” creating more than 200,000 jobs — a level considered to be an important benchmark of economic health. And, with employers expanding payrolls by 209,000 in July, last month marked the sixth consecutive month in which job creation surpassed that key level, even if the pace of employment gains slowed noticeably from the previous three months and fell below Wall Street’s expectations. Still, those sixth months represent the healthiest pace of job creation over that length of time since 2006. Regardless of the implications last month’s job creation has for the broader recovery narrative, the slower-than-expected growth will help to alleviate concerns that the Federal Reserve might decided to lift interest rates from near zero earlier than expected. The main takeaway from the July jobs report is that the labor market is stable; it is neither accelerating or losing momentum. “This report is consistent with a moderation in economic growth in the second half of the year,” Dean Maki, chief United States economist at Barclays, told The New York Times. “This is a labor market that is growing solidly, just not quite as fast as in prior months.” And while the unemployment rate ticked up a tenth of a percentage point to 6.2 percent last month — despite what can be considered strong job gains, or at least gains consistent with the past several months — that jump is not evidence of new weakness. Rather, the small uptick, which was actually smaller than one percentage point, is mostly the result of what is known as statistical noise. The number of unemployed persons remained little changed in July. Generally positive labor market trends are coinciding with general economic improvement. On Wednesday, the Department of Commerce reported that gross domestic product grew at an annual rate of 4 percent in the second quarter of this year — a welcomed improvement from the 2.1 percent contraction recorded in the first three months of 2014. And while that number could increase or decrease dramatically in future revisions, economists are generally encouraged by the data. “The trends from 2013 and this most recent data show that the economy is on sound footing and justify a solid forecast for the second half of 2014 of 3.0 — 3.5 percent growth,” Doug Handler, chief U.S. economist for IHS, wrote in a statement obtained by Bloomberg. However, that report and Friday’s job numbers confirmed that the U.S. economic recovery has yet to break free from the subpar growth that has characterized the post-recession years. In typical fashion, the headline numbers hide a number of ills, and other calculations of joblessness tell a more nuanced story. For the fiftieth time in 51 months, more unemployed workers stopped looking for employment than found jobs. And as a result, the labor force participation rate increased slightly to 62.9 percent. In general, the labor force participation rate has remained stable, near historical lows, since April. “The participation rate is at lows not seen since 1978,” according to MFR economist Joshua Shapiro, “and therefore conditions in the labor market are certainly worse than indicated by the reported steep drop we have been seeing in the unemployment rate.” Meanwhile, the number of involuntary part-time workers stood at 7.5 million last — a figure that indicates a large number of Americans are not adequately employed. With that reality, economists must consider whether businesses will give those part-time employees more work as the economy improves, or whether the U.S. economy is shifting permanently toward part-time employment, or whether those workers have been unable to secure full-time work because they do not have the necessary skills.
If all the unemployed lined up shoulder to shoulder, the queue of jobless people would stretch from New York to San Francisco. — Justin Wolfers (@JustinWolfers) August 1, 2014
There also remain 9,671,000 unemployed Americans, and that measure changed little in July and decreased only 1.1 percent over the past 12 months. And of that total, 3.2 million have been jobless for more than 27 weeks, a measure that also held constant last month. The number of long-term unemployed has dropped by 1.1 million over the past 12 months, dropped approximately 50 percent over the past two years, and accounted for around 70 percent, but it is still double the number when the recession began in 2007.
Recent drops in the unemployment rate have largely come as discouraged workers have dropped out of the labor force, with a majority of those discouraged workers being Americans who have not held jobs for more than six months, meaning the decrease in long-term unemployment has caveats. The government’s definition of unemployment only includes those who are actively looking for work. Unemployed Americans who have given up the job search are not included in official tabulations, meaning the decline in long-term unemployment does not tell economists whether more people are finding jobs or whether fewer people are looking.
FiveThirthyEight’s Ben Casselman argues that the decreases in the number of long-term unemployment is the result of fewer people searching for employment. Former Obama administration economist Alan Krueger has made the same claim. But a July 21 research paper from Federal Reserve economists noted that the long-term jobless are faring better than commonly believed, with the drop in the rate of long-term unemployment over the past eight months coinciding with a stable labor force participation rate and an improving employment to population ratio. The reason for the disparity in these two assessments of the health of jobless Americans comes down to how data is collected. The Labor Department tracks 60,000 households for four consecutive months, in order to keep track of the changing employment status of those individuals. After that period, those households cycle out of the survey for eight months before they are polled once again. And the data shows that the percentage of long-term unemployed Americans finding jobs on a monthly basis has barely increased since the worst of the recession.
But when changes in the share of long-term unemployed are examined on a yearly basis — and remember households are included in the Labor Department survey for one four-month period per year — a different reality emerges. Statistical noise — caused by workers who stop hunting for work and then later return to the job search, or take a temporary job — exaggerate the number of workers dropping out of the labor force on a monthly basis, meaning annual numbers show a clearer trend of improvement. According to government data, the odds a long-term unemployed worker will have a job the following year are now as high as they were before the recession.
Still, Casselman is not convinced by that “interpretation.” He argues that while those Americans who were jobless for more than 27 weeks saw their employment prospects improve significantly in 2010, gains have been much more modest in the subsequent three years. And even though there appears to be an increase in their job-finding rate over the past six months, “it’s hard to tell whether that’s a trend or just statistical noise.”
High number of underemployed Americans, stagnant wage growth, the large share of the unemployed who have been out of work for six months or more, and the record-low levels of labor force participation are all indications of labor market has a great deal of slack which is a particular concern of Fed Chair Janet Yellen. In particular, wage growth has been extremely weak. In July, wages barely moved, increasing by only a penny — a jump that leaves them only 2 percent higher than a year ago. Still, that number does contrast with the Labor Department’s Employment Cost Index. Thursday’s release of the June reading showed labor expenses rose significantly, although the average for the first half of the year remained in line with 2013’s underlying trends. The June jump ignited fears on Wall Street that wages might soon accelerate; investors pushed down stocks based on fears that solid wage growth would prompt the Federal Reserve to lift interest rates sooner rather than later. However, Friday’s job report calmed those fears, leaving the 209,000-payroll increase the loudest news of the July jobs report.
As the Labor Department’s Bureau of Labor Statistics reported, professional and business services companies added 47,000 jobs in July, manufacturers created 28,000, retail trade businesses expanded payrolls by 27,000 workers, and construction employment increased by 22,000.
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