Another Strong Jobs Report, But Economy Remains Weak
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
August 9, 2016
IN THIS ISSUE:
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- July Jobs Report Stronger Than Expected, 2nd Month in a Row
- The Real Unemployment Rate Went Up To 9.7% in July
- The Worst Economic Expansion in 30 Years Continues
- Maybe It’s Time to Dump the U-3 Unemployment Rate
- Special Report: How to Maximize Your 401(k) – Advanced
Last Friday’s unemployment report for July was significantly better than expected for the second month in a row. This has led many analysts to upgrade their forecasts for growth in the second half of this year. Yet as I will argue below, forecasters often put far too much weight on one or two monthly economic reports that can be revised significantly in subsequent months.
While new jobs were substantially above the pre-report consensus in June and July, let us not forget that job creation in May was almost non-existent, the lowest in several years. The fact is, the US economy continues to limp along at less than 2% growth.
July Jobs Report Stronger Than Expected, 2nd Month in a Row
In July, the US labor market capped off the best two-month stretch of hiring so far this year – despite global turbulence and slower business spending once again. Employers added 255,000 net new jobs last month versus the pre-report consensus of 180,000.
More Americans joined the labor force last month, which is a good sign, but this served to keep the headline unemployment rate steady at 4.9% rather than falling to 4.8% as many had expected leading up to the report.
Wages for private-sector workers matched their strongest annual pace of growth in seven years, rising 2.6%. Hourly wages increased by 8 cents to $25.69 in July, while the average work week edged up to 34.5 hours, near an eight-year high.
Obviously, the strong growth in jobs in June and July is encouraging, as opposed to the paltry 24,000 jobs created in May. Yet if we consider all three months, we get an average of 190,000 monthly jobs created, which is below the average of 206,000 over the last 12 months ended July.
The Labor Force Participation Rate – the share of American adults either working or actively looking for jobs – climbed a tenth of a percentage point to 62.8% in July. That suggests the stronger hiring is nudging more Americans to re-enter the job market, but participation is still depressed historically.
Every major industry hired in July except for energy companies, which have shed jobs for more than a year because of lower oil prices. Business and professional firms led the way, adding 70,000 jobs, only 17,000 of which were temps. Healthcare providers hired 43,000 new workers and restaurants and hotels beefed up staff by 45,000. The government also bolstered its workforce by 38,000, the most in almost two years.
Other industries showed more modest gains. Construction companies and manufacturers increased employment slightly, but hiring in those segments of the economy remains weak. Manufacturers are growing more slowly because of depressed domestic and global demand. Home builders, for their part, continue to add jobs to keep up with rising home sales, but commercial construction has lagged behind, due to a slowdown in business investment.
In conclusion, Friday’s unemployment report for July was the second stronger than expected monthly report in a row. But does that mean that the US economy is ready to shift into a significantly higher gear? Probably not.
The Real Unemployment Rate Went Up To 9.7% in July
As noted above, the official unemployment rate remained unchanged at 4.9% in July. On the first Friday of every month, the Labor Department’s Bureau of Labor Statistics (BLS) puts out a slew of employment-related data, each of which tells its own story about the jobs situation. Most economists look past the official unemployment rate – also known as the “U-3” number – to other metrics that provide other views on the state of the labor market.
One of those figures is the “U-6” rate, which has a broader definition of the unemployed. That rate rose slightly in July to 9.7%. The U-6 rate is defined as all unemployed, plus people who are available to work but have not looked for work in the last four weeks, and people who are working part-time because they can’t find full-time work.
The U-6 rate thus includes the unemployed, the under-employed and the discouraged. Most economists consider the U-6 rate as a better indicator of the labor markets than the headline U-3 number. I agree. The U-6 rate has shown improvement in the past few years, and it fell to 9.6% in June, the lowest level since April 2008. Yet it inched up to 9.7% in July.
The Worst Economic Expansion in 30 Years Continues
At the risk of getting a little wonky here, we should delve into the latest unemployment numbers a little deeper before we get too euphoric over the jobs reports for June and July. The unemployment data and reports are compiled by the Labor Department’s Bureau of Labor Statistics (BLS), based on two separate monthly surveys.
The Current Population Survey, also known as the “household survey,” is a sample of 60,000 selected households. The Current Employment Statistics Survey, also known as the “payroll survey,” is a sample of 160,000 businesses and government agencies. The results of the surveys are based on what respondents tell them and as such, they can sometimes be confusing or even misleading.
In addition, the BLS applies “seasonal adjustments” to its data and monthly reports in an effort to smooth-out the numbers. Before we apply too much importance to one or two monthly reports that may be better or worse than expected, it is advisable to look at the non-seasonally-adjusted numbers periodically.
The non-seasonally-adjusted unemployment rate for July of this year was 5.1%, as compared to the seasonally-adjusted rate of 4.9% as reported above, and down from 5.6% a year ago. There’s a little bit of an improvement there, but the unemployment rate is a function of both the number of people who say they’re actually employed in the labor force, and the number of people who are actively looking for work.
So, we must look beyond the unemployment rate since changes in the size of the workforce can push down the unemployment rate without any real gains in total employment. For example, in spite of a falling unemployment rate, if we look at the actual number of unemployed people, we find that little has changed over the past year according to the BLS.
During July of this year, there were about 8.1 million unemployed people. 12 months earlier, during August 2015, the number was pretty much the same – and it’s been hovering around 8 million over the last year, even as the official unemployment rate has been dropping.
The fact is that US economic expansions have been getting weaker and weaker. Specifically, total payroll employment today is only 3.5% higher than what it was back in 2008 as we headed into the Great Recession. That 3.5% growth in jobs compares to 20% growth from both 1991 to 2000 and 1981 to 1990 (not shown below).
So yes, we are in an economic expansion right now, but it’s a very weak one in historical context. Yes, the unemployment rate has dropped significantly in recent years, but the number of unemployed Americans has changed very little.
Unfortunately, the government’s official U-3 unemployment rate is a very incomplete indicator of the state of employment/unemployment in America. The bottom line is that the worst US economic expansion in 30 years continues with no clear end in sight.
Maybe It’s Time to Dump the U-3 Unemployment Rate
Historically a high U-3 unemployment rate has signaled an economy in decline or recession, whereas a low U-3 usually meant a booming economy. Obviously, our economy is not booming and people aren’t happy about it. Over two-thirds of Americans believe the country is headed in the wrong direction.
I didn’t know this until last week, but the US unemployment rate has only been below 5% on two other occasions in the last 40 years – once in the late 1990s during that economic boom, and again in late 2006 to early 2007 leading up to the financial crisis.
In 1997, the Consumer Confidence Index reached 130 and topped 140 in 1999 when the unemployment rate fell below 5%. In 2006 when the U-3 rate again dropped below 5%, the Confidence Index was in the 110 range. However, with the U-3 below 5% in five of the last seven months, the Confidence Index was only 97.3 in July.
Signs of gloom abound. The latest IBD/TIPP poll found that more than a third of adults (37%) think the country is in a recession now. Less than half (48%) say that the economy is improving, while 49% say it’s not. More than half (55%) are dissatisfied with federal economic policies.
What’s happened is that the official unemployment number (U-3) has grown increasingly useless as a reliable economic indicator, for the simple reason that millions of Americans have quit looking for jobs. Since the unemployment rate is based largely on those who are actively looking for work, the more people who stop looking and drop out of the labor force, the lower the unemployment rate becomes.
For this reason, the government may as well phase-out the U-3 rate and focus on the broader U-6 rate, or come up with a new jobless measure that more accurately depicts what’s really going on in the job market today.
It’s Become a Joke to Predict What the Fed Will Do Next
In case you haven’t noticed, Fedwatchers (including me) have been increasingly flip-flopping their predictions on when the Fed will raise rates again. It has become borderline ridiculous.
At the end of July, we got very disappointing reports on the US economy. As I discussed last week, the Commerce Department reported that GDP rose only 1.2% in the 2Q, less than half of what was expected, and only a revised 0.8% in the 1Q.
This discouraging news caused most Fedwatchers to conclude that a rate hike was off the table for this year. Then on Friday we got a second month of above-consensus jobs growth and Fedwatchers are once again fretting about a rate hike just ahead.
I have been an ardent Fedwatcher for over 30 years, and I would say I’ve had a pretty good record of predicting what the Fed will do in advance. Yet at this point, I have to admit that I have no idea as to the Fed’s next move.
We know the Fed really wants to raise the Fed Funds rate to give it more ammunition to fight the next recession. But we also know the Fed is sensitive to raising the rate too soon out of fear of crashing the stock market and/or setting off a new recession.
We’ll know more about the Fed’s latest thinking on August 17 when the minutes from the latest policy meeting which was held on July 26-27 are released. Some Fedwatchers believe that the policy Committee has become more confident about a rate hike at the next meeting on September 20-21. We’ll see about that when the minutes are released next week.
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All the best,
Gary D. Halbert