Jobs report: Payroll number lower than expected but trend holds at 200,000

May 6th, 2016 at 9:26 am

Payrolls rose 160,000 last month, less than the 200,000 we’ve come to expect and the smallest monthly gain since last September. Revisions to the prior two months data shaved 19,000 off of their previously reported gains.

However, though this slower pace could represent a downshift in the rate of job creation, it is far too soon to jump to that conclusion. These monthly numbers are jumpy and require averaging a few months’ gains to get at the underlying trend. In fact, the monthly trend over the past three months is precisely 200,000, as shown in my monthly smoother below. So, even while one can point to other slowing indicators, especially the 0.5% GDP growth in the first quarter of the year, do not assume the job market is softening.

The rest of the report provides indicators that bounce both ways. On the soft side, the slipping of the labor force participation rate was a real disappointment and a reversal of a recent upward trend in this closely watched metric of movements in and out of the labor force (see figure). After rising from a low of 62.4% last September to 63% in April, the LFPR ticked back down in May to 62.8%. That’s still significantly off its lows, and again, the monthly numbers are jumpy, but this was the number I liked least in today’s report, especially since the same 0.2 percentage point decline was seen among prime-age workers, meaning the drop can’t be pinned on aging retirees.

Source: BLS

Source: BLS

On the other hand, both average hourly wages and weekly earnings continue to beat (very low) inflation (weekly hours ticked up slightly last month), with both earnings measures up 2.5% over the past year, while inflation’s running around 1%. Importantly, from the Fed’s perspective, even while the job market is tightening, the extent of wage acceleration remains mild. Essentially, average wages from the establishment survey have climbed from around 2% growth in the first half of last year to around 2.5% this year. That’s what we’d expect in an improving job market and a pace that remains below the 3-3.5% Fed chair Yellen has suggested is “equilibrium” wage growth.

The smoother shows 3-, 6-, and 12-month averages of monthly gains. As noted, the recent trend is 200K, a slight deceleration from the longer term trend, but still a solid number that will move the job market towards full employment if it persists.

Source: BLS, my calculations

Source: BLS, my calculations

Underemployment, which includes about six million part-time workers who’d rather work full-time (and are thus under-employed), ticked down slightly but remains elevated at 9.7%. I’ve argued that an underemployment rate about a percentage point lower than this is consistent with full-employment, meaning there’s still slack left to be squeezed out of the job market.

The goods-producing side of the job market was notably weak last month. Even as oil prices have come up a bit, extraction industries continue to shed jobs, and manufacturing remains weak. Factories added 4,000 jobs last month, an improvement over losses of 45,000 jobs over the prior two months. But the strong dollar continues to weigh on the international competitiveness of the sector.

As noted, GDP rose only 0.5% and productivity fell 1% in the first quarter of this year, obviously weak indicators. Now we can add a jobs report that’s off its recent pace. Is the U.S. economy, just about to hit year seven of an expansion that begin in mid-2009, heading toward recession?

That’s unknowable, but I would strongly avoid reading too much into these indicators. On a year-over-year basis, GDP is up about 2%, which is about its trend in the recovery. Similarly, I’d definitely discount the negative handle on the Q1 number—these data are noisy and I don’t think we’re forgetting how to make stuff. Yr/yr, productivity is up 0.6%, which is too slow but also right at its recent trend. And, as I’ve shown, underlying job growth at 200K is also at trend.

In other words, filtering out some statistical noise, we’re growing at trend. Productivity is too low, but the job market is tightening and wage growth is getting a bit of a boost. We certainly want to take note of the weaknesses in the “high-frequency” data, but a month or a quarter does not a new trend make.

Quick GDP point re 2016q1

April 28th, 2016 at 10:57 am

As expected, real GDP for Q1 came in at a suckingly low 0.5%, SAAR. In this case, “SAAR”– seasonally adjusted at an annualized rate”– is important. That’s because there’s some concern with the seasonal adjusters, which some argue are biasing Q1 down and Q2 up. Also, annualized quarterly changes tend to jump around.

So a good way to squeeze out some of the noise is to measure year-over-year changes, which (partially) wash out the seasonal factor (“partial” because BEA allows seasonal factors to change over time, so the SA factor for Q1 this year could be slightly different from Q1 last year).

Source: BEA

Source: BEA

So, as you see, real GDP is growing around 2% when you smooth out the bumps. That’s not to say there aren’t some worrisome signs of deceleration, but I tend to think of those around longer term trends, like productivity and labor force participation.

Certainly based on the job market, the economy looks better than 0.5%, but that said, the smart move would be to plan for the next downturn, as per Bernstein/Spielberg.

The wage/price ballet: keep the music going!

April 27th, 2016 at 10:33 am

I’m sure it’s no surprise that I’d like the Fed to announce later today that they’re holding rates steady and maintaining a pretty dovish stance. Inflation remains unthreatening, real GDP growth in the first quarter is likely to come in at <1%, and—the subject of this post—the typical (median) worker is only now getting a bit of a boost from the tightening job market. The last thing we’d want to do given these conditions is endanger that welcomed trend.

Though slack remains in the job market, as it has tightened, wage growth has picked up a bit, even at the median. The figure below shows the year-over-year growth rate of nominal weekly earnings, and the smooth lines, based on a model I’ll explain in a moment, cut through the jigs and jags, revealing a bit of upward mo.

Source: BLS, my calculations.

Source: BLS, my calculations.

The model predicts median earnings growth based on a labor market slack variable and two lags of the dependent variable. What about those bits at the end, where one wage forecast keeps going up and one flattens? Those are based on different assumptions of just how tight the labor market gets.

The wage line that flattens out at around 3.5 percent nominal growth by 2018 assumes that the job market gets to full employment (which, given the slack metric I used, accounts for not just unemployment but underemployment as well) by the first half of next year and stays there (Chair Yellen has named 3.5% as a target for average compensation, implying she views that pace as trend productivity growth + the Fed’s inflation target).

The wage line that continues to grow, hitting 4 percent, simulates a job market that’s even hotter, where the jobless rate is allowed to fall below what we think of as full employment. With this scenario, we’re basically simulating a labor shortage, which significantly lifts the bargaining power of middle-wage workers.

But wouldn’t that be inflationary?

Not so much, really. Research I’ve cited elsewhere suggests that the slope of the “Phillips Curve”—the correlation between slack and inflation—is flat right now, implying a low level of transmission from the tight labor market to prices.

In this spirit, the next chart shows the result of another modelling exercise, this time, predicting the growth rate of the CPI (Consumer Price Index) based on the same slack variable as the wage model, along with energy prices and an index for the dollar, as both of these factors predict overall price movements. As you see, predictions from this little model track the CPI pretty well.

Source: BLS, my calculations

Source: BLS, my calculations

The end of this figure shows inflation “firming”—slowly drifting upward—but at full employment, the CPI hits its target of 2.5 percent at the end of 2018. And remember, that target is an average, not a ceiling. As you see, it’s been missing to the downside, so it’s due for a walk on the wild-up-side.

The other simulation, where the Fed kicks back and lets the job market fall below full employment, has the CPI hitting 2.8 percent by the end of 2018. Slightly above target, but again, that’s as it should be, assuming (and here I’m donning the cloak of the central banker) that inflation expectations remain anchored around their target, meaning people expect them to eventually tighten and nudge price growth back to the target.

Obviously, this is all just modelling and all models are wrong. Still, these models are telling us something useful and plausible: tighter labor markets are delivering a bit of bargaining clout to middle-wage workers. In our age of inequality, full employment—and even fuller-than-full employment—are critical correctives to the skewed distribution of growth. Allowing these dynamics to proceed apace may generate some price pressures, but that too is as it should be given how weak inflation has been.

So let’s see what Chair Yellen and company have to say later this afternoon, but their right move, in my not-so-humble opinion, is to let this ballet play out as above.

The new age or the stone age: we either deal with the costs of trade or they deal with us

April 26th, 2016 at 9:51 am

Economist David Autor et al keep producing really important findings about the impact of trade on people and communities hurt by international competition. Their latest entry, on the connection between trade-induced job losses and political polarization, is written up in today’s NYT:

“Cross-referencing congressional voting records and district-by-district patterns of job losses and other economic trends between 2002 and 2010, the researchers found that areas hardest hit by trade shocks were much more likely to move to the far right or the far left politically.”

For years, it was impolite to raise the costs of trade in policy discussions, even while fully recognizing the benefits. Eventually, the implications of the models, especially “factor price equalization,”—the idea that trade with low-wage countries could lower the wages of workers in sectors that compete with imports—allowed the word “globalization” to be added to “technology” in describing inequality. (Go ahead and try this at home: ask an economist what causes inequality, and they’ll say “globalization and technology.”)

But Autor et al, along with various others (the Economic Policy Institute has been onto this since its inception in the 1980s), have helped us get beyond sweeping generalizations. They’ve done so by drilling down into the microdata to identify the impact on affected communities and groups of workers (e.g., those without college degrees), with a particular emphasis on the impact on China of trade in the 2000s. Their work is creating the oxygen to recognize, even in polite company, the double-edged sword of U.S. trade dynamics, with our persistent and large deficits.

In my work, I’ve argued for an agenda that recognizes the benefits of trade, both to ourselves in terms of deeper supply chains and lower prices, and to the poor in developing economies. That means pursuing full employment here, especially in the communities that Autor et al identify as highly exposed to import competition. The Autor et al game-changer insight for mainstream economists is that people are not only consumers; they’re also workers that dwell in places that can be devastated when factories leave.

This is true even if the net benefits for the nation are positive. It’s mind-blowing how long it has taken establishment politicians and economists to recognize that people in communities crippled by import competition couldn’t care less about the aggregate national benefits of trade. Even in the NYT piece, a prominent trade economist crows: “Free trade really helps working-class people in terms of lower prices for products. The benefits are skewed toward people with lower income because they spend a much larger fraction of their income on merchandise.”

Those are the very people whose wages and incomes–real wages and incomes, factoring in lower inflation!!–have fallen.

The next trade agenda must also, I’ve argued, pursue a new kind of trade deal, one that elevates a wholly different group of stakeholders than the largely corporate interests who have come to dominate that process.

That agenda must also incorporate an evolving understanding of international macroeconomics, one that incorporates “savings gluts,” wherein large trade surplus countries export savings to and import labor demand from deficit countries; capital flows and their contribution to “secular stagnation;” and the impact of these dynamics on the dollar, interest rates, the Fed’s macro-management, and inflation.

The problem we face, of course, is that it took way too long to get to this discussion. That has allowed protectionists/demagogues to blame immigrants and trade for all that ails us, which leads to the obvious solutions: get rid of the immigrants and build barriers to trade.

But those ideas can’t work in no small part because globalization is…um…a global force with a massive infrastructure in place and benefits that American consumers will not comfortably sacrifice, nor should we, both for our own well-being and for the ability of emerging economies to lift their living standards through trade with richer countries.

Because we ignored the brewing problems with trade for so long, wasting time with fractious arguments over trade deals instead of dealing with the real problems identified by Autor et al and EPI, we’ve not built the policy architecture to deal with the micro and macro issues raised above (sorry, but “wage insurance” doesn’t get it). The Times piece points out that the unemployment rate in a district wherein the trade/polarization problem is fully operational is about 2.5 percentage points above the national average.

That’s a big hint, friends. Where trade deficits and import competition have hit hardest, labor demand is weakest. These communities need jobs and new investment. If the private sector doesn’t go there, and it often doesn’t, than the public sector must, through direct job creation and infrastructure investment.

On the macro front, when countries manage their currencies, as China did in the 2000s, we must take countervailing actions of the type I suggest in Chapter 5 here. When the strong dollar is exacerbating the trade deficit and capital inflows are further weakening demand, the Fed must incorporate these dynamics and act accordingly, as they have in their dovish turn in recent months.

We either figure out how to offset the impacts that Autor et al have been documenting in ways that preserve the benefits while accounting for the costs, or we’ll be stuck with Trumpian atavism. Not to put too fine a point on it, our choice is between the new age or the stone age. We’d best choose wisely.

The new fiduciary rule: strengths, limits, and politics

April 25th, 2016 at 6:30 am

OTEers know I’ve long been concerned about economic security in retirement among aging Americans whose limited earnings and savings threaten to generate inadequate income replacement rates once they’ve aged out of the workforce.

That’s one reason for my frequent scribblings on behalf of the new “fiduciary rule,” limiting conflicts of interest among financial advisors providing investment advice for retirement savers. Jeff Sommer has a useful piece in the NYT on this and other matters, making many good points but glossing over one very important one.

First, the gloss. Thanks to some seriously stiff spines by Democrats in the White House and Congress, conservatives’ efforts to block the rule have thus far been thwarted. The rule—which basically requires retirement savings advisors to put their clients’ interests first—starts phasing in about a year from now, i.e., early in the next president’s first term.

But you notice how I keep calling this a “rule,” not legislation? Congress didn’t pass this into law, of course (that would be way too functional), so the next president can change the rule on day one. It would actually take some time to unwind it—there’s a process that would take months—but it could be stopped before it started.

The fact that this and the many other rule changes and executive actions (the overtime rule, higher minimum wage for workers on federal contracts, and much more) enacted by this White House could be wiped out by the next administration is, IMHO, underappreciated.

It’s also the case that rule changes have limited purview—without Congress, the White House could raise the minimum wage for workers on federal contracts, but not for the national workforce. In the case of the fiduciary rule, the administration’s purview is only in regards to advice for retirement savings.

Thus, other advisers can over-manage funds and, as Sommer emphasizes, charge the commissions and fees most commonly associated with active fund management; research consistently shows how costly that can be to savers. Sommer presents new research comparing returns on S&P indices to those from active management. The finding is once again that “index funds outperformed the average actively managed fund in every single category” out of 29 asset categories.

However, when the researcher eliminated the impact of fees, the funds “managed to beat their benchmarks. For example, in the real world, more than 80 percent of large-cap funds trailed their benchmarks. But when Ms. Soe’s calculations removed the negative effect of fees from fund returns, only 69 percent underperformed. That’s still a poor record — and still argues for cheap index funds — but it’s much better.”

A common complaint among investment advisors is that the new fiduciary rule will push them toward passive vehicles, like low-fee index funds. I gotta say: that increasingly sounds more like a feature than a bug.