Jobs Report: Yes, the unemployment rate is 5.1%. No, we are not at full employment.

September 4th, 2015 at 9:24 am
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Source: BLS, my calculations.

 

Job growth came in below expectations, as August’s payrolls grew 173,000, according to this morning’s jobs report from BLS. Private sector job growth was particularly weak, at 140,000, its weakest month since March. Wage growth remains tame—remarkably so, given the low unemployment rate, which fell to 5.1% last month—and the labor force remains historically low, suggesting significant numbers of potential workers remain on the sidelines, creating downward pressure on wages and a downward bias on the jobless rate.

The unemployment rate, as noted, fell from 5.3% to 5.1%, the lowest rate since April 2008 and the rate that the Federal Reserve believes consistent with full employment in the job market. The labor force remained flat in August, meaning the participation rate is still stuck at a low 62.6%, more than three points off of its peak prior to the downturn. Some of that decline can be assigned to retiring boomers, but some remains due to persistently weak demand.

The number of involuntary part-timers—those working part-time who want full-time hours—remains highly elevated at 6.5 million, though that trend too is moving in the right direction, down 700,000 over the past year.

Thus, for the closely watched Fed decision as to whether they will begin their rate-raising campaign later this month, today’s report poses a bit of a dilemma. The unemployment rate says “raise!” The payroll number says “hold!” What’s the Fed to do? More on that in a moment.

Job gains were particularly weak in goods-producing industries, down 10,000 in construction and 17,000 in manufacturing, which has been hurt by the strengthening US dollar That makes our manufactured goods less competitive abroad and so far this year, factories have added 28,000 workers, well below last year’s pace of 119,000 by this point. Retail trade fell off of its recent pace, adding only 11,000 jobs after adding over 30K in the prior two months.

Government employment, on the other hand, has added between 20K and 30K over the past three months, including 33K last month, largely in local education. Since the jobs data are seasonally adjusted, that implies an increase in education hires over the usual August bump you’d expect based on back-to-school activities.

That raises the issue of revisions. First, the prior two months payroll numbers were revised up by 44,000 in total—in the revised data, both June and July saw solid gains of 245K. Importantly, there’s a pattern to August revisions, which have averaged almost 80,000 over the past five years, meaning that after the two monthly revisions, the original August payroll gain has been this much higher, on average.

For today’s number, that would mean a gain much in keeping with that of June and July. However, it’s entirely possible that August’s revision will go the other way, so the best we can do is downplay any one month’s data, using the smoother technique I always feature in these write-ups.

Averaging out the monthly payroll gains over 3, 6, and 12-month rolling averages, the smoother figure above shows that we’re consistently adding over 200,000 jobs per month. That’s a solid pace of gains, and while today’s weaker number must be considered, given the statistical noise in these data, it should not at all be taken to suggest a shift in the trend you see in the figure.

Average hourly wages, which despite low unemployment have been stuck at around 2% for years now, are up 2.2% year-over-year. That’s over the past year, but has there been a more recent acceleration in wage growth? Nope. If we take an average of wage growth over the past three months, and compare it to the average over the prior three months, the annualized growth rate is…wait for it…1.9%.

Of course, everyone is watching today’s report to see how it might influence the Federal Reserve’s pending decision re the craze to raise. Distilling a lot of buzz, the consensus seems to be that a strong payroll number—say, something north of 200,000—would clear the way for a mid-September liftoff, while a weak number would push the move to December if not later.

While I don’t believe a quarter-of-a-percentage point would be a big deal in terms of slowing the economy (the perspicacious Tim Duy disagrees), I’ve long scratched my head about why the Fed seems so driven to raise rates. Certainly neither price nor wage pressures are pointing in that direction, and the strengthening dollar amidst global weaknesses points the other way.

But I’m particularly hard-pressed to see how one month’s jobs data would seal the deal. While there’s of course important information in these jobs reports—if there weren’t, I’d still be at home blogging in my jammies—the signal-to-noise ratio is low in such high-frequency data. Significant revisions will be made. Yes, August’s jobs numbers tend to be revised up, but when we’re talking about a fundamental change in the economy’s key interest rate, a one-month’s jobs number is a small drop in what should be a big bucket of lots of other indicators.

So, should they listen to the jobless rate telling them we’re at full employment or the weaker payroll number (which may well be revised up), quiescent wage and price growth, ongoing slack signified by the depressed labor force rate and the elevated number of involuntary part-timers?

That’s actually an easy one. We’re clearly not at full employment so, especially given the absence of price and wage pressures, the correct answer is to hold for now. Either 5.1% is an inaccurate estimate of the “natural rate”—which is actually lower than that—or the reported jobless rate is biased down by some of the factors noted above.

Either way, for a data-driven Fed, it’s the same answer. For a Fed driven by other stuff—emotions, ennui, nervousness (“let’s just raise the damn thing already and break the suspense!”), nightmares from the late 1970s, or whatever…well, that’s a different story.

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12 comments in reply to "Jobs Report: Yes, the unemployment rate is 5.1%. No, we are not at full employment."

  1. Smith says:

    Why always play defense? That is a losing strategy. Yes I know this blog forcefully argued for policies to produce full employment, and authored a book Reconnection Agenda. However, if raising rates are counter productive, and mask the missing fiscal polity, where is the outrage? The current administration treads on eggshells, afraid combat over the economy will compromise (destroy) the ability to reach accommodation when dealines arrive. At that point everyone has to save face, meaning Republicans have to declare victory and go home, something they’re not very good at. Obama meanwhile has to get the best deal possible, (same as with Iran). But for others, where is the common sense calling out of the Emperor’s New Clothes. That’s why Sanders and Trump gain traction.

    The lines are “Made me give you the eye and then panic, Janet There’s one thing to say and that’s, Dammit, Janet”


  2. Tom in MN says:

    Read Duy again. He’s not saying the 0.25% increase will have much of an effect on the economy. He’s saying that the act of raising the rate says a lot about the Fed and that the timing of when they do it will send a significant message about their thinking. At least that is how I read it.

    As I commented on his site: I think whenever they raise it they will soon find themselves reversing course and ending up back at the ZLB. So from that point of view when they raise rates does not matter much. They think they have a chance of getting the funds rate up to 3%, high enough to deal with the next negative shock, I think this is dreaming. The long term trend in long rates does not give them anywhere near the room to do this.


  3. Robert Salzberg says:

    How can any reasonable group of economists think 5.1% unemployment is at NAIRU? We got to 4% unemployment in the late 90s without accelerating inflation and since then Capital has gained even more power over Labor so if anything, NAIRU should be lower than during the late 90s.

    If the Fed is serious about a 2% inflation target and since we’ve been under that mark for years, shouldn’t we have a bit more than 2% inflation before the Fed pulls the punch bowl?

    The Fed know wages have been stagnant for decades, what economic analysis says that’s a good economic trend to shoot for so raise rates now, now now?

    The Fed has missed it’s mandate by having too little inflation and too much unemployment for years.

    I think the real problem is credibility. The Fed says NAIRU is at 5.1% so that’s the least unemployment they will tolerate. Also since they’ve been saying they’ll raise rates this year they feel they must.

    It’s nice to have a plan, but when conditions change or your analysis is faulty, sticking with your plan is usually a bad idea. Working People Matter.


    • urban legend says:

      Do estimates of NAIRU factor in to any extent the relative power of labor compared to earlier years when the concept was formulated? If not, then how can the the concept be taken seriously? Does anyone seriously think we will see an actual wage spiral — not just some long-overdue wage increases, but a process spiraling out of control — after 15 years of virtually unrelieved bad news for labor? It’s going to take a long time for a greedy mindset to take hold.


      • Robert Salzberg says:

        The Fed gets its estimates of NAIRU by a group of professional forecasters instead of using in-house research. The list of professional forecasters shows an obvious bias towards banking, finance, and business interests. Worse still, the list includes people that are giving their estimates anonymously. While the Fed board certainly is free to make their own decisions, mostly using industry analysts estimating NAIRU helps to skew those decisions towards Capital and against Labor.

        “Natural Rate of Unemployment Estimated at 5.0 Percent

        In third-quarter surveys, we ask the forecasters to provide their estimates of the natural rate of unemployment — the rate of unemployment that occurs when the economy reaches equilibrium. The forecasters peg this rate at 5.0 percent. The table below shows, for each third-quarter survey since 1996, the percentage of respondents who use the natural rate in their forecasts and, for those who use it, the median estimate and the lowest and highest estimates. Sixty-two percent of the 37 forecasters who answered the question report that they use the natural rate in their forecasts. The lowest estimate is 4.25 percent, and the highest estimate is 5.8 percent.”

        “The Federal Reserve Bank of Philadelphia thanks the following forecasters for their participation in recent surveys:

        Lewis Alexander, Nomura Securities; Scott Anderson, Bank of the West (BNP Paribas Group); Robert J. Barbera, Johns Hopkins University Center for Financial Economics; Peter Bernstein, RCF Economic and Financial Consulting, Inc.; Christine Chmura, Ph.D. and Xiaobing Shuai, Ph.D., Chmura Economics & Analytics; Gary Ciminero, CFA, GLC Financial Economics; David Crowe, National Association of Home Builders; Nathaniel Curtis, Navigant Consulting; Gregory Daco, Oxford Economics USA, Inc.; Rajeev Dhawan, Georgia State University; Michael R. Englund, Action Economics, LLC; Michael Gapen, Barclays Capital; James Glassman, JPMorgan Chase & Co.; Matthew Hall, Daniil Manaenkov, and Ben Meiselman, RSQE, University of Michigan; Jan Hatzius, Goldman Sachs; Keith Hembre, Nuveen Asset Management; Peter Hooper, Deutsche Bank Securities, Inc.; IHS Global Insight; Fred Joutz, Benchmark Forecasts and Research Program on Forecasting, George Washington University; Sam Kahan, Kahan Consulting Ltd. (ACT Research LLC); N. Karp, BBVA Research USA; Walter Kemmsies, Moffatt & Nichol; Jack Kleinhenz, Kleinhenz & Associates, Inc.; Thomas Lam, RHB Securities Singapore Pte. Ltd.; L. Douglas Lee, Economics from Washington; John Lonski, Moody’s Capital Markets Group; Macroeconomic Advisers, LLC; R. Anthony Metz, Pareto Optimal Economics; Michael Moran, Daiwa Capital Markets America; Joel L. Naroff, Naroff Economic Advisors; Mark Nielson, Ph.D., MacroEcon Global Advisors; Luca Noto, Anima Sgr; Brendon Ogmundson, BC Real Estate Association; Tom Porcelli, RBC Capital Markets; Arun Raha, Eaton Corporation; Martin A. Regalia, U.S. Chamber of Commerce; Philip Rothman, East Carolina University; Chris Rupkey, Bank of Tokyo-Mitsubishi UFJ; John Silvia, Wells Fargo; Sean M. Snaith, Ph.D., University of Central Florida; Neal Soss, Credit Suisse; Stephen Stanley, Amherst Pierpont Securities; Charles Steindel, Ramapo College of New Jersey; Susan M. Sterne, Economic Analysis Associates, Inc.; Thomas Kevin Swift, American Chemistry Council; Richard Yamarone, Bloomberg, LP; Mark Zandi, Moody’s Analytics; Ellen Zentner, Morgan Stanley.

        This is a partial list of participants. We also thank those who wish to remain anonymous.”

        https://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/2015/survq315


        • Procopius says:

          In other words they pull the number out of … the air? A synonym for NAIRU is SWAG (Scientific Wild Ass Guess). When you have the same amount of inflation at 9% unemployment and at 6% unemployment, I think the Phillips Curve is a pretty weak hypothesis.


      • Robert Salzberg says:

        6th paragraph Irwin post from yesterday:

        “The roughly 2 percent annual rise in wages is considerably lower than what has historically been evident when the jobless rate is in its current range (it was 5.1 percent in August). Using data since 1965, the unemployment rate over the last year would predict an annual wage increase for nonmanagerial workers of about 2.5 percent; it has actually been only 1.85 percent.”

        Irwin attributes this lower wage growth to changes in the labor market. Whatever the cause, the facts on the ground scream that NAIRU is much lower than 5%.

        Too bad Irwin isn’t on the Fed’s list of professional forecasters…or JB or Krugman or Baker or Stiglitz.

        http://www.nytimes.com/2015/09/04/upshot/this-was-to-be-the-year-of-bigger-wage-gains-its-not.html?ref=topics


  4. Karl F says:

    The BLS publishes six (6) unemployment rates every month. While the U-3 rate (5.1% in August) is the one usually reported, the U-6 rate (10.3% in August) does a much better job of demonstrating that we are not close to fully recovery. This rate includes people who are working part-time who want full-time employment and discouraged workers who are not counted in the labor force, but are likely to re-enter the work force as their job prospects improve.

    The U-6 rate was 8.4% in the fall of 2007 before the start of the Great Recession of December 2007 to June 2009. It reached a peak of 17.1% during the downturn (vs. a peak of 10.0% in the U-3 rate). At its current rate of decline, the U-6 rate will show full recovery (to 8.4%) in the fall of 2016. As we approach full recovery, wages will start to increase faster. But as others have written, this does not necessarily mean that inflation generally will be increasing by much.

    Thus, it is way too early to be raising interest rates


    • David Spier says:

      This is a perfectly reasoned comment. Perfect. In this “new” economy (i.e. utterly mismanaged by the President), the U3 rate has become the shadow on the cave wall. Only the U6 rate matters; it is the true and accurate measure of the employment environment.


  5. PatricHenry says:

    It doesn’t matter, the numbers are bogus.


  6. Robert Salzberg says:

    According to the Fed, high productivity growth kept inflation at bay despite low unemployment in the late 90s. With productivity persistently low now with low unemployment and low inflation, will the Fed look into their crystal ball and find that decades of erosion of Labor power holds down wages? Or perhaps that a shift of the share of profits towards Capital and away from Labor has an persistently suppressive effect on wages?

    “”From November 1997 through June 2002, the staff interpreted the relatively rapid productivity growth seen in the late 1990s as a factor temporarily holding down inflation, thereby allowing a lower unemployment rate to be consistent with a stable inflation rate, and the staff’s NAIRU estimates incorporated this productivity effect. As of August 2002, however, the staff’s definition of the NAIRU was modified to exclude such temporary productivity effects.”

    https://www.philadelphiafed.org/research-and-data/real-time-center/greenbook-data/nairu-data-set


  7. Martine says:

    And yet, less people are actually working then ever….good one. And as EVERY COMPANY OUT THERE IS POSTING DISAPPOINTING EARNINGS< they can't afford to give single raise, or even really stay unpinkslipped if this keeps going. Whatever. If the consumer is dead, this awesome jobs number makes no damn sense.


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