Friday, March 8, 2013

February Employment Report

The headlines from the February Employment Report contained some better than expected news about the job market: the unemployment rate fell to 7.7% (from 7.9%) and the economy added 236,000 jobs (246,000 in the private sector.  Let's look at some of the details.  The February numbers look quite good, but should be interpreted along with somewhat weaker numbers for January to assess the trend.  For example, though the private sector added 246,000 jobs in February, it added 140,000 in January, which averages 193,000 per month so far in 2013.  Looking at particular sectors, construction has added 140,000 jobs over the past year, a majority of those in the last 2 months (+73,000 in 2013).  To empahsize the significance of the pickup in construction, it added about 8,000 jobs per month, on average, in 2012, but is averaging more than 36,000 per month so far in 2013.  Other sectors and industries showing significant gains include retail trade, food accomodations, and health care.  One industry that you may not have expected to make a significant contribution, motion picture and sound recording industries, added nearly 21,000 jobs in February.

Why  did the unemployment rate fall?  A combination of more people employed and fewer people in the labor force.  The participation rate declined back to a 30-year low of 63.5% (the last time it was lower was in 1979).  Meanwhile, the employment-population ratio remained at 58.6%, unchanged so far in 2013 as well as from February 2012, but up from the post-recession low of 58.2% in November 2010 and still considerably below it's pre-recession high of 62.9% in November 2007.

What are the key takeaways from the report?  The job market has gotten off to a pretty good start in 2013, led by the rebound in construction.  That said, the employment gains in February were across the board, not concentrated in one sector.  Given the weakness in January, the job market is not signaling a robust economy, but an economy that continues to move forward.  In the coming months, there will be a battle between the rebounding housing market as seen in rising employment in construction and the fiscal drag due to the increase in the payroll tax and sequestration.

Sunday, March 3, 2013

The Impact of a Decline in the Participation Rate on the Uenmployment Rate

Recently, I was interviewed for a story in the Orlando Sentinel regarding the impact of a decline in the pariticpation rate on the unemployment rate.  Since it's hard for reporters to include all relevant information in an article, I decided to fill in some of the details that were missing.  As has been reported in many places, the labor force participation rate has declined significantly since the start of the Great Recession, falling from 66% in December 2007 to 63.6% recently.  If the participation rate was still 66%, the current unemployment rate would be more than 11% (simple math requiring no assumptions).  Should the participation rate be 66%?  A study by the Kansas City Federal Reserve explores it in some detail.  Estimates are that about half of the decline in the participation rate was due to the aging of baby boomers, which was not a result of the recession (though it did cause many to age prematurely!).  Taking that into account, a participation rate of 64.8% would result in the unemployment rate being about 9.6% (down from a peak of 10% in October 2009).  Someone was quoted in the Sentinel making the point that one can't assume that if more people were participating in the labor force, that they would be unemployed.  While this may be true, it's hard to imagine that more people participating in the job market would result in a noticeable increase in the number of jobs (some participants who dropped out of the labor force would have obtained jobs that others ended up getting) ; thus the primary result would still be a significantly higher unemployment rate.  Does that mean there has been little improvement in the job market?  The economy has added over 5 million jobs in recent years, so the job market has definitely improved, but the significant decline in the unemployment rate is due in a large part to the declining participation rate.  That's why a recent consensus forecast from a survey of economists for the Wall Street Journal predicts employment rising by 2 million in 2013 while the unemployment rate only declines to 7.4% by the end of the year.  According to the forecast, the rate of job creation is expected to increase, but the unemployment rate is not expected to decline as quickly as in recent years due to stabilization of the participation rate (and a possible minor rebound).

Saturday, March 2, 2013

A Look at the Past Week's Economic Reports

The government released several economic reports this past week, including a revision of fourth quarter GDP and personal income/spending for January.  The headline numbers show that, instead of shrinking by 0.1% in the fourth quarter, the economy grew by 0.1%.  Personal income declined by 3.6% in January, the worst month in 20 years, after rising by 2.6% in December.  What did we learn from these reports?  Not too much.

The GDP report contained minor revisions and still reflect an economy that is growing at a modest rate (the private sector continues to grow at close to a 2% rate, which is better than 0%, but nothing to brag about).

The personal income/spending report reflects the impact of the anticipation and reality of the tax changes.  Those who could shifted income into December 2012 to avoid the anticipated tax hikes, resulting in a surge in dividends and bonuses in December and a subsquent decline in January.  When was the last time the US saw such a shifting in income?  In the early 1990s after the election of President Clinton, who promised to increase taxes on the rich during the 1992 campaign; the result was a surge in income in December 1992 to avoid the higher taxes and decline in January 1993 (so that's why this January was the largest decline in 20 years).

More importantly, consumer spending, adjusted for inflation rose by 0.1% in both December and January, reflecting a slowdown from the Fall of 2012.  The savings rate, which rose in December due to the temporary surge in income, declined to 2.4% in January, the lowest since November 2007 (right before the start of the recession).  Given the conisderable noise in the data, it's important to watch how things unfold in the coming months.

What are the key takeaways?  The economy was sluggish as 2012 came to an end and consumer spending continues to move forward, but at a slow rate.  It's still a little too early to tell how much of a hit consumer spending will take from the payroll tax hike.  Early evidence indicates that low and moderate income consumers are struggling, which should contribute to a sluggish economy in the first half of 2013.  Though not part of this post, it should be noted that housing is now the strongest part of the US economy (growing at a double-digit rate over the last year), helping to offset weakness in consumer spending and reductions in government spending.