December Job Market Report

The December job market report was disappointing, falling significantly short of expectations as the economy added just 74,000 jobs.  Meanwhile, the unemployment rate fell to 6.7%, the lowest since 2008.  What comes next is similar to what I've written quite often over the last year, but it has to be said.

Why did the unemployment rate decline from 7% to 6.7%?  The main reason was that more people stopped looking for work, reducing the labor force participation rate to 62.8%, the lowest since early 1978.  If the participation rate had not changed, the unemployment rate would have remained at 7%,  Comparing December 2012 to December 2013, the participation rate declined from 63.6% to 62.8%.  If the participation has remained constant, the unemployment rate would have also remained unchanged at 7.9% (so the entire decline in the unemployment rate in 2013 was due to a lower participation rate).  During the last five years, the noninstitutional adult population has increased by about 11.7 million people while the labor force has increased by 60,000 (December 2008-December 2013, not seasonally adjusted since we're comparing the same month; given new seasonal adjustments, the seasonally-adjusted labor force has increased by 280,000).  As a result, the participation rate has dropped from 65.8% in December 2008 to 62.8% in December 2013.  If the participation rate had not changed, the unemployment rate would currently be 10.9%.  As discussed elsewhere, some of the decline in the participation rate was expected due to the aging of baby boomers, but it is clear, based on the data, that the primary reason for declining unemployment in recent years is a smaller portion of people participating in the job market.

Let me stick with the negative before pointing out some bright spots.  Job gains in December were led by retail trade (+55,000) and temp jobs (+40,000).  Given a net increase of 74,000 jobs (87,000 in the private sector), that means the rest of the economy lost jobs.  In addition, hours worked declined, confirming weakness in employment.  What about the bright spots?  Given that these are estimates, it's helpful to look at three-month trends.  In the fourth quarter (Sep-Dec 2013), the economy added 515,000 jobs (530,000 in the private sector), for an average of 172,000 per month (177,000 in the private sector).  Nearly 200,000 of these jobs were retail trade or temp jobs (nearly 40%); still a high proportion, but not over 100%!.

Here are some more interesting numbers regarding changes in employment by age.  Which age group has experienced the largest employment gains in the last year?  According to the household survey, those 55 and over achieved just over one-third of job gains; almost 30% went to those between 25 and 54; 27% to those between 20 and 24, and just under 10% went to teenagers.

Enough with the numbers.  What are the key takeaways from this report?  Despite the decline in the unemployment rate, the report was quite weak, led by weak job gains, primarily in low-paying sectors, and a decline in the participation rate.  However, looking at the three-month trend and considering other reports about the economy, it's like that the report understates the strength of the job market.  For the fourth quarter as a whole, the labor market continued it's modest healing, though noticeable weaknesses remain.

Job Market: Florida and Orlando

The latest snapshot of the state and local job market was released this morning, showing unemployment declining to 6.4% in Florida (seasonally adjusted) and 5.8% in Metro Orlando (not seasonally adjusted).  In both cases, the rates were the lowest since 2008.  Does that mean that unemployment is no longer much of an issue in Florida?  While the job market has improved, readers of this blog can probably guess what I'm going to say next.  A major reason for the decline in the Florida unemployment rate over the last year has been the decline in the labor force participation rate, which fell from 60.5% in November 2012 to 59.6% in November 2013 (after already falling quite a bit in prior years).  If the participation rate had remained steady over the last 12 months, the unemployment rate would be about 7.7%, a small decline from last November's 8%.  Though employment growth was modest in November (net increase of 6100 jobs, nearly 60% of which were in retail trade), that's coming off of two strong months of job growth in which the state economy added nearly 69,000 jobs.

Metro Orlando's unemployment rate declined as well, but some of it reflects seasonal issues (the local data released today are not seasonally adjusted) and some of it is likely due to a lower participation rate.  That said, there is real improvement in the local job market, but not as much as implied in the official figures.  Employment growth in both Florida and Orlando exceeded the national average over the last 12 months (2.7% in Orlando, 2.5% in Florida, 1.7% in the US).  Leading growth sectors statewide (since Nov 2012) were retail trade and professional/technical services while food/drinking places and ambulatory health care services were the top gainers for Orlando over the last 12 months (though retail trade was responsible for half of the employment gains in November, primarily due to seasonal issues, i.e., Christmas!).

What are the key takeaways from this morning's report about the state and local job market?  Both continue to improve, but the improvement is somewhat overstated due to fewer people participating in the job market (if you're no longer participating in the job market, you're not counted as unemployed).  A relative strengthening of the Florida and Orlando labor markets is evidenced by employment growth statewide and locally exceeding that of the nation (over the last few months as well as the last year).

Fed Begins to Taper

The Fed announced that they will reduce their bond purchases by $10 billion (will now purchase $75 billion per month).  It emphasized that future tapering depends on economic data; further tapering will take place if the labor market continues to improve and/or inflation rises from its current low rate.  At the same time, it stated that the "Committee now anticipates, based on its assessment of these factors (labor market, inflation, financial developments), that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal" (words in italics added for clarification).   This represents a change from previous statements in which it stated that 6.5% unemployment was its threshold (though not a trigger, as emphasized by Ben Bernanke).  In other words, previous statements said that the federal funds rate wouldn't be raised until unemployment declined to at least 6.5%.  However, the unemployment rate has fallen more quickly than expected, not because of a very strong job market, but due in part to a declining labor force participation rate.  Thus, the unemployment rate by itself is not the best gauge of the labor market.  In the statement released today, the Fed stated that it will consider various measures of the labor market, not just the unemployment rate.  Prior to today, most economists expected the Fed to begin to raise the federal funds rate in 2015.  What about now?  According to projections released by the Fed today, most members of the Fed still anticipate that the federal funds rate will begin to increase in 2015.

What's the key takeaway?  The Fed thinks that the economy is strong enough to begin to reduce the amount of stimulus, though it still needs significant stimulus.  It thinks that the recent decline in inflation is temporary and that inflation will increase somewhat in the next year or two (so deflation is not a serious threat).  Though it changed the wording of the unemployment threshold leading to an increase in the federal funds rate, this is expected to have little impact on the timing of the increase.

The Latest Economic Reports: GDP and Employment

The government released two economic reports last week which, on the surface, indicates that the economy was strengthening in the second half of 2013.  Of course there's more to it than that.  Economic growth for the third quarter was revised up to 3.6% (from an initial report of 2.8%).  Does that mean growth and demand were picking up?  Not quite.  About half of the growth for the quarter was due to an increase in inventories; final sales rose by 1.9% (in line with the previous trend).  In fact, both consumer spending and business investment increased at a slower rate in the third quarter compared to the second quarter.  This was offset somewhat by somewhat faster growth in state/local government spending.  Also, another measure of economic growth, gross domestic income, rose by 1.4% in the third quarter (after growing more quickly than GDP in recent quarters).  What does this mean?  More of the same.  The recent trend in economic growth has been about 2%.

The other major economic news was the November Employment report, which showed an increase of 203,000 jobs with the unemployment rate falling to 7%.  Is this good news?  Yes, but not as good as it appears on the surface.  If you have read this blog before, you probably know what's coming next.  The main reason for the decline in the unemployment rate in recent months (and recent years) is the decline in the participation rate (a smaller portion of the population participating in the job market).  The participation rate fell from 63.2% in September to 63% in November (was 62.8% in October).  If it had remained at 63.2%, the unemployment rate would have been 7.3% in November (a slight increase rather than a decline of 0.2%). The quality of the jobs added appeared to improve somewhat in November compared to previous months, with a higher portion of jobs in relatively high-paying industries such as construction and manufacturing and a smaller share in relatively low-paying industries compared to previous months.

Together, the two reports suggest that the economy continues to grow at a modest pace: an underlying growth rate of 2% with about 200,000 jobs per month.

October Job Market Report and More

So much has happened since the last time I was able to post.  The latest job market report was released this morning and it indicated that 204,000 jobs were added last month while the unemployment rate ticked up to 7.3%.  What impact did the government shutdown have?  It had little direct effect on the number of jobs created (based on the establishment survey) since government workers were either back on the job or counted as on the payroll since they were promised back pay.  However, government workers on furlough were counted as unemployed based on the household survey (those who were contacted said either that they were on temporary layoff or absent from work).  Beneath the surface, there was quite a few interesting details (interesting by economic standards!).

The labor force participation rate plummeted to 62.8% (from 63.2%); that's the lowest since March 1978 and tied for the largest one-month decline in the last 30 years.  Similarly, the employment-population ratio fell from 58.6% to 58.3%, now just 0.1% above the post-recession low.  Some of the decline in the employment-population ratio was due to furloughed government workers, but this should not have affect the labor force participation rate.  A person is considered to be in the labor force if they have a job or if they are unemployed, including on temporary layoff or absent from work.  It'll be interesting to see if there was some fluke in the data or if this actually does represent a decline in the true participation rate.  As noted in the past, a lower participation rate results in a lower unemployment rate without any real improvement in the job market (a person is not considered to be unemployed if they are not participating in the job market; i.e., they don't have a job and are not looking for one).  I tend to think that the participation rate was underestimated this month, causing it to bounce back somewhat next time.

What industries contributed to the employment gains?  Nearly half the job gains in October were due to retail trade and leisure/hospitality.  Over the last 3 months (July-October), nearly 40% of job gains in the private sector were in those two industries.

Add it up and it was a pretty good report by today's standards (definitely not a strong report, but reflective of modest  to moderate growth).  The most puzzling aspect is the huge decline in the participation rate, which is hard to explain at first glance.

No Taper in September

To the surprise of many, the Fed decided not to begin tapering QE3 at its meeting today.  Personally, I expected a modest taper of $10 billion (in other words, it would start purchasing $75 billion worth of Treasuries and mortgage-backed securities each month instead of $85 billion).  What happened?  I think many on the Fed had been concerned about excessive leverage and speculation in the system as evidenced by record-low long-term interest rates, record low interest rates on high-yield bonds, etc.  Once the possibility of tapering began to be discussed, there was an unwinding of risk in financial markets (higher long-term interest rates (including mortgage rates), interest rates on high-yield bonds, etc.).  Since this mission was accomplished, even more than what the Fed had expected, the Fed could turn its focus back to the economy.  As discussed in previous posts, the economy is growing at a modest pace and there is question as to how much the spike in interest rates will affect economic growth in the coming months.  Together with continued low inflation, the Fed felt comfortable delaying tapering until at least its next meeting.

Was this the correct move?  It's debatable (I would have voted to taper a little).  Hopefully it'll provide further stimulus to the housing market and the rest of the economy without reigniting excessive speculation; only time will tell.  Financial markets have responded by increasing stock prices and oil prices by more than 1% (compared to before the announcement) while driving down the yield on the 10-year bond by about 0.2% (as of 3pm on September 18).

What's the Fed's outlook for the economy in the coming years?  Here's a link to its latest forecast.

August Employment Report

The headline numbers from today's report on the job market are that the unemployment rate declined to 7.3% and the economy added 169,000 jobs.  Beneath the surface, the report shows some weakness.  Job growth for June and July were revised down by more than 70,000; employment growth has averaged 148,000 per months over the last 3 months (just under 158,000 in the private sector).  Nearly one-third of net jobs created over the last 3 months have been in retail trade and 2/3 have been in retail trade, food/drinking places, temp jobs, and home health services (relatively low paying jobs).

Why did the unemployment rate decline?  The labor force participation rate fell to 63.2%, the lowest since the summer of 1978.  A major reason for the decline is that, for men over the age of 20, the participation rate declined by 0.3% to 72.3%, the lowest since records started being kept in 1948 (the participation rate didn't change for adult women).  The employment-population ratio declined slightly to 58.6%, which is where it began 2013 (and 2012).  As with the participation rate, the employment-population ratio declined significantly while it rose slightly for adult women.  What about part-time vs. full-time jobs?  There was a shift from part-time to full-time employment last month (modest increase in full-time jobs, noticeable decline in those working part time for economic reasons), but 60% of net jobs created in 2013 are still estimated to be part time.

Add it up and the job market is improving modestly (not as strong as some were thinking).  On a positive note, the ISM service index for August was very strong and auto sales have risen to the highest level since 2007.  On the flip side, it remains to be seen how much a drag the recent spike in interest rates will have on the economy.  So how's the economy doing?  Modest growth in terms of output (GDP) and jobs with some preliminary signs of a possible pickup in the coming months.