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Patrick J. O'Keefe Discusses July 2016 Jobs Report


8/5/16

On Friday, August 5, the Bureau of Labor Statistics (BLS) released data summarizing national labor market conditions in July.  

In advance of the report's release, Patrick J. O'Keefe, Director of Economic Research, shared expecations and explained why the unemployment rate is the most misunderstood indicator on CNBC Worldwide ExchangeWatch the interview here.

In the Los Angeles Times, he discussed the July jobs report. With the unemployment rate holding steady at 4.9%, he says it “confirms that, on the jobs side, the economy is robust.” Read the article.

Read expectations: 

8/1/16

CohnReznick expects the BLS to report that:

  • The economy added 190,000 jobs in July, all but 10,000 in the private sector;1
  • Private sector earnings rose for the seventh consecutive month; and,
  • The rates of labor force participation, employment and unemployment recorded incremental improvements.

The accompanying chartbook displays the national labor market data through June.

BLS is expected to report that the unemployment rate was 4.9% in July, the 12th month in close proximity (+/- 0.2%) to the Federal Reserve's "maximum employment" target.

The alignment of the data and the Fed's goal prompts speculation of an interest rate increase at the Fed's September meeting. But that is unlikely for numerous reasons, including: the Fed's aversion to political controversy, most especially during a national election; and the implications of undependable data – reflecting near-term volatility and secular shifts – for its "data dependent" policy framework.

As noted, BLS will likely report a July unemployment rate of 4.9%, less than one-half the recessionary peak. On its face, that should prompt a tightening of monetary policy, but the predictable political fallout will forestall action.

Further, today's subdued unemployment rate reflects the sustained decline in labor force participation since its Y2K peak rather than an increase in the utilization of the nation's human resources.

A participation adjusted rate of unemployment (PARU), an estimate that takes account of the secular decline in labor force attachment, indicates that actual labor market slack is substantially greater than indicated by the conventional unemployment rate.

As discussed below, the Fed's "maximum employment" goal has yet to be approached, much less met.

Background – Employment [Charts 1 - 29]

In June, the U.S. economy provided a record 144.2 million jobs, 5.7 million (4.1%) more than at the recession's start in January 2008.

From the onset of the contraction through its nadir in February 2010, employment declined by 8.7 million jobs (6.3% of the pre-recession peak).

Between the start of the jobs recovery in March 2010 through June of this year, private employment increased – in 75 of 76 months2 –  by 14.8 million jobs, more than two-thirds greater than the recessionary losses.

Over that period:

  • Private service providers added 12.8 million new jobs, almost nine-tenths (88.6%) of the recovery's gains and substantially more than their pre-recession share (67.2%) of all jobs;
  • Goods producers regained less than one-half (46.4%) of the 4.3 million jobs lost during the contraction; and,
  • Public sector employment (16.3% of pre-recession jobs) was 269,000 (1.2%) below the January 2008 total.
     

On Friday, BLS is expected to report that total nonfarm employment rose by 190,000 jobs in July. Public sector employers contributed 10,000 of the month-on-month rise.

Average hourly earnings are estimated to have increased by 7 cents (+ 0.28%) in June, yielding a year-on-year increase of 2.6%

Background – Labor Force [Charts 30 - 43]

The labor force is comprised of all non-institutionalized civilians, 16 years and older, who are either jobholders or jobseekers (i.e., sought work in the prior four weeks).

The labor force participation rate (LFPR), the share of the work-age population that has or is seeking paid employment, peaked at 67.3% early in 2000.  It then drifted lower – to 65.8% in 2007 – largely due to shifting demographic trends.

Participation trended downward through the "Great Recession" and its subsequent recovery. The LFPR reached a 38-year low (62.4%) in March and has fluctuated since. June's LFPR was 62.7%.

Friday's data are expected to show that the LFPR ticked up to 62.8% in July.

June's unemployment rate (the number of jobseekers as a percent of the labor force) was 4.9%, the lowest since November 2007.

At its recessionary peak in October 2009, the unemployment rate was 10.0%.

We expect BLS to report that the unemployment rate in July remained at 4.9%, in close proximity to the Fed's policy target.3 As noted above, however, the diminished unemployment rate overstates the degree of recovery. Most of its drop reflects a shrinking labor force rather than expanding employment.

To be clear: some of the decline in participation is demographic (e.g., retiring Boomers); but most of it is due to the absence from the labor market of dispirited aspirants (i.e., those who have deferred entry due to a perceived paucity of opportunities and those who abandoned their job search due to frustration rather than fruition).

Because of the decline in participation, the conventional unemployment rate has become an archaic guide that should be replaced or, at the very least, supplemented by a participation adjusted rate of unemployment (PARU), which would provide a more realistic estimate of the utilization of the nation's human resources (i.e., the labor market's relative slack or tightness).

Since the start of the recession, the work-age population has increased by 8.9% (20.8 million).  Over the same period, the labor force grew by 4.8 million (3.1%), a marginal participation rate of 23.2%.  As a consequence, the LFPR, which was 66.2% in January 2008, fell to 62.7% in June.

Were labor force participation equivalent to its pre-recession average (e.g., 66.1% between 2003-2007), the PARU would exceed 9.0% (versus June's 4.9%) and the count of jobseekers would exceed 16 million (versus the officially reported 7.8 million).

There is room for debate about how a PARU should be defined. But there is little, if any, rationale for making policy decisions based on the current maladjusted indicator.

As discussed above, June's "official" unemployment rate (4.9%) is near the Fed's "maximum employment" goal. While that might appear to justify an interest rate hike – a reasonably calculated PARU would indicate otherwise.

The employment rate (i.e., jobholders as a proportion of the work-age population), slipped to 59.6% in June, well below its 63.0% pre-recession average.

We look for BLS to report that the employment rate rose modestly (to 59.7%) in July.

Had the employment rate been equivalent to its pre-recession average, an additional 8.5 million Americans would have been jobholders.

Underemployment (i.e. involuntary part-time workers) fell substantially in June – down by 627,000 (-9.4%) jobholders. When it peaked in 2010, 6.6% of all jobholders were underemployed. In June, 3.8% of all jobholders were underemployed.

We anticipate a modest decline in July's underemployment count, with its share of jobholders falling to 3.7%, the lowest since June 2008.

Long-term unemployment (spells exceeding 26 weeks) in June was 72.3% less than its April 2010 peak (6.8 million). June's total (2.0 million) was a bit higher than May's, the lowest since mid-2008.  Little, if any, improvement is expected in July's data.


[1] The revisions to the May 2016 data – which were published in the July 8, 2016, BLS release – brought to an end 74 consecutive monthly increases in private sector employment, a record.  Some subsequent revision, perhaps even this Friday's BLS release, may resurrect the streak, but for now it is ended.

[2] In 2010, the underlying trend in total nonfarm employment (i.e., including both private and public jobs) was obscured by a six-month spike of 564,000 temporary Federal jobs to conduct the decennial census.  Since then, nonfarm employment has increased for 67 consecutive months and added 14.2 million jobs.

[3] The Federal Reserve Act directs the Fed to promote three goals: maximum employment, stable prices, and moderate long-term interest rates.  It actively pursues its employment goal (i.e., an unemployment rate of about 5.0%) and prices goal (i.e., inflation of about 2.0%), but treats its third mandate (interest rates) like a red-headed stepchild.
 

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