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Patrick J. O'Keefe Shares Expectations for April 2016 Jobs Report


5/2/16

On Friday, May 6, the Bureau of Labor Statistics (BLS) will release data on labor market conditions during the month of April.

We expect the BLS to report that in April:

  • Private employers added 160,000 jobs, the 74th consecutive monthly increase;
  • Average hourly earnings of private employees advanced modestly;
  • The labor force participation rate was the highest in two years;
  • The unemployment rate is down to its pre-recession level; and
  • The employment rate is at a seven-year high.
     

View accompanying chartbook.

April's data are expected to confirm that the rate of jobs growth has been trending lower since reaching its cyclic peak in 2014.

Further, as noted below, when adjusted for the decline in the nation's labor force participation rate, unemployment remains well above the Federal Reserve's policy target.

Background - Employment [Charts 1- 29]

In March, the U.S. economy reached a record 143.8 million jobs; 5.3 million (3.9%) more than when the recession began.

From that pre-recession peak in January 2008 through February 2010, employment fell in 24 of 25 months and 8.7 million (6.3% of the pre-recession peak) jobs were lost. 

Since the jobs recovery began in March 2010, private sector employment has grown for 73 consecutive months.  Over that period, total nonfarm employment increased by a total of 14.0 million jobs, more than fully recovering the recessionary losses.

The underlying performance of total nonfarm employment early in the recovery was temporarily masked by the temporary surge in Federal jobs related to the 2010 Census, an endeavor involving 564,000 temporary jobs between March and September. 

Subsequent to that temporary blip, total nonfarm employment has increased for 66 consecutive months.

The jobs expansion was most vibrant in 2014, when it accelerated sharply in the second quarter and then maintained a faster pace into 2015's first stanza.  Since then, however, the gains have slowed, albeit erratically.

The recent deceleration is consistent with other economic indicators suggesting that the current expansion may be growing long-in-the-tooth.  Although expansions seldom die of old age, they tend to become more vulnerable as they grow older and their gains become more concentrated.

We expect Friday's BLS report to show that total nonfarm employment increased by 170,000 jobs, with the private sector accounting for 160,000 of that increment.

Since the employment recovery began in March 2010, the pace and composition of its gains have proceeded unevenly. 

In March: 

  • Total nonfarm employment exceeded the pre-recession (January 2008) peak by 5.3 million jobs (an increase of 3.9%);
  • Private service providers have accounted for more than all of those gains (net add of 7.9 million), contributing 148.1% of the post-recession increase; pre-recession they contributed two-thirds (67.2%) of all jobs;
  • In March, goods producers' payrolls (16.5% of the pre-recession total) remained 2.3 million (-10.3%) below the pre-recession peak; and,
  • Public sector employment (16.3% of pre-recession nonfarm jobs) remains 1.4% (306,000 jobs) below its January 2008 total.
     

March's employment increment was even more concentrated.  More than one-half (57.9%) of the month-on-month gain (215,000 jobs) was contributed by three sectors: retail, leisure/hospitality, and healthcare.  And that concentration is not a one-month fluke; those same sectors accounted for two-thirds (66.6%) of the most recent three-month period's average gains.

That pattern is expected to persist in the April data. 

Average hourly earnings are estimated to have increased by 7 cents (0.28%) in April.

Background - Labor Force [Charts 30-42]

The labor force is comprised of all non-institutionalized civilians, 16 years or older, who are either jobholders or jobseekers (i.e., actively 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% in early 2000 and subsequently drifted downward on shifting demographic trends to reach 66.0% in mid-2007, early in the recession. 

The decline persisted through the downturn and for much of the recovery, reaching a 38-year low (62.4%) last September.

Increasing retirement by Boomers (those born between 1946 and 1964) – although at a slower rate than anticipated – partially explains the LFPR’s decline. 

But diminished participation of prime work-age adults (those between 25 and 54) has contributed substantially to the decline, with long-term implications for economic growth, as well as fiscal and monetary policies.

Encouragingly, participation has been moving higher since last September and in March reached 63.0%, the highest in two years.

Friday's data are expected to show that the LFPR recorded yet another uptick as it rose to 63.1% in March.

It would be premature to conclude that the secular decline in labor force participation has ended – there have been false-starts before – but the most recent data offer at least a modicum of encouragement.

The unemployment rate rose to 5.0% in March, up a tad from the prior two months' eight-year low.  The monthly uptick was of no real consequence and, despite it, the rate remained well below the recessionary peak (10.0% in October 2009).

This Friday's BLS data should show that the unemployment rate was unchanged. 

Importantly, at 5.0%, the unemployment rate is in close proximity to the Federal Reserve's policy target.

But the unemployment rate's drop overstates the degree of recovery

Much of that decline reflects diminished labor force participation (largely owning to frustrated jobseekers abandoning their search for a job, rather than having found one.)

And under any set of reasonable assumptions, the participation adjusted rate of unemployment (PARU), a more realistic assessment of the nation's underutilized human resources, is well above the reported rate of joblessness.

Since the start of the recession, the work-age population has increased by 8.7% (20.2 million) while the labor force has grown by 3.4% (5.2 million, a marginal participation rate of about 25%). 

Consequently, the LFPR fell from 66.2% in January 2008 to 63.0% in March.

As noted above, the decline in labor force participation reflects several factors, including inter alia demographic trends, alternative opportunities, and social welfare policies.

While there is room for debate over what the rate should be, there is little argument in favor of the current estimate.

A simple alternative:  Were labor force participation equivalent to its pre-recession average (e.g., 66.1% between 2003-2007), the unemployment rate would be 9.3% (vs., March's 5.0%) and the number of jobseekers 15.6 million (rather than the officially reported 8.0 million).

While the official rate of unemployment (5.0%) is in close proximity to the Federal Reserve's policy target, the PARU is well above the monetary authority's "maximum employment" goal.

The employment rate (i.e., jobholders as a proportion of the work-age population) rose for the fifth consecutive month in March.  At 59.9%, the rate exceeds the recession's nadir (58.2%) but falls well short of the pre-recession average (63.0% in 2007).

We look for BLS to report that the employment rate to remain at 59.9% in April.

The number of jobholders (i.e., employed individuals) reached a record 151.3 million in March.  But if the employment rate had been equivalent to its pre-recession average, March would have recorded an additional 7.9million jobholders

Underemployment (i.e. involuntary part-time workers) has fallen gradually from its March 2010 peak of 9.1 million.  And while it remains elevated (6.0 million in March), there has been substantial progress:  in March 2010, the underemployed comprised 6.6% of all jobholders; in March, 4.0% of those with jobs were underemployed.

The most recent data indicate that long-term unemployment (spells exceeding 26 weeks) has declined considerably; since its April 2010 peak (6.8 million), long-term unemployment has fallen by more than two-thirds (down 67.5%).  We look for further improvement in the April data. 

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