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Patrick J. O'Keefe Discusses June Jobs Report


Patrick J. O’Keefe appeared on CNBC Worldwide Exchange Friday morning, July 8 to discuss expectations for the June jobs report being released today. He said, “The U.S. recovery is getting long in the tooth…a mature recovery is not going to generate the kind of jobs growth that we saw last year or the year before.” He also talked about the “mystery of the Fed” and the likelihood of a recession in the U.S.
 
 

Watch a segment from the interview.

Read his full expectations for the June’s job report below.

Patrick J. O'Keefe Shares June Jobs Report Expectations
 
By Patrick J. O'Keefe, Director of Economic Research
 
On Friday, July 8, the Bureau of Labor Statistics (BLS) will release data on national labor market conditions in June.  CohnReznick expects BLS to report that:
 
  • The economy added 160,000 jobs; with resolution of a strike contributing almost one-quarter of the increment; 
  • Private sector employment increased for the 76th consecutive month, the longest uninterrupted string of gains on record;
  • Private sector earnings rose modestly in June; and
  • The rates of labor force participation, employment, and unemployment improved.
 
Friday's release is expected to show that, even after adjustment for the impacts of a telecommunications strike, the pace of employment growth decelerated.
 
BLS is expected to report that June's unemployment rate was 4.8%, near the Federal Reserve's (Fed's) policy target.  Much of the improvement in the unemployment data reflects the decline in labor force participation since it peaked in Y2K's first quarter.
 
As outlined below, a participation adjusted rate of unemployment (PARU), an estimate that takes account of the secular decline in labor force attachment, indicates that labor market slack is substantially greater than indicated by the conventional unemployment rate.  By that measure, the Fed's "maximum employment" target has yet to be achieved.
 
View accompanying chartbook displays the national labor market data through May.
 
Background – Employment [Charts 1 - 29]
In May, the U.S. economy provided a record 143.9 million jobs; 5.5 million (3.9%) 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).
From the jobs recovery's start in March 2010 through May of this year – a span of 75 consecutive months – private employment increased by 14.5 million jobs, more than fully recouping the recessionary losses. [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.]
 
Over that period:
 
  • Private service providers added 12.6 million new jobs, almost nine-tenths (86.3%) of the recovery's gains and substantially more than their pre-recession share (67.2%) of all jobs;
  • Goods producers regained a bit more than one-half (53.8%) of the 4.3 million jobs lost during the contraction; and,
  • Public sector employment (16.3% of pre-recession jobs) was 299,000 (1.3%) below the January 2008 total.
 
On Friday, BLS is expected to report that total nonfarm employment increased by 160,000 jobs in June, with returning strikers accounting for almost one-quarter of the month-on-month rise.
 
Average hourly earnings are estimated to have increased by 5 cents (0.2%) in June.
 
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 the subsequent recovery.  Last September, the LFPR reached a 38-year low (62.4%).
 
From that nadir, it rose to 63.0% (in March) and then slipped to 62.6% over the next two months. 
 
Friday's data are expected to show that the LFPR rose to 62.8% in June.
 
May's unemployment rate (the number of jobseekers as a percent of the labor force) was 4.7%, the lowest since November 2007.  
 
At its recessionary peak in October 2009, the unemployment rate was 10.0%.
 
We expect BLS to report that June's unemployment rate was 4.8%, in close proximity to the Fed's policy target. [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 percent) and prices goal (i.e., inflation of about 2.0 percent), but treats its third mandate (interest rates) like a red-headed stepchild.]
 
But the unemployment rate overstates the degree of recovery, as most of its drop reflects a shrinking labor force rather than expanding employment.  To be clear:  some of the decline in labor force participation is demographic (e.g., retiring Boomers); but most of it is due to withdrawal from the labor market by discouraged jobseekers (i.e., those whose job search ended in frustration rather than fruition).   
 
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 8.8% (20.6 million) while the labor force has grown by only 4.4 million (2.9%), a marginal participation rate of 21.4%.  
 
As a consequence, the LFPR fell from 66.2% in January 2008 to 62.6% in May.
 
Were labor force participation equivalent to its pre-recession average (e.g., 66.1% between 2003-2007), the PARU would exceed 9.0% (versus April's 5.0%) and the count of jobseekers would exceed 16 million (versus the officially reported 7.9 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.
 
May's unemployment rate (4.7%) is near the Fed's "maximum employment" goal – which might justify an interest rate hike – but a reasonably calculated PARU would indicate otherwise.  
 
The employment rate (i.e., jobholders as a proportion of the work-age population), at 59.7% for two months, is well below its 63.0% pre-recession average (2003-2007). 
 
We look for BLS to report that the employment rate rose to 59.8% in May.
 
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) rose to 6.4 million in May.  Despite that increase, there has been substantial progress.  When underemployment peaked in 2010, 6.6% of all jobholders were underemployed.  
 
In May, only 3.9% were underemployed.  No change is anticipated in the June data.
 
Long-term unemployment (spells exceeding 26 weeks) has declined by 72.3% since its April 2010 peak (6.8 million).  May's total (1.9 million) was the lowest since August 2008.  No improvement is anticipated in June's data.
 
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