In December, non-farm payrolls were up 292k; the second best result of 2015. That result capped a two-year run that saw the monthly average rise to 240k; it’s the strongest 24-month job gain since the late nineties. The unemployment rate held steady at 5.0%; that is the third month in a row at the lowest mark since December 2007. Additionally, the weekly report on initial jobless claims has been below 300k for forty-five consecutive weeks; the longest streak in more than forty years.
The key numbers are solid; one might even say they are great. These are the sort of labor market statistics about which presidents brag; the kind of figures that encourage central bankers to upgrade growth prospects.
So What’s Not to Like?
Sorry, but I just can’t play along. My point is not that the labor market is bad, but merely that it is not all that it is cracked up to be. Labor market headlines strike me as a shiny facade without a solid structure behind it; sort of a Potemkin Village. Among my problems re: the best payroll gains in fifteen years is not reverberating through the economy now as it did then; the unemployment rate is low, but it seems to have more to do with the demands of math than demand for workers; and the persistently low level of jobless claims is as much about tighter regulations as it is about tighter labor markets.
- For the 24-months ending in December 1999, the monthly average for non farm payrolls was +259k and as I noted above, in the last two years, to December 2015, the payroll average is similar, at +240k. But beyond payrolls there are more economic differences between these two-year periods than there are similarities.
- In the last two years of the century the GDP average was +4.8%; the latest two year GDP average is +2.5%. The Q4 1999 GDP was +7.1%; the Atlanta Fed thinks the Q4 2015 GDP will be +0.8%.
- As of November, the annualized retail sales was +1.4%. In December 1999, sales were +9.4% year on year. The two-year average back then was +6.3%, or more than double the +3.0% reading now.
- Maybe one reason for the better sales in the two years to December 1999 was that the annualized wage gains averaged +3.9%. For the latest two years the average is +2.2%, which is as low as it gets in the last fifty years, aside from the period surrounding the Great Recession.
The recent lack of better wage gains is particularly interesting when wages are juxtaposed with the Unemployment Rate. As can be seen on the chart below, the usual ebb and flow of higher wage growth, (production and non supervisory workers, or 80% of the workers), coinciding with a lower jobless rate, and vice versa, is largely missing in aftermath of the recession. (wages = orange; unemployment rate = white)
The Unemployment Rate peaked at 10% in October 2009; wage growth for the production and non-supervisory workers back then was 3.5%. The annualized rate for wages as of December is 2.4%, down by a third even though the Unemployment Rate fell by a half during that time to an eight year low. As noted above, the last time before recent months that the Unemployment Rate was 5.0% was December 2007; a time when, in case you were wondering, the wage rate was 3.9%.
The Unemployment Rate had round-tripped: five percent in December 2007, up to ten percent and back down to five as 2015 closed out. But the labor market shows wear and tear from the journey.
In the eight years from the end of 2007 to the end of 2015 the Civilian Non-institutional Population, (people who are 16 years and older, not in military or otherwise institutionalized) grew by 18.8 million; but the number of employed rose by only 3.6 million during that time.
Most of the population increase, 14.8 million, can be found in the Not in Labor Force category, (people who are not employed but not statistically unemployed). Those who are not in the labor force are also not in labor force calculations such as the Unemployment Rate. The Not in Labor Force category now makes up 37.4% of the Civilian Non-institutional Population, up 3.4 points from the percentage in December 2007. The number of people not in the labor force are on the other side of the coin from the Labor Participation Rate; a rate that was up at 66.0% eight years ago and is down to 62.6% now, a move down of 3.4 points. But I think that when you see that 79.1% of the population increase in the last eight years does not participate in the labor force, it makes an impression.
To be sure, it’s true that the large flow out of the labor force is a result of the baby boomers, captured in the 55+ age group. But that’s too easy to just blame us older folks. Of great interest are the changes in the labor data for the 25 to 54 year-olds in the last eight years.
- The Civilian Non-institutional Population aged 25 to 54 years old fell 751k in the period from December 2007 to December 2015.
- But the number of employed 25 to 54s fell almost five times as much, down 3.5 million during that time.
- The Not in Labor Force for the 25 to 54 age group rose 2.8 million in the last eight years, even as the number of people this age fell by three quarters of a million.
- The percentage of these people not participating rose to 19.1% up from 16.8%, meaning that the Labor Force Participation Rate fell 2.3 points from where it was eight years ago to 80.9% now; it has been around this level the last couple of years, but before now it hasn’t been down here in three decades.
- Worthy of note is that people between the ages of 25 to 54 are the ones who garner the best wages on average.
So the Unemployment Rate is back to where it was before the recession began and monthly payroll gains are as strong as they were in the late nineties, but look behind the headlines and the story is not so good.I don’t mean to suggest that the BLS is playing the role of Grigory Potemkin. But I think that it’s clear that while the top line labor market data is an impressive facade, it does not have a solid structure behind it. There is not much there over there in the labor market; not as much as it would appear at first glance anyway.
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