An in depth look at the US labor markets
People love to talk about how statistics can be used to prove any point.
I don’t entirely disagree with that claim, but it really depends on both the perspective – or time frame – and the source of the data set.
My research typically involves trying to separate the meaningful data from the nonsense.
In general, people are increasingly absorbed with short term results.
What’s more important is long term trends.
Some of my favourite chartists such as @lanceroberts, @not_jim_cramer, @m_mcdonough, @zerohedge, @greekfire23, @cigolo, and @minefornothing are good examples of economic analysts who don’t try to fool you with the data.
Often time they will present their data over long time frames to make comparisons with other periods possible.
This can help us to identify similar expansionary or contractionary periods or inflection points.
Credible sources are essential but so is doing your own research and making your own conclusions.
But that’s the beauty of economic data – regardless of the author’s opinion, it’s open to interpretation. (Even though most of the time one side is right and the other is wrong – see: santelli and liesman, respectively.)
Back to the matter at hand…
Today we’re going to look at an area of the economy that I’ve been meaning to write about for a while – the US labor markets.
Despite that fact that US GDP is incredibly reliant on consumption – approximately 68% of US GDP is comprised of personal consumption expenditures…
Some could argue that consumption’s actual usefulness to an economy is not as great as it may seem.
For example, if someone buys a stuffed bear every day for a year straight then is that really going to improve the economy in the long run?
When thinking about the quality of an economy or a business venture isn’t sustainable growth what’s important?
In my opinion, wages are what drive an economy.
Higher real wages allow people to save and then invest without taking on debt.
Unfortunately for the US economy, debt is up and incomes and savings are down.
Moreover, these trends have been in play for a long time.
The personal savings rate, GDP (yoy), and personal income (yoy) peaked in the 1970s.
On the other hand, household credit market debt outstanding is barely off of its peak.
As a result of inflation and lower real median household incomes, individuals are taking on debt in order to maintain the same standard of living.
And that’s why the CPI i?s? ?a? ?j?o?k?e? ? cannot be considered an accurate gauge of the cost of living – because it no longer measures real inflation.
Let’s get back to the labor markets.
Every month, all the m?e?t?e?o?r?o?l?o?g?i?s?t?s? economists make projections for the nonfarm payroll number.
Regardless of details and long term trends, what’s important to the market is whether or not it beats analysts’ estimates.
Despite a lot of talk about this number, job growth has not improved in a meaningful way for the past few years.
Furthermore, since the mid-1980s, the rate of increase (yoy) has been in a downtrend.
What’s more is that the number of jobs that the US has gained since the financial crisis has not consistently kept pace with population growth.
This is reflected in the employment/population ratio – which has not increased since 2010.
But if the employment rate is flat then why is the unemployment rate falling?
To answer that question let’s first define the unemployment rate as: the number of unemployed persons / the labor force.
In order for this rate to fall one of two things needs to happen.
1) The number of unemployed persons falls
2) The number of people in the labor force falls
So why is it falling then?
Because of the number of people not in the labor force is increasing.
From 1980 to the present that number has increased from 60 million to 92 million.
What’s more is that people are now leaving the labor force at a faster pace than they were from 1980-2001 and from 2001-2010.
Let’s move on to another important consideration: the quality of the jobs that have been added.
For the most part, everyone is obsessed with the number of jobs.
That said, one could argue that the quality of those jobs is more important.
That’s because high quality and not low quality jobs are going to help the US government to bring in more tax revenues.
In a country where entitlements are growing at an incredible pace, that fact cannot be overlooked.
Unfortunately, the US is not adding enough of what David Stockman referred to as “breadwinner jobs”.
The paper that this chart was taken from can be found here; it’s one of the best analyses of the labor market that you might come across.
So what kind of jobs have been added?
Mostly low quality ones such as retail salespeople, cashiers, food prep workers, etc.
These are kind of jobs that 1) are vulnerable to technological advancement.
Note: as technology continues to improve it’s likely that many people will lose their jobs to robots.
2) won’t generate enough tax revenues to support growing social benefit payments.
Note: to put to rate of increase in social obligations in perspective, social security now costs 8x what it did in 1980.
And 3) aren’t full time.
Note: during the financial crisis, full time employment as a % of the labor force fell dramatically.
It has recovered since then but it’s still at a depressed level.
On the other hand, part time employment as % of the labor force rose during the financial crisis and is still at a very high level.
Another concerning trend is that weakness in the labor markets is more apparent among the young.
The following graph shows that only the only age group that only those 55 and older have added net jobs since 2007.
Furthermore, since there are fewer quality jobs available overall – those jobs are often held by more experienced persons.
Both of these trends are reflected in lower and higher labor force participation rates for the young and old respectively.
As you can see in the following chart, participation rates for those 16-24 are projected to decrease through to 2020.
In contrast, the labor force participation rates for those 55 and older are projected to increase.
Now that we’ve gone over what’s really happening in the labor markets, let’s examine some of the misconceptions that are commonly held about them:
1) assumption: a falling unemployment rate is indicative of an improving labor market.
Reality: the unemployment rate – especially the U3 rate – is not a good measure of the health of the labor markets for reasons that we alluded to earlier.
On the other hand, the average duration of unemployment seems to be more relevant.
Currently, the average duration of unemployment in the US is 35 weeks.
To put this in perspective, from 1980 until the financial crisis, the highest the number reached was in the low 20s.
What this means is that those who are unemployed are staying unemployed for longer.
2) assumption: a reduction in initial jobless claims is indicative of an improving labor market.
Reality: initial jobless claims are in a downtrend because – as Lance Roberts reports here – businesses are hoarding their employees
3) assumption: if the US economy keeps adding 200,000 jobs every month then everything will be fine in the labor markets
Reality: at the current pace of growth, “it would take until December of 2018 to return to pre-recession employment levels while also absorbing the people who enter the labor force each month”
In conclusion, the labor markets are not as healthy as some people think they are.
Employment seems as though it may have peaked for this cycle.
And the so-called “recovery” in the labor markets is much weaker than past recoveries were.
These trends are probably reflective of 1) changes in societal labor trends – such as the move away from manufacturing jobs and towards retail jobs.
And 2) a structurally weak US economy whose growth is being held back by debt.
Next time you hear t?h?e? ?w?e?a?t?h?e?r?m?a?n? Joe Lavorgna talking about how good the labor markets are, consider the long term trends and go over all of the details before you draw a conclusion.
*And don’t forget to support #teamphil.
Shane Obata @sobata416