job numbers

The Fed got it wrong

Posted on by j.giglio

The job market received a jolt last week when the Labor Department reported that just 38,000 jobs were added in May, the fewest for any month in more than five years. The experts expected a gain of 150,000 jobs and had included an estimated decrease of about 35,000 striking Verizon workers.

Equally disturbing, the job numbers for the two previous months were revised downward. In total, there were 59,000 fewer jobs in March and April than had previously been reported. This suggests the May numbers will be revised downward next month.

But it gets worse. Of the 38,000 new jobs, only 25,000 were in the private sector. Yet even as job growth stalled, the headline unemployment rate fell to 4.7 percent from 5 percent, in large part due to a drop in the labor force participation rate as many frustrated Americans stopped looking for jobs, meaning they are not counted in the unemployment rate. It’s an ominous sign that suggests the economy may be slowing.

Since the end of the recession, economic growth has been lackluster despite the Federal Reserve putting the pedal to the metal by pursuing zero interest rates and engaging in bond purchases known as quantitative easing. The rationale for this policy is that artificially suppressed interest rates and easy money are required for the Fed to fulfill its full-employment mandate. They assume that low rates stimulate business investment and make it easier for consumers to finance big-ticket purchases such as housing and automobiles.

The May employment numbers are just the latest evidence that it isn’t working. This should come as no surprise, since the Fed high priests’ failure to prophesize the 2008 crisis has been well documented.

President Truman once famously asked for a one-armed economist because his economic advisers kept telling him “on the one hand this, and on the other hand that.” For sure, there are pros and cons to the Fed’s monetary policy. Low interest rates have contributed to a partial recovery and growth may be stronger than it would otherwise have been. The rationale was to lower interest rates to encourage movement into riskier assets with higher yields, including stocks, junk bonds, real estate and commodities. The Fed has privileged Wall Street over Main Street in the belief that the wealth effect will trickle down to the ordinary American worker.

Lower rates would encourage greater leverage, i.e., borrowing to invest and boost asset prices. This pseudo “wealth effect” would then stimulate consumption, economic growth, and job creation. Such monetary policy raises the question of whether the Fed should be promoting risk and inflated asset prices that outpace real economic growth.

On the other hand, zero interest rates have created problems for savers, retirees and those on the other side of the velvet rope. Savers get virtually no return on their money market funds and saving accounts. Indeed, after inflation and taxes, real rates on these instruments are negative, promoting inequality and resulting in declining purchasing power. With so many Americans living paycheck to paycheck, is it any wonder that payday lenders are doing record business?

Lost interest is a permanent loss of wealth. Very low interest rates force retirees, who rely on interest income, to reduce their spending. Workers contemplating retirement will stay in the labor force longer to save more, blocking access for younger workers.

More importantly, low interest rates play havoc with retirement planning for both individuals and pension plans. Pension funds face increasing unfunded liabilities. Without adequate future income streams, retirement as Americans have known it is off the table.

Fed policy can’t overcome structural weakness in the job market that results from the twin challenges of globalization and rapid technological change. Continuing the policy of cheap credit is reminiscent of the old lesson about looking for a lost item under a lamppost at night because that’s where the light is. It’s time to look elsewhere for answers.

Originally Published: Jun 11, 2016

Why ‘good’ job numbers leave us feeling mad, sad and worried

Posted on by j.giglio

Earlier this month the Bureau of Labor Statistics released its February jobs report. The unemployment rate of 4.9 percent is the lowest since February 2008 and suggests nearly full employment, but the real picture is far more mixed.

The report finds that the country created 242,000 new jobs last month, well ahead of the Wall Street forecast of 190,000. It also revised its December and January reports to add a total of 30,000 more jobs. The numbers suggest that even in the face of financial market turmoil and slowing global demand, the

U.S. has averaged about 228,000 new jobs over each of the last three months.

Still, many of the jobs were concentrated in low-wage sectors. Retailers added 54,900 jobs last month and restaurants and drinking establishments another 40,200. Manufacturers cut their payrolls by 16,000 jobs as slow growth in key markets around the world and the rising value of the dollar reduced demand for U.S. products. By far the weakest sector for job growth was the mining sector, which includes oil and gas producers. It cut jobs for the 17th straight month, losing 19,000 in February.

Hiring by employers directly associated with consumers has more than offset layoffs by manufacturers and fossil fuel companies, the two sectors squeezed by declining oil prices and a strong dollar.

An increase in the labor force participation rate was an encouraging sign. The rate of 62.9 percent is the highest in over a year as more than half-a-million people joined the labor force. Fewer and fewer people appear to be sitting on the sidelines.

But there is more to the story. The headline unemployment number does not account for the underemployed, such as those who are involuntary working part time. And even though labor participation rose, there are still many long-term unemployed and discouraged workers who have stopped looking because they believe no jobs are available for them. When these groups are included, the February unemployment rate rises to 9.7 percent, which suggests that the labor market is far from overheating.

Other downbeat notes were that the average length of the workweek declined by 0.2 hours, aggregate hours worked fell 0.4 percent, and average wages fell by 3 cents to $25.35 an hour. This put the yearly wage growth at 2.2 percent, just slightly ahead of core inflation rate. That makes it difficult for the average American to keep up with the staples of a middle class life. Indeed, real wages for most American workers have been flat lining since the 1970s.

A 4.9 percent unemployment rate masks the fact that things are not going very well for a large share of American workers. Jobs may be plentiful, but they are not paying much. It may be good news that the economy is growing at 2 percent, but ordinary Americans are not reaping the benefits of that growth.

Things are tough on Wall Street, too. Average bonuses paid out in the financial services sector tumbled 9 percent last year to the lowest level in three years, according to new figures from the New York State comptroller. Of course, that average $146,200 bonus is still nearly three times the median annual U.S. household income of about $52,000.

In light of these disparities and glass-half-empty job numbers, is it any wonder that average working class Americans are seething with anger, are anxious about the future, and are feeling betrayed? Stalled incomes may be fueling the hard line positions on illegal immigration and opposition to job-destroying trade deals that spur the rise of both Donald J. Trump and Bernie Sanders, the yin and yang of America’s season of political discontent and economic stagnation.

If that continues, voters might find themselves liking the cure even less than they like the illness.

originally published: March 19, 2016