Jobs growth is substantially slower than the headline employment data indicate...
As the U.S. election cycle gets underway, expect much debate over just how strong the economy really is after becoming the longest uninterrupted expansion in America’s history. After all, the jobless rate is at a half-century low and the S&P 500 Index is at a record high. The bond market, though, is signaling that the Federal Reserve will soon be forced to ease monetary policy to shore up the economy. How can that be?
A key part of the answer lies with jobs “growth,” which has been slowing much more than most probably realize. Despite the better-than-forecast jobs report for June, the fact is the labor force has contracted by more than 600,000 workers this year. And we’re not just talking about the disappointing non-farm payroll jobs numbers for April and May.
Certainly, that’s caused year-over-year payroll growth, based on the Labor Department’s Establishment Survey – a broad survey of businesses and government agencies – to decline to a 13-month low. But year-over-year job growth, as measured by the separate Household Survey – based on a Labor Department survey of actual households – that is used to calculate the unemployment rate is only a hair’s breadth from a five-and-a-half-year low. (The data in the charts below don’t reflect Friday's employment report.)
Multiple indicators suggest a significant slowdown in the labor market is underway
Source: U.S. Government, ECRI
Growth in the Economic Cycle Research Institute’s more comprehensive U.S. Coincident Employment Index (USCEI), which includes both those figures and more, has fallen to its worst reading since late 2013. Because it subsumes data from both surveys, its verdict about overall job growth is more reliable than the others.
But there’s even more cause for concern. Months from now, the Establishment Survey will undergo its annual retrospective benchmark revision, based almost entirely on the Quarterly Census of Employment and Wages conducted by the Labor Department. That’s because the QCEW is not just a sample-based survey, but a census that counts jobs at every establishment, meaning that the data are definitive but take time to collect. Since it is retrospective, few pay any attention but the QCEW offers critical information for those wanting to verify that the job market is as strong as the headlines would lead you to believe.
The latest QCEW data are available through 2018, but note how much worse the 2018 QCEW data look than the Establishment Survey data, even though the two appear fairly similar in previous years, for which the latter has already undergone the requisite revisions. The Establishment Survey’s nonfarm jobs figures will clearly be revised down as the QCEW data show job growth averaging only 177,000 a month in 2018. That means the Establishment Survey may be overstating the real numbers by more than 25%.
Separately, according to the Household Survey, the number of people unemployed has dropped by more than 400,000, or 6.50%, since December. But the number employed has also declined, by almost 200,000. So their sum total – the labor force – has fallen by almost 600,000, or about 0.33%.
Since the unemployment rate is the ratio of the number unemployed to the labor force, the numerator has seen a bigger proportionate drop than the denominator. This is why the jobless rate has fallen from 3.9% to a half-century low of 3.6%. While that makes a great headline, it isn’t good news. Said another way, employment as measured by the Household Survey has actually declined this year by almost 200,000, while twice as many who were earlier unemployed have apparently given up looking for jobs.
The notion of the tight labor market drawing people into the labor force from the sidelines is largely a myth. Digging under the headlines reveals that job growth looks to have been substantially slower last year than the headline payroll jobs data indicate. Meanwhile, the decline in the jobless rate to a half-century low obscures the unflattering truth that almost half a million people have left the labor force just this year. These facts are in sharp contrast to strong job growth narrative.
Politicians of all stripes are in the business of myth-making, so it’s no surprise that they’ve been touting the robust health of the labor market, even as the ground shifts beneath their feet. But slowing job growth and a shrinking labor force virtually dictate that there will be a new chapter to the jobs story as campaigning goes into full swing.