Opinion

Felix Salmon

Those noisy payrolls figures

Felix Salmon
Feb 7, 2014 16:13 UTC

Bf4WME_CQAANHFA.jpg_large.jpg

The chart of the day comes from Betsey Stevenson, and helps to show just how noisy the payrolls data really are. The big headline figures of the day, 113,000 is ostensibly the increase that we saw, in January, in the number of people on American payrolls. It’s a disappointing number, while a print of say 200,000 would have been decidedly encouraging.

But just look at how we got to that 113,000 figure. We took January’s workforce, of 135,396,000 people, and then subtracted December’s workforce, of 138,266,000 people — for a total decrease of 2,870,000 jobs. But we know that the number of jobs in America always decreases in January — even when the economy is surging. It’s cold out, making outdoor jobs very difficult to do, and the Christmas seasonal jobs are all in the past. So the BLS institutes some seasonal adjustments. In this case, it subtracted 880,000 jobs from the December number, and it added 2,103,000 jobs to the January figure.

All of which means that the 113,000 headline figure is, in fact, 135,396,000 + 2,103,000 – 138,266,000 – 880,000.

You want to trade on that being 70,000 jobs lower than you thought it would be?

But wait: we’re not even close to being done. This month’s payrolls release is much longer than normal — 2,465 words — because it has to explain a lot of changes. As it says in a big box at the very top of the page:

Changes to the Employment Situation Data

Establishment survey data have been revised as a result of the annual benchmarking process and the updating of seasonal adjustment factors. Also, household survey data for January 2014 reflect updated population estimates.

These changes are not small: last month’s preliminary number, for instance, was revised up — on a seasonally adjusted basis — to 137,386,000 workers from 136,877,000. That’s a difference of more than half a million people.

The noisiness of the payrolls report is good news, truth be told. Now that the taper is well under way, there’s very little doubt about the direction of monetary policy for the next year or so. We’ll taper all the way to zero, QE will be over, and then we’ll look at where we are and start wondering whether and when rates might actually start rising. The employment situation when QE is finally over will have almost nothing to do with what happened this month, or next month, or the month after that. Most importantly, it will have to do with the number of people actively looking for work: as the unemployment rate comes down, and the economy continues to grow, will discouraged workers start returning to the workforce, or at least start looking for work again?

There are a lot of unemployed and underemployed workers on the sidelines of the economy, who would work much more if work was available. The Fed’s full-employment mandate means that it’s Janet Yellen’s job to find work for those people. How she’s going to interpret that mandate is something we’re not going to get a real hint of for a long time yet. But one thing’s for sure: we’re not going to be able to guess anything useful by looking at today’s payrolls report.

COMMENT

Felix, great that you’re pointing this out. The press release also discloses the margin of error which tells the same story. It’s sad that the mainstream press is ignoring this.
We really shouldn’t be dumbfounded by why Wall Street trades on the “noise”, it isn’t that surprising. You need variability (i.e. “noise”) to make money. If it’s easy to predict what the number is, then the profits would disappear.

Posted by junkcharts | Report as abusive

Under the weather

Felix Salmon
Jan 10, 2014 15:26 UTC

13 months ago, the Hurricane Sandy jobs report was released — the one for November 2012. Analysts were bracing themselves: a lot of people hadn’t been able to work that month, due to bad weather. But in the end, the report was not that bad: 146,000 new jobs were created in the month, and the unemployment rate nudged down to 7.7%. Markets, which had been expecting a mere 80,000 new jobs, were positively surprised.

This month, the story is the exact opposite. Yes, we knew there was bad weather in December, but no one expected it to have a huge impact on job creation. And yet the actual jobs report for the month is a huge disappointment: there were just 74,000 new jobs created, and the labor participation rate fell sharply yet again. On top of that, substantially all of the jobs which were created were in low-wage sectors.

Once you take into account the weather, however, the December report wasn’t that bad. A whopping 273,000 people were counted as “Employed – Nonagriculture industries, Bad weather, With a job not at work”, which is to say that they did not get counted in the payrolls figures even though they’re employed. Most of the time, that number is in the 25,000 to 50,000 range, and although it always spikes in the winter, this was the worst December for weather-related absence from work since 1977.

None of this is an exact science. The January 2011 jobs report, for instance, showed a weak gain of 36,000 in the headline payrolls number — but would have looked insanely strong if you added in the 886,000 people who couldn’t get to work, and weren’t paid, because of the snowstorms that month. That’s not just bigger than this month’s figure of 273,000; it’s also vastly bigger than the Hurricane Sandy figure of 369,000 in November 2012. And sometimes the numbers can be much bigger still: the record was set in January 1996, when 1,846,000 people were kept off payrolls by stormy weather, and the headline number on the employment report was a negative 201,000.

Still, when the weather series starts going skewy, the signal-to-noise ratio in the jobs report, which is pretty low to begin with, tends to drop even further. As a result, the Fed is unlikely to pay too much attention to this report. We’ve already started the taper now, so the important signal has already been set by the Fed: it doesn’t need to reduce the pace of bond-buying even further at this month’s meeting, the last one with Ben Bernanke as chairman. He’ll probably just hand over the reins to Janet Yellen and let her decide how aggressively to pull on them over the rest of the year. Certainly, with Yellen as chair and Stan Fischer as vice chair, the Fed has more than enough credibility: it can draw out the taper as long as it likes, in an attempt to help support the pace at which jobs are being created.

It’s worth remembering that when it comes to monetary policy, the markets are still looking almost exclusively at the jobs report: no one is remotely worried about inflation figures. So long as we continue to see underwhelming job creation, the Fed’s going to keep its foot on the accelerator. Especially if the weather is particularly awful.

COMMENT

That is why short-term numbers are so meaningless. Only annual figures make sense.

Posted by pbgd | Report as abusive

Tidings of comfort and joy

Felix Salmon
Dec 6, 2013 15:47 UTC

It’s the season of good cheer, and the BLS is doing its bit to make econowonks happy in December. The last jobs report of 2013 is a great one; it now looks as though Fed chair Ben Bernanke is going to be able to go out on a high note, having brought the unemployment rate down to the key 7% level.

Even more happily, the news that we’ve finally reached that level has not sent the markets into a panic. The number is important because at one point the Fed was saying that it wanted QE to be finished by the time that the unemployment rate reached 7%; in reality, it turns out, the taper hasn’t even begun yet. Of course, the 7% number was only ever a ballpark — and it had to be a “good” 7% number, due to fewer unemployed people, rather than a “bad” 7% figure, due to discouraged workers simply dropping out of the labor force.

Still, today’s 7% is a good number: the employment-to-population ratio rose, by a heartening 0.3 points, to 58.6%, even as the unemployment rate saw that big drop to 7.0% from 7.3%. And the rest of the report was good as well: the broad U-6 unemployment rate, for instance, fell a whopping 0.6 points to 13.2%. Still too high, of course — but moving sharply in the right direction. There were more than 650,000 full-time jobs created last month, the number of employed people rose by more than 800,000, the number of unemployed people fell by 365,000, and even the amount of money that people earn each week rose by 0.7%. Just about everything, in this report, was as good as could realistically be hoped.

That said, it’s important not to extrapolate too much from a single jobs report, and especially not from month-on-month comparisons with October, the notorious garbage in, garbage out report which covered the period of (and was delayed by) the government shutdown. And if the BLS is going to be nice enough as to cheer us all up on December 6, I’m still reasonably confident that the Fed will continue the good news by keeping QE in place, at its current rate, on December 18. The taper, if and when it happens, is going to fundamentally change the government bond market: the Fed is by far the world’s largest buyer of Treasuries right now, and no one on the Fed board seems to be in any rush to start tapering by the end of the year. As Justin Wolfers says, looking at this chart, there’s no particular reason to start tapering right now.

The more important chart, however, is this one, which shows the 10-year Treasury yield over the course of this week. What it shows is that the market’s knee-jerk reaction to an unexpectedly strong jobs report was pretty much exactly what you’d expect — but there were a lot of buyers at those higher yields, and a couple of minutes after the report was released, yields were right back to where they were ex ante. Indeed, the amount that the 10-year Treasury yield moved on Wednesday is going to turn out to be much greater than the amount it’s going to move today.

My reading of these particular tea leaves, then, is that the market is comfortable at its current levels, and that it has also made peace with the inevitability of the taper in 2014. My guess is that the taper will start on March 19, at the first open market committee meeting chaired by Janet Yellen, and that 10-year yields will be then more or less where they are currently, in the 3% range. Right now, given the almost insatiable demand for high-quality collateral, I’m reasonably sanguine about all this, and I suspect that the market will be able to step in to buy Treasuries at these levels even as the Fed steps out. Maybe this is just the short term effects of the good mood that the BLS put me in this morning. But I’m determined to try to keep smiling at least through the rest of the holidays.

The GIGO jobs report

Felix Salmon
Nov 8, 2013 14:25 UTC

This is undoubtedly the most distorted jobs report in living memory. Scroll down a bit, and you get to a whole box entitled “Partial Federal Government Shutdown”, which explains that for a multitude of reasons, the amount of “nonsampling error” in this report is going to be much bigger than it normally is — and yet, the BLS also made the correct decision that for the sake of “data integrity”, it was not going to try to correct for any of those nonsampling errors.

The markets, however, are hard-wired to take the payrolls report seriously, especially right now. We had a very strong GDP report yesterday, which was itself subject to all the same errors and omissions, and there’s something more generally febrile about the broader atmosphere: yesterday alone saw an unexpected rate cut in Europe, as well as a decidedly frothy first-day valuation for Twitter. On top of all that, we’re still in the very heart of good-news-is-bad-news territory, where traders only care about when the famous Taper will begin. The stronger the data, the more worried they become, and the more that stocks and bonds sell off.

Put it all together, and you have a recipe for volatility. News organizations have a largely unspoken rule of thumb that the bigger the market move, the more important the news must be; their readers, certainly, have an inexplicably insatiable appetite for stories which try to answer the “why did the markets move so much?” question. But today of all days, the right reaction is to take a deep breath and try not to pay too much attention to any of the numbers coming out of Washington and New York.

For one thing, it’s possible (anything’s possible) that, thanks to the strength of this report, Ben Bernanke, at the very end of his final term in office, will decide to kick off the last full week before the Christmas break with a tapering announcement. But it’s not very likely. The report is unreliable, thanks to the shutdown; the timing would be perverse, needlessly constraining his successor’s option space; and, most importantly, the Fed just isn’t seeing the kind of increased inflation which would cause it serious concern. Just this morning, we saw the release of inflation data for personal consumption expenditures — that’s the number the Fed likes to concentrate on most, even more than CPI. And the number came in at just 0.1%. Nothing to worry about there.

So be very wary of anybody saying that in the wake of this morning’s release, markets now “think” that there’s a significantly increased chance of a taper in December, or even January. (Janet Yellen doesn’t take over from Bernanke until the February meeting.) You can try to back out implied probabilities from market prices if you like, but the more volatile the markets, the less informative those implied probabilities will be.

This is a GIGO jobs report: garbage in, garbage out. In fact, its doubly GIGO. The first GIGO is the way in which all those incorrectly-completed questionnaires resulted in much larger, and much less quantifiable, error bars than we normally see in the jobs report. And the second GIGO is the way in which the unreliable jobs report created significant market moves.

So unless you’re a trader working on a time horizon of minutes, it’s best to ignore all of today’s noise, both in the data and in the markets. These things will resolve themselves eventually, but it could easily take until well into 2014 for them to do so.

COMMENT

Great article. I have studied Economics for over 40 years and laugh at the modern day economic statistics.

About forty years ago I read a book called “How to lie with statistics”. Most modern day Economists are corporate owned like the politicians.

The western world needs a revolution, and I will join it.

Posted by NewCapitalist | Report as abusive

Jobs: The summer’s over

Felix Salmon
Sep 6, 2013 13:39 UTC

If you wanted to engineer the strongest possible recovery in the US economy, you would try to create two things. First, and most important, you would want robust jobs growth, with employers adding positions, the unemployed — and especially the long-term unemployed — finding new jobs, and the proportion of Americans with jobs rising steadily. Secondly, you would want to introduce errors into the monthly jobs report. You would try to make jobs growth seem weaker than it really was, and unemployment higher. By doing that, you would keep monetary policy — and market expectations for future monetary policy — as accommodative as possible. That in turn would keep both short-term and long-term rates low, which would provide extra fuel for the recovery.

What we saw this summer was the exact opposite of that scenario. The monthly payrolls reports were positive, which seemed like good news — except we learned today that the jobs gains they reported were overstated. Meanwhile, the Fed started talking explicitly about tightening monetary policy (the so-called taper), which resulted in a massive spike in long-term interest rates: the 10-year Treasury bond hit 3% yesterday. That move was also, partially, fueled by talk of Larry Summers becoming the next Fed chairman rather than the more dovish Janet Yellen.

On top of that, to make things even worse, the Fed started targeting unemployment at exactly the point at which the headline unemployment rate has never conveyed less information. With today’s employment report, I hope we just stop taking it seriously: the small drop, to 7.3%, came entirely for the wrong reasons. This is the chart we should all be looking at instead:

This is, literally, the very picture of a jobless recovery: the recession ended at the end of the last light-blue column, but the participation rate just kept on falling, while the overall employment-to-population ratio stubbornly refuses to rise from its current miserable levels. Both of them are lower than at any point before women had finished their big move into the jobs market, and the Fed must surely take its “full employment” mandate to refer as much to this number as it does to the unemployment figures. (The unemployment statistics in general, and the headline unemployment rate in particular, are misleading mainly because they don’t include discouraged workers who have given up looking for work.)

Today’s jobs report was bad, no two ways about it: no matter how far you reached into the data, there was very little in the way of silver linings. That said, however, the market can look at the data too — with the result that long rates are on their way back down: traders no longer expect tapering to start imminently. On top of that, the most prominent skeptic of quantitative easing, Larry Summers, might not be the lock that we thought he was for Fed chair.

To put it another way: this report is something of an unwind of what we saw this summer. It shows that the reality of the economy was not as good as we thought it was, and that the market probably got ahead of itself in anticipating a taper beginning very soon. We can’t take any solace in the mediocre economy. But if you’re desperate for good news, here it is: at least we know, now, how mediocre the recovery is, especially on the jobs front. And we’re going to stop hobbling ourselves by pushing long-term interest rates inexorably upwards, thereby making that recovery even harder.

COMMENT

Foppe –

No, BLS revisions tend to be pretty noisy, and they go upward as well as downward. Stats here:

http://www.bls.gov/web/empsit/cesnaicsre v.htm

Posted by strawman | Report as abusive

When the government outsources employment policy

Felix Salmon
Jul 5, 2013 13:39 UTC

America is creating jobs — but they’re not well-paid jobs, and they don’t seem to be going to the previously unemployed.

Today’s headline figure is certainly impressive: 195,000 new jobs were created in June, in the wake of a super-strong 207,000 new jobs in May. But the headline unemployment rate went nowhere, stuck at 7.6%, while the broadest measure of underemployment, the U6 unemployment rate, saw a worrying and substantial rise, to 14.3% from 13.8%.

Good jobs, like those in government, continue to get cut, while most of the jobs growth came in the most low-wage sectors, like hospitality. And while the data on wages was pretty healthy, remember that wage data applies overwhelmingly to people who have been employed for some time, rather than to people newly entering the workforce. Basically, if you’re employed, you’re doing OK, but if you’re underemployed, the options available to you — the new jobs being created — are pretty underwhelming. Partly as a result, the number of discouraged workers — people who have given up looking for work because they can find nothing available — has gone up, sharply, to more than 1 million.

This report is going to have no visible effect on Fed policy. The Fed has no employment-growth target: the thing it cares about, on the jobs front, is unemployment. So when it comes to measures like tapering and rate hikes, the survey which matters most is the household survey — the employment status of American households — rather than the establishment survey, which measures the size of total US payrolls. Theoretically, the two surveys are two different ways of measuring the same thing, but in practice we’re seeing in the jobs report exactly the same thing that we’ve been seeing for most of the recovery: businesses reporting healthy numbers, with workers in general, and people looking for work in particular, seeing little benefit as a result.

The markets are jittery, on this illiquid holiday weekend, with the yield on the 10-year bond soaring more than 20bp to almost 2.7%. By the standards of recent history, that’s extremely high — but it’s worth remembering that on an absolute level, it’s still very low. The combination of aggressive monetary policy and a very weak economy managed to bring rates down to unsustainably low levels, and the bounce back to something a bit more normal was always more likely than not to be chaotic and weirdly timed.

But that said, the rise in long-term rates will surely only serve to delay, at the margin, any tapering by the Fed. Monetary conditions are already significantly tighter now than they were a month ago; the last thing the Fed needs to do, with unemployment still well above target at 7.6%, is try to make them tighter still by tapering. The doves on the FOMC will of course want to keep the current accommodative stance unchanged, while the hawks will for the time being be placated with the idea that the bond market is doing their job for them.

Ultimately, however, neither Fed policy nor long-term interest rates are actually going to have much effect on the unemployment rate. US corporations are loaded up with cash; they don’t need to borrow money to invest in new jobs, and insofar as they do need to borrow money, most of them have already done so, locking in the low rates we saw a few months ago. As a result, the path that the borrowing rate takes from here on in is not going to determine the velocity with which we reach the key Fed levels of 7% and 6.5% unemployment. (The first is the point at which the Fed starts thinking about tapering; the second is the point at which the Fed starts thinking about raising the Fed funds rate.)

So what’s left? Fiscal policy could help, in terms of reducing unemployment, but it won’t: the sequester is still in effect, and Congress has zero willingness to use government money to create jobs.

Which means that job growth, from here on in, is entirely going to be a function of the private sector. When, and how, will America’s cash-rich and profitable corporations start using the money they’re making to hire Americans who are currently unemployed? The healthy headline figures in the establishment survey indicate that we’re moving in the right direction, albeit not fast enough. And the stock market will help, too: companies will need to start growing in order to justify their current share prices. With any luck, corporate growth will mean employment growth.

As for the government, the base-case scenario is essentially neglect. The legislature will do nothing to improve things, while the Fed will do nothing to hinder the recovery. The ball is in America’s court.

COMMENT

QE has been pushing on a string because almost none of it has made its way into the money supply. Money growth has been retarded by credit contraction following the Minsky Moment. However, private sector credit has finally begun to grow, especially for businesses. Household credit contraction has ended but hasn’t yet begun to grow. Once HH credit starts to grow, you will see money growth accelerate, thus raising NGDP.

Posted by nixonfan | Report as abusive

The minimum-wage stimulus

Felix Salmon
Jun 20, 2013 13:50 UTC

Nick Hanauer has a good idea today: raise the minimum wage to $15 per hour.

The minimum-wage intervention would kill a lot of birds with one stone: it’s a win-win-win-win-win-win.

First of all, most simply and most cleanly, it would immediately raise the incomes of millions of cash-strapped Americans — precisely the people who most need to be earning more than they’re making right now. A whopping 51 million people would benefit directly, along with 30 million who would benefit indirectly: these are enormous numbers.

Secondly, the cost to the government of putting billions of extra dollars into these workers’ hands would in fact be substantially negative: there’s a strong fiscal case for a $15 minimum wage. We currently spend $316 billion per year on programs designed to help the poor, with the lowest-income households receiving about $8,800 per year. Billions of those dollars would be saved as the workers in question saw their wages rise. And no longer would the likes of Walmart be able to take advantage of implicit government wage subsidies, whereby low-paid workers receive substantial top-up checks from Uncle Sam to supplement their direct income.

Thirdly, the move would constitute a huge economic stimulus program: Hanauer says that it would inject about $450 billion annually into the US economy every year. If you like massive stimulus but you don’t like the idea of the government paying for it, then a higher minimum wage is the program for you.

Fourthly, and crucially, a higher minimum wage would be good for employment. A $450 billion stimulus, delivered directly into the hands of the Americans most likely to spend it, can’t help but create jobs across the economy. Of course, as in any healthy economy, there will be a birth/death model: some employers will see demand soar, while others will see their costs rise and their margins shrink. But there’s empirical evidence to suggest that states which raise the minimum wage when unemployment is high — when there’s a lot of slack in the labor force — then you get faster job growth than in the country as a whole.

This is the particular genius of Hanauer’s suggestion: it’s especially effective right now, and we’re at the perfect point in the economic cycle to implement it. At the depths of a recession, a disruptive move like this can have unintended consequences. But the economy is growing now, albeit not as fast as anybody would like, which means the wind is behind our backs to a certain degree. The bigger economic problem is that employment hasn’t kept pace with economic growth: most of the gains in GDP have gone to capital, rather than to labor. A higher minimum wage would redress the balance somewhat.

Fifthly, insofar as a one-off hike in the minimum wage would be inflationary, that’s a good thing, and exactly what the economy needs. We’re well below the Fed’s target inflation rate right now, and the inflation which might result from this policy would give us a healthy short-term boost in the inflation rate, bringing down real interest rates in a world where the Fed is constrained by the zero lower bound. If you’re worried about the unintended consequences of heterodox monetary policy, then again, a rise in the minimum wage might be very helpful indeed in terms of weaning the Fed off QE.

Finally, there’s the global context. There are surely some US jobs which simply aren’t economic at $15 per hour, and those jobs will end up being lost. (In aggregate, as I say, raising the minimum wage is probably good for employment, but the extra jobs at employers taking advantage of all that extra spending aren’t going to be in the same places as the jobs lost at employers who can’t afford to pay that much.) But the point here is that the US has already done a spectacularly good job of exporting most of its exportable low-wage work. As Hanauer says, “virtually all of these low-wage jobs are service jobs that can neither be outsourced nor automated”. As a result, raising the minimum wage will result in many fewer job losses now than it would have done a couple of decades ago.

Of course, given Congressional dysfunction, there’s zero chance that this will happen. But I can easily imagine someone like Ben Bernanke reading Hanauer’s column and dreaming wistfully about how great it would be if we lived in a country where such things were possible. If we want economic stimulus, higher growth, higher employment, and higher inflation — which we do — then raising the minimum wage is exactly the kind of thing we should be doing.

COMMENT

The problem is that Felix, like a lot of people, are ivory tower folks on this. A $15 min MIGHT work in the Northeast and West Coast, but would cause catastrophic destruction in the rural Midwest and South. And, I wish anybody else who “expertly” comments on this issue would not do so until having lived in said areas themselves. (I’m assuming Felix hasn’t.)

This lack of informedness then carries elsewhere. I’ve had an Australian comment on my blog who simply doesn’t understand why this won’t work.

Posted by SocraticGadfly | Report as abusive

Doomed Europe

Felix Salmon
May 7, 2013 21:35 UTC

It’s long — at some 4,500 words — but I can highly recommend the debate between George Soros and Hans-Werner Sinn about what Soros calls The German Question.

The debate is profound, and the two stake out radically different positions, even though they end up at pretty much the same place. Soros says that Germany should make a simple choice: either sign on to Eurobonds, where the euro zone as a whole would issue low-yielding debt to the benefit of all, or else leave the euro zone entirely. Either way, he says, Europe would win — either from reducing the fiscal burden of the various national debts, or else from seeing the euro devalue against the new Deutschmark.

Sinn agrees with Soros that Germany would be making a huge mistake were it to leave the euro zone; he disagrees vehemently, however, on the subject of Eurobonds. But both men are clear that given political realities in Germany, neither of Soros’s two choices is going to happen. Germany is going to stay in the euro zone, and Eurobonds aren’t going to happen.

That, says Soros, is a tragedy:

Europe would be infinitely better off if Germany made a definitive choice between Eurobonds and a eurozone exit, regardless of the outcome; indeed, Germany would be better off as well. The situation is deteriorating, and, in the longer term, it is bound to become unsustainable…

There is no escaping the conclusion that current policies are ill-conceived. They do not even serve Germany’s narrow national self-interest, because the results are politically and humanly intolerable; eventually they will not be tolerated. There is a real danger that the euro will destroy the EU and leave Europe seething with resentments and unsettled claims. The danger may not be imminent, but the later it happens the worse the consequences. That is not in Germany’s interest.

And even though Sinn thinks that Soros is wrong, his prognosis seems just as grim, filled with painful austerity and sovereign default:

The only remaining option, as unpleasant as it may be for some countries, is to tighten budget constraints in the eurozone. After years of easy money, a way back to reality must be found. If a country is bankrupt, it must let its creditors know that it cannot repay its debts.

My sympathies in this debate are with Soros, although Sinn does make a good point about the unintended consequences of Alexander Hamilton mutualizing state debts in 1791. (There really aren’t a lot of precedents for the kind of Eurobonds Soros envisages.) The overarching message from both of them, however, is that, as Soros puts it, “the current state of affairs is intolerable”. The only question is whether there’s a better alternative; Soros says there is, while Sinn says there isn’t.

The conclusion from them both, then, would seem to be that Europe as a whole is doomed to misery for as far as the eye can see, and that things are going to get worse before they get worse. I really hope they’re wrong. But so long as Europe’s future generations remain jobless, it’s hard to see a silver lining to this cloud.

COMMENT

Sinn’s take on state defaults of mid-19th century as flowing from Hamilton’s federal debt project is incomplete at best. The popular view of these defaults as the end of moral hazard is equally misguided. Since then, the US has doubled down on debt mutualization with a federal income tax and federal counter-cyclical spending. This may be good, bad, or neither — but the lessons Europe takes from US federalism too often seem selective and misinformed.

Posted by ag4601 | Report as abusive

Understanding the painfully slow jobs recovery

Felix Salmon
May 3, 2013 18:29 UTC

Today’s jobs report was a solid one, and shows that the recovery, while not exactly strong, is at least not slowing down: Neil Irwin calls it “amazingly consistent”. Whether you look at the past 1 month, 12 months, 24 months, or 36 months, you’ll see the same thing: average payrolls growth of roughly 170,000 jobs per month. That’s not enough to bring unemployment down very quickly, given the natural growth in the workforce. But unemployment is coming down slowly. And at the rate we’re going, at some point in the second half of 2014 we should see total payrolls reach their pre-crisis levels, and the headline unemployment rate hit the key 6.5% level.

There’s a real human cost to the fact that unemployment is coming down so slowly, but there are lots of reasons why it’s very hard to bring it down more quickly. First and foremost, of course, is the fact that US GDP growth is mediocre, coming in at less than 2% per year over the past few years. That’s not the kind of V-shaped recovery which creates jobs. Calculated Risk’s justly-famous jobs chart shows just how bad the recession was for employment, and just how painfully slowly we’re scratching our way back: we’re more than five years into this jobs recession, and we’re still at the worst levels seen in the wake of the dot-com bust.

One of the reasons is the undisputed conclusion of Reinhart and Rogoff: that recoveries from financial crises are much slower than recoveries from other crises. But there’s something bigger going on, too, which Joe Stiglitz writes about today in a very wonky blog post for the IMF.

This is more than just a balance sheet crisis. There is a deeper cause: The United States and Europe are going through a structural transformation. There is a structural transformation associated with the move from manufacturing to a service sector economy. Additionally, changing comparative advantages requires massive adjustments in the structure of the North Atlantic countries.

To put it another way: what looks like a broad economic recovery is actually a combination of many trends, including the end of what turned out to be a very short and weak recovery in manufacturing employment. Here’s Irwin:

The fact that the overall job growth numbers have been extraordinarily stable does not mean there isn’t some real churn going on in the U.S. workforce. In the earliest phase of the recovery, manufacturing jobs was a major driver of job creation, but that turned out to be not a longer-term trend but a partial reversal of the steep declines of the recession. Now, job creation is entirely confined to the services sector: Manufacturing had no net change in employment, construction lost 6,000 jobs, and even mining and logging was a net negative.

Government employment, meanwhile, continued its long swoon… That leaves one sector to drive the train of job creation: private sector services. This particular month, there were strong gains in leisure and hospitality, retail jobs, and professional and business services, and health care has been a mainstay of the expansion.

Stiglitz makes the case that in a recovery with so many moving parts, the single blunt instrument of setting short-term interest rates at the Fed will never be enough, and that “there needs to be close coordination between monetary and fiscal policy.”

What’s more, as Mohamed El-Erian says, policymakers should ideally be able to use job growth not just as a goal, but also as a tool for achieving other ends.

Robust employment growth would – and, let us hope, will – play a critical role in helping the US pivot to a better place… It would do this by maintaining consumption and allowing for a more sustainable savings rate; by countering an excessive upfront fall in public spending that increases the risk of a recession; by enabling the Fed to slowly and gradually normalise monetary policy before it breaks too many things; and by reducing the risk of financial bubbles.

The US economy is a highly complex machine, with many moving parts which ought to be working with each other rather than against each other. Stiglitz makes a strong case that the financial sector broadly is right now part of the problem rather than part of the solution: it’s not directing funding to help the economy grow and create jobs, even as it continues to represent a serious systemic risk. It should go without saying at this point that fiscal policy broadly is part of the problem as well: you don’t create jobs by firing people, and the government should be borrowing if and when the private sector won’t. And as for monetary policy — well, it’s probably too early to tell. It’s done a great job of making people with money richer, but it has had a much less obvious effect on creating jobs for those who want them and don’t have them.

And yet there’s real room for optimism in today’s jobs report. Look at the revised numbers for February: an incredibly heartening 332,000 jobs created, in one short month. Look at the number of people unemployed for 27 weeks or more: that unhappy cohort shrank by 5.6% in April alone, to 4.3 million people. It’s still far too high, but this time last year it was over 5 million, so we’re making a significant dent in what has been the toughest nut to crack.

We can — and should, and could, and must — do better than this. But doing so will require a thaw in the Washington gridlock. When Jack Lew became Treasury secretary, it was understood that the most crucial thing he could deliver would be greater cooperation between the White House, Treasury, and Capitol Hill. That hasn’t happened yet. I hope and trust that he’s been working very hard behind the scenes to make it happen — partly because he doesn’t seem to have achieved anything else, but mainly because it’s by far the most important thing that he could be doing right now. Behind the jobs numbers there are some powerful forces driving real recovery in large parts of the US economy. It’s Lew’s job to work with Congress to identify those forces, and to give them all the support the government can muster.

COMMENT

It is really disappointing to see all this commentary and no mention of 1) China and 2) predatory capitalism. There are two causes of the declining role of employment in our economy: outsourcing to lower wage geographies and a persistent culture of cutting all FTEs from corporations. The Great Recession merely accelerated these trends and legitimated massive cost cutting across all corporations in the US.

There really is no end to these trends. We would need a complete reengineering of the motivations of businesses and governmental policies to even slow down these trends. And note that not a single politician is wlling to tackle either one of these monsters.

Posted by Dollared | Report as abusive
  •