MacroScope

The U.S. workforce has been shrinking rapidly in recent years, but a new report from UniCredit highlights just how massive the effect of this trend really is. Economist Harm Bandholz says it amounts to a gaping 3.6 percentage points of U.S. unemployment.

That means the U.S. jobless rate, which dropped to 7.7 percent in February, would actually be around 11.3 percent without the decline in labor force participation. This would put American unemployment a lot closer to the euro zone’s recently reported record high rate of 11.9 percent.

The labor force participation fell further in February to 63.5, matching an August reading that was the lowest since 1981.

Of that 3.6 percentage point decline attributable to a shrinking workforce, a little over half is due to long-term demographic factors, Bandholz’s models surmise. But the remainder represents direct damage to the U.S. job market from the Great Recession. While labor force participation has historically moved lower during economic slumps, Bandholz says the recent drop has been particularly abrupt.

“What is unprecedented since World War II, however, is the extent of the current cyclical decline,” he writes.

For the first time, Federal Reserve Chairman Ben Bernanke has given credence to the idea that America’s long-term economic potential may have been permanently scarred by the turmoil of recent years. In a speech to the Economic Club of New York, Bernanke said:

 The accumulating evidence does appear consistent with the financial crisis and the associated recession having reduced the potential growth rate of our economy somewhat during the past few years. In particular, slower growth of potential output would help explain why the unemployment rate has declined in the face of the relatively modest output gains we have seen during the recovery.

True, Bernanke came nowhere near saying monetary policy was impotent to improve the situation. Indeed, he argued that the weaker potential growth “seems at best a partial explanation of the disappointing pace of the economic recovery.”

Jobless claims fell unexpectedly last week to 361,000. Analysts were particularly heartened by the improvement because the latest figures were finally “clean” of recent seasonal adjustment quirks related to auto factory shutdowns. That’s the good news.

Some lingering cause for hesitation: Eric Green at TD Securities reminds us that recent dips in claims have not necessarily translated into great bursts of new job creation.

Over past periods of this recovery claims at this level have been consistent with (monthly) job growth closer to 200,000. With claims back at these levels, one cannot presume that this will continue to hold given the level of uncertainty and slower growth momentum from which labor demand will lag.

Strong productivity may be good for an economy’s long-term growth prospects. But it’s not always great for workers in the near-run, since it literally means firms are squeezing more out of each employee. In reality, rapid productivity growth can make it harder for workers to get new jobs or bargain for raises.

The benefits of operating efficiently are obvious enough: Productive firms will have more money left over to invest, which should lead to more job creation in the future. Except lately, that future seems never to come, giving rise to the somewhat oxymoronic notion of a jobless recovery.

Millan Mulraine at TD Securities explains:

In many ways, the 2009 and 2002 economic rebounds are very similar in that both can be characterized as largely ‘jobless recoveries’. However, the compensating boost from capital investment – which was a defining feature of the 2003 economic recovery and a key underpinning for economic and productivity growth during the 2003-2007 period – has been largely missing during this cycle. The missing boost from capital investment activity has reinforced the subpar economic performance over the past two years, and will portend poorly for longer-term economic growth potential if the trend continues.

After a string of very weak figures in the second quarter, the July employment figures prompted a collective sigh of relief that the U.S. economy was at least not sinking into recession. That doesn’t mean the news was particularly comforting. U.S. employers created a net 163,000 new jobs last month, far above the Reuters poll consensus of 100,000. Still, the jobless rate rose to 8.3 percent.

Steve Blitz of ITG Investment Research explains why the underlying components of the payrolls survey offered little cause for enthusiasm:

The headline is good but the details do nothing to dissuade the notion that economic activity remains soft. There is, in effect, no sign in the details economic activity has accelerated from June’s pace when a downward revised 73,000 private sector jobs were added. Hours worked remain the same and overtime at manufacturing firms fell. The diffusion index (percentage of firms adding workers plus one-half of the percentage with unchanged payrolls) dropped in July to 56.4 from 56.8 in June, 61.3 in May, and 62.2 in July of last year. The civilian labor force dropped by 150,000 and the broad U-6 measure of unemployment rose to 15.0% — reversing all the gains made in 2012.

The “big wildcard” in making July payroll projections is the size of the swing in public school teachers and other school workers.

Because of the size of teacher layoffs and the effect of the July 4th holiday on the data, the July seasonal adjustment factor can vary significantly from one year to the next, and the variation can be extreme, says Ward McCarthy, managing director and chief financial economist at Jefferies & Co in New York.

Many public school teachers, in addition to some other public school employees, are hired on a ten-month calendar that runs from September through June, large-scale layoffs occurring in July and large-scale hiring occurring in September.

How bad is the U.S. employment situation? The Labor Department’s tally for March, which showed only 120,000 new jobs were created, raised doubts about the sustainability of a recent pick up in job growth. But to get a broader sense of what things are really like it helps to put things in a longer-term perspective.

Even with the 3.6 million new jobs created during the recovery, some 5 million more are needed just to make up for all of the jobs that were lost during the Great Recession. At March’s pace, it would take nearly four more years to get there – and that’s not accounting for population growth.

If job growth remains at tepid clip of around 150,000 a month, it would take five years for the jobless rate, which registered 8.2 percent in March, to fall to 6 percent, according to Atlanta Federal Reserve Bank economist Julie Hotchkiss.

Ed Krudy contributed to this post

The Philadelphia Fed’s Mid-Atlantic manufacturing survey covers a pretty small chunk of an already shrunken U.S. factory sector. Still, analysts at Harris Bank have found that the survey’s employment component has been a pretty solid leading indicator of the monthly payrolls figures.

If the trend persists, then February’s report could be a bit of a letdown following a surprisingly robust gain of 243,000 jobs last month. The Philly Fed’s employment index dropped sharply in February to its lowest level since August.

According to Jack Ablin, Harris Bank’s chief investment officer:

For the last several months, the Business Outlook survey has been a keen predictor of the monthly change in the Bureau of Labor Statistics’ non-farm payroll. The survey came close to nailing last month’s 243,000 gain, even though economists expected a 140,000 pickup on average. Should the survey’s predictive power continue, investors could be disappointed with February’s BLS report. The Philly Fed survey implies roughly 50,000 net new non-farm payroll jobs added in February. Positive yes, but it would be a big momentum killer. Stay tuned. The payroll report is not due out until March 9th.

A new survey from job placement firm Challenger, Gray & Christmas offers good news and bad news for U.S. job seekers. While some Americans have become more optimistic about their employment prospects, others have grown even more frustrated at their inability to find work.

The results were based on a random sample of 600 callers to Challenger’s yearly job-search advice hotline. Here are some key findings:

- Over the two-day event, the firm’s professional counselors helped more than 1,000 job seekers, 77 percent of whom were unemployed. That is down only slightly from the previous two years, when 81 percent of callers were out of work.

7,231,514. That was the real number of Americans receiving jobless benefits on last count – not the 381,000 new weekly applications that made the headlines.

It’s always heartening to get good news on the job market. Still, it’s easy for fully employed Wall Street analysts to get carried away with optimism after relatively minor improvements in the data.

Jobless claims figures are a case in point. True, new weekly applications for unemployment benefits fell to a 3-1/2-year low earlier this month, even if the latest report showed a larger-than-expected rise to 381,000. The trend, coupled with a moderately positive run in payroll employment growth, is encouraging. Yet it is important to remember that fewer layoffs do not necessarily imply more jobs are being created, as Eric Green at TD Securities notes: