Putting Some Perspective on the March Jobs Figures

The jobs numbers released last month were, by any measure, a tepid take on the performance of the US economy in March at 126,000, and despite the fact that the Bureau of Labor Statistics (BLS) also tempered the first pass at the spectacular job figures for February, which were revised down to a net 264,000 new jobs created, the consensus on Wall Street was that the economy was sagging.  This led to all sorts of speculation that now the Fed wouldn't raise rates until the fall or even into the back end of this year, but I think all this Fedspeak is frankly misguided.  The Fed is simply NOT going to base it's judgement on one month's numbers, and particularly a month that was, by any standards, unseasonally cold and unusual.  So to get this out of the way right at the beginning of this blog, I will state for the record that I still think the Fed will raise rates in June, and September at the very latest, for reasons I have elucidated in previous blogs postings.  My reasoning hasn't changed here, and no slightly weaker sets of data will affect the business cycle and monetary policy "normalizing" arguments.

But I digress.  What I want to address here is the BLS labor data released last month, and the reasons why I think the data will get revised upwards, and even if it doesn't, why it really doesn't merit the type of response it got from the markets.  So first, I know that most of the readers of my blog will recognize that one month's numbers do not a trend make - and this data point, in my view, was simply a blip on an irregular cyclical pattern. Now if we get April and May numbers below 100,000, then I will change my view, but one datapoint in the 100,000s range should cause panic, and particularly not at the Fed, as other data on wage increases suggest that wage increases are now accelerating which points to a tightening labor market, which is not surprising given that we're now at a 5.5% unemployment rate.

US Non-farm payrolls (sa)
2007 to date

The points I would like to make about this datapoint are as follows: when one looks at this data on a longer term basis then there does appear to be a small drop off in employment but this also happened at the beginning of 2012 or 2014, and the economy bounced back nicely from those points. But probably most importantly, the March datapoint was not an outlier, it was just a little disappointing. This is shown in the figure to the left.

US Non-farm payrolls (sa)
1939 to present

So why should it have been disappointing? I think there are clearly 2 reason - first, and probably most importantly, the layoffs that are now occurring in the energy sector given that the oil price is clearly not doing following the "v" shape that some expected.  The "j" (on it's side) shape of price trajectory that we are now seeing means that although the highly indebted small and mid-sized oil companies will have to lay off workers, the larger oil companies will be much better able to tough it out.  These oil layoffs, therefore, will be very much one shot deals, which although now occurring, will not trail beyond around 3 months in my estimation.

The other reason for such a tepid growth figure is that the north of the country once again got a really cold blast this winter, and as I was up in Boston in March (seeing Thomas Piketty speak among other things), so I can personally corroborate that fact!  In fact by some measures that part of the country got record amounts of snow this year. Now the figures are "seasonally adjusted" so do take account of the lower level of labor market activity in different seasons, but the statistical methodology can only account for the average level of seasonality - it cannot detect outliers - so these will inevitably show up in the data, which, I believe, they did.

Now the second point I would like to make is that when you observe the full sweep of non-farm payroll figures going back to the beginning of the series (see the figure above), what is clear is that although the figures in the upturn that we have seen might be slightly lower than those observed in the 1992-2000 period, they are certainly not out of line with figures from previous decades.  In fact the level of net job creation appears to be very much in line with what we observed in the 2003-2006 period and back in the 1960s as well. In other words it is somewhat of a myth that jobs have not been created at the same rate that they have been in the past, as it depends which "past" business cycle you look at!

In fact one of the biggest observations I see from this longer series is that there appears to be several highly irregular cycles at work in the data - and although obviously the negative observations occur mostly during recessions, the positive datapoints also appear to show a lot of cyclical behaviour.  That obviously calls for some analysis - and so I will definitely be using this dataset for a future academic paper.  Stay tuned folks!

Even without a double dip, should we feel bad about the US economy?

The grim outlook outlined by Martin Wolf in his FT column this week was a stark reminder that economic measurements, while being constructs that usually measure what we want them to, can sometimes not reveal what we want them to reveal.  The example of our definition of a recession is a good example and the one used by Wolf in his column.  By the measures used by the business cycle dating committee of the National Bureau for Economic Research (NBER), the recession ended in June 2009, and yet here we are 24 months later still at real output levels that are below those of the peak of the previous cycle.  The graphic from Martin Wolf's article is reproduced on the left, and shows that US real GDP is still slightly below it's peak in late 2007 and that other countries such as Japan, Italy, the UK and France are also still languishing at output levels way below their peak in the second quarter of 2007.

The fact that the vast majority of the American general public believe that the US economy is still in recession.  According to a CNN poll (see here) only 18% of Americans believe that we are not in recession right now, so this also does not accord with the way that economists measure recessions, and suggests that we might need to review this, or at least re-categorise the phases of the business cycle!


So what should be our measure of a "recession"?  I have heard many commentators say that although we are still not officially in a recession, it sure still feels like one, particularly when unemployment is still high and there are still calls for economic stimulus like the one heard only today from Fed Chicago District President Charles Evans (see here).  But given what has happened in Japan and what appears to be happening in some other developed countries, maybe we should reconsider our definition of recession as a cyclical downturn and recovery up to the point where we surpass the level of real GDP achieved at the peak of the previous boom. In fact with a growing population even this is unsatisfactory because 4 years ago in 2007 the population was smaller than it is today in nearly all of these countries ( - the exception perhaps being Japan) so if we measure output on the basis of output per head of population (or per capita), we would take longer than indicated in the graph above to get to the same level of output per capita so we would be calling the recession over before it really ended. In fact, to be frank I am in favor of changing our definition of a recession because the current measure only focuses on the downturn and does not focus on what happens afterwards - plainly Japan's experience in the 1990s plus our own recent experience suggest that not all downturns are followed by rapid upturns.

All this is even more relevant given the release of the employment statistics on Friday - and the New York Times had a great graph in it's economics top story on the release - an update of the graph originally used by Nancy Polosi to justify the stimulus in the heady first 100 days of the Obama administration back in 2009.  The frightening thing about the graph on the left is that it most clearly shows why this current downturn has been much different from previous downturns. The previous downturn to be matched against the Great Depression was the downturn in the early 1980s where employment fell by 3% from the peak of employment. This last recession caused job losses for way longer than the other recessions ( - in the early 1980s the job losses started turning around after 15 months whereas it took 26 months in this downturn), and way bigger than other recent recessions (over a 6% fall in employment).  The big picture shows that we have only managed to claw back 1% of the loss in jobs, despite economic stimulus and the Fed pumping credit and money into the economy.

I think a much more serious problem is another quite different story that the New York Times (august newspaper though it is) does not bring out in its reporting. If you look at the recessions of the 1970s, 80s and 90s and then the 2 recessions of the 00s, it seems clear to me that the US labor market is much less able to cope with recessions than it used to be - the recovery times seem to be longer and much more drawn out than they were even 20 years ago. To me this implies that there is some very serious changes going on - some of it structural, but I think something must be also be going on in terms of reluctance to hire - for example do companies delay hiring much longer than they used to, asking their current employees to do more overtime for a longer period of time before they decide to bite the bullet?  I'm not sure we know the answers to these questions yet, but clearly things are changing for US workers, and changing fast!  A pretty grim interpretation for the reasons for this are also given today by Robert Reich in the New York Times and although I don't go along with everything he says, I do agree that we need to focus on education, but I would also add that the US really also needs to focus on marketing itself to the rest of the world - countries that sell products to the developing countries (where the economic growth is right now) is one of the best ways to help expand our economy.

So to answer the question I pose for this blog, the response is clearly a resounding "No"! But for all the problems with the labor market ( - and given that it's really no surprise that Obama recently chose a Labor economist, Alan B. Krueger, to head up his economic team), the US has a lot going for it. It has some of the most dynamic companies in the world, and it is far ahead of most countries in the area of technology - but these advantages will narrow compared to Europe and Asia if the US does not focus on what leads to these advantages - education! I think what the US is essentially finding out is that although the military gave you economic power back during the cold war, spending a lot on military does not give you that advantage now. Countries that have focused more on education over the last 20 years (e.g. Finland, Germany, South Korea etc) are now doing very well thank you - countries that have not grown as fast.

What should be done then? I think a good start would be to redefine what a recession is, re-prioritize government spending towards education and away from the military, and to set up some kind of corporate international opportunities bureau which would list foreign opportunities and so US companies would be more aware and able to more easily grasp new overseas opportunities.