Data Points to Improved Labor Market

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The headline unemployment number is very low, yet many people complain that the labor market is not in good shape, saying the true unemployment rate is much higher. Others dispute that, and there is good data on both sides. But I think the recent labor market reports make clear that the labor market isn’t as good as the headline unemployment rate indicates.

There’s no doubt that in the early part of the financial crisis many people left the labor market involuntarily because they lost their jobs and couldn’t find new ones. Because they were older than 50, many gave up and had little or no intention of trying to find new jobs. After the first few years, the labor force participation rate continued to decline. But much of the decline in labor force participation was the result of the Baby Boomers aging and deciding to retire.

A couple of movements in the recent data indicate that there’s still a lot of slack in the labor market.

The first indicator is that wage growth remains low. When the unemployment rate is this low, employers should have to compete with workers and would do that by raising pay. That’s not happening. Some economists argue that the aggregate numbers for the economy are misleading. They say there are many industries and geographic areas where wages are rising rapidly. But the evidence for that is more anecdotal than anything else. The aggregate numbers have been reliable in past decades, and there’s no explanation for why they wouldn’t be reasonably accurate now. Also, wage increases are low globally. In a global economy, it’s unlikely the United States could have more rapid wage increases than the rest of the world.

The second indicator is that labor force participation has edged up as the unemployment rate declined. Clearly, there are people on the sidelines who either have decided to re-enter the workforce as it’s improved or who have received job offers without putting forth much effort.

The third indicator is the high number of part-time jobs. In surveys many of these part-time workers say that they would like to work more hours. Related to that, the hours of the average work week haven’t increased much as unemployment declined. Normally, when the unemployment rate is low, employers offer more hours to workers and the workers accept them.

So, while the labor market has steadily improved since the financial crisis, it’s far from peak levels. In a normal economy, today’s low unemployment rate would cause high wage growth and fears of inflation. We don’t have that today, and that’s why the Fed needs to be careful about raising interest rates or taking other contractionary actions.

The Data

As mentioned, the Employment Situation reports showed 215,000 new jobs last month, and that was about in line with expectations. The unemployment rate increased to 5%, because the participation rate in the labor force increased. But the number of hours in the average workweek decreased, and average hourly earnings increased a modest 0.3%.

There also was mixed news in the JOLTS (Job Openings and Labor Turnover Survey). The number of job openings declined from last month. Even so, the number of job openings still is the fourth highest since the financial crisis. Other signs of strength were increases in the hiring rate and the quit rate. A rising quit rate is an indication that workers are optimistic about the job market.

New unemployment claims declined by 9,000.

Some positive news continues to seep into the manufacturing data. The PMI Manufacturing Index released last Friday increased fractionally to 51.5. Any number above 50 is supposed to indicate an expansion of the sector. The ISM Manufacturing Index also popped above 50 to 51.8 for the first time since September.

Factory orders, on the other hand, declined 1.7% and last week’s solid increase was revised a little lower. There wasn’t much positive in the report.

The nonmanufacturing sector of the economy continues to do well. There was some concern that the negative market moves early in the year would lead to more caution by households and businesses, holding back the service sector. But that hasn’t been the case so far. The PMI Service Index increased to 51.3 after falling below 50 last month. But the new orders portion of the index is at its lowest level in six and a half years.

The ISM Non-Manufacturing Index was more positive. It made a solid jump to 54.5. Also, the new orders component showed a very solid increase and backlogs showed strength.

Consumer Sentiment, as measured by the University of Michigan, remained solid at 91. It remains below the highs of early 2015 but still is in very positive territory.

The Markets

As of mid-day Thursday, large company U.S. stock indexes had modest gains for the week, reversing last week’s decline. The S&P 500 was up 0.19%. The Dow Jones Industrial Average was up 0.08%. But the Russell 2000 smaller company index lost 0.14%. International markets didn’t fare as well. The All-Country World Index lost 1.15%. Emerging market equities lost 2.33%.

Long-term treasuries had a good week, gaining 1.40%. Investment-grade bonds gained 0.97%. Treasury Inflation-Protected Securities (TIPS) gained 0.15%. High-yield bonds gained 0.43%.

Commodities lost ground this week. Energy-based commodities lost 1.60%. Broad-based commodities lost 1.86%. Gold lost only 0.17%.

The dollar declined less than 0.5%.

Some Reading for You

Controversial new regulations about brokers and retirement accounts were issued this week.

There are differences between taxpayers who file their returns early and those who file later.

This article could be the best summation of the Panama Papers that were made public this week.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.

Sincerely,