You Should Overreact to the Employment Report

The normal advice from sage, two-handed economists is that people shouldn't overreact to one bit of bad news.  The wise guys on Wall Street snicker at the day traders with lines like, "Two data points make a trend!"  So count on lots of punditry that today's employment situtation isn't as bad as it looks, especially when the Bureau of Labor Statistitcs comments that the uptick in the unemployment rate is statistically insignificant. With friends like these ...

This time, if your instinct is not to overreact, I'd urge you to reconsider.  This month's report on May activity shows that the April report wasn't a fluke. And it confirms that the entire last year of lackluster labor market equilibrium isn't some unique aspect of a unique recovery. It's time for some overreaction.

• The unemployment rate is now 9.1 percent, up from 8.8 percent two months ago.  That's important.  Although research shows the U rate is more reliable than the payroll employment numbers over the long term, it might still suffer from a one month blip due to turnover in the survey sample.  But a second increase in two months all but nails the coffin shut. By that I mean that the U.S. is experiencing if not a double recession then a historically stagnant recovery. 
• The May payroll gains of 54,000 are nothing short of stunning. The U.S. lost 8 million payroll jobs during the recession.  Adding 54,000 a month will get the nation back to normal ... never!  A recovery in the job growth number needs to average 400,000 a month to achieve the simplest recovery in 2.5 years.  As it stands, the BLS commissioner is trying to emphasize the good news that the average payroll growth has been 220,000 for the previous 3 months. Let's be clear: that is not a silver lining, it's an indictment of the current course.
• The long-term unemployed increased in May by 361,000.  Add that to the disturbing uptick in weekly jobless claims, stuck north of 400,000 a month.
• The labor force increased by roughly 1.2 million a year before the recession, peaking at 154.7m in Dec 2008.  Two and half years on, it is 153.7m (a million souls fewer).  Another way to think of this is that the labor force has roughly 4 million in extra-normal slack, people who have officially left/not joined the labor force but will come in as the economy recovers.  This is a recipe for the unemployment rate to rise as things get better, but what we are seeing is the unemployment rising even as conditions slip.

So who is to blame?  It's easy for some to blame the Federal Reserve, but I think that is a foolish debate.  Monetary policy, inceed macro in general, has limits to its effectiveness.  The Fed can only compensate for a broken fiscal policy for so long, and it appears the U.S. has reached that point. Think of money supply as blood supply.  You can pump gallons of fresh blood into a sick lion, and she ain't gonna roar.

Comments

[Rea Hederman]

Tim: This is a bad, no good report. Throw in downward revisions for the previous 2 months, flat hours, neg temp workers and yikes. The labor market has stalled out again.

It's very hard right now for long-term workers to get hired and the mean duration of unemployment is 9 months!

We have the same take on this. It's hard to find any good news in this report or expect any better reports in the next month or so.