Tuesday, October 9, 2018

Lowest unemployment in 50 years! So why aren't we getting paid like it?

You may have seen this headline from late last week.
The U.S. unemployment rate is at a historic low.

The September jobs report released Friday morning showed the U.S. economy added 134,000 jobs during the month while the unemployment rate fell to a new generational low of 3.7%. This is the lowest unemployment rate since December 1969.

Nonfarm payrolls were forecast to rise by 185,000 in September while the unemployment rate was expected to drop to 3.8%, according to estimates from Bloomberg.
Seems kind of contradictory, let’s look at the actual jobs report and get a bit deeper into this.

First of all, the jobs increase of 134,000 is a bit misleading, because the prior months were better than originally known, especially August.
The change in total nonfarm payroll employment for July was revised up from +147,000 to +165,000, and the change for August was revised up from +201,000 to +270,000. With these revisions, employment gains in July and August combined were 87,000 more than previously reported. (Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.) After revisions, job gains have averaged 190,000 per month over the last 3 months.
So you could argue that this is a +221,000 jobs number, which would be considered a sizable increase. It’s relatively services-based – out of the 404,000 jobs added since July, over 320,000 was in services. But construction has stayed strong (+23,000 in Sept., +315,000 for the last year), and manufacturing bounced back with 18,000 new jobs after a soft month of August.

The unemployment rate dropped for the “good” reason, as the labor force increased by 150,000, but the total “employed” were up by 420,000. Granted, August had a drop of nearly 470,000 people out of the labor force, so the total employment and participation rate isn’t as high as it was 2 months ago. But still, we are pretty much maxed out for what the employment market can be.

But what "maxed out" is in 2018 isn't as many people as it was when the US last had unemployment below 4%, in the late '90s and 2000. Why? Because all of the Boomers that were middle-aged in the work force are retired and/or not working for other reasons, and there have been fewer workers to follow them. This is shown through the Employment-Population Ratio (EPR), which gives an idea how many people are working as a % of the population, and it shows that we have a lower percentage of people working today than we had in the nadir of the 1990s recession.

In itself, this may not be a bad thing, if it means workers are making enough money and/or have enough wealth that they don't need to be employed vs retire or go to college or raise kids. And with the jobs being added, unemployment so low, and a relatively smaller number of people in the labor force, that means wages are going up big-time, right?

In September, average hourly earnings for all employees on private nonfarm payrolls rose by 8 cents to $27.24. Over the year, average hourly earnings have increased by 73 cents, or 2.8 percent. Average hourly earnings of private-sector production and nonsupervisory employees increased by 6 cents to $22.81 in September.
If you want to nit-pick, that 12-month hourly wage increase is actually 2.75%, and that’s down from 2.92% in August. That still means that real wages are still near-zero, as they have been since inflation ticked up around the middle of last year.

And average hourly wages in manufacturing are well behind the rate of inflation, with a 12-month increase of only 1.35% (0.7% in non-durable manufacturing like food, textiles and paper).

While wage growth is still “bleh”, have I mentioned that oil prices have jumped 15% in the last 7 weeks? That’ll be hitting people in the pocketbook soon enough, along with increases from ACA sabotage for next year’s plans.

The reality of the still-good job market, rising prices (if not wages), and our looming $1 trillion budget deficits have put a lot of pressure on bond prices, which means the benchmark 10-year Treasury Bond is now at its highest interest rates in 7 years, exceeding 3.2%.

You could argue that the higher interest rates are a good thing, as it indicates things are somewhat back to the conditions that we were used to before the Great Recession hit a decade ago. Certainly the good job growth and full-employment status that the country is in seems to show that.

But you should ask yourself “is this really as good as it’s going to get?” Because for the typical American, these alleged “boom times” still are far from idyllic, and it feels like the downsides of massive budget deficits and rising prices are set to put a lot of people at or over the edge when the economy inevitably slows down in the coming months.

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