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Day April 4, 2004

More on jobs and the economy

Following my earlier post, it’s important to keep in mind that although an increase of 308K jobs is certainly welcome, it’s going to take a number of months of growth at this rate or higher to simply catch up with the effects of population growth and new workers entering the workforce (on the young end of the demographic pipeline).

The number of jobs needed simply to keep up with young adults entering the workforce has been estimated at approximately 150K per month. That means that about half of March’s jobs can be statistically “absorbed” by growth in the overall size of the workforce, with only 150K jobs going towards re-employment of unemployed workers. I’ve seen estimates (in Paul Krugman’s column, I think, and elsewhere) that we need a sustained rate of around 450K jobs per month to make headway and bring the unemployment rate back to down to its non-inflationary minimum.

So the jury is still very much out on whether the “jobless recovery” has shifted gears on us. I certainly hope it has, but the details in the BLS report for March aren’t as encouraging as the sound bite.

As for my comment that we’re in a “mini-bubble” with the stock market, I don’t have time for a detailed and rigorous analysis tonight, but I’ll make a few observations (since Joseph at the Corpus Callosum asked), for what they’re worth. First, the Dow and S&P 500 are near their highest values since the 2000 collapse, and much of that growth has come in less than a year. Second, in the last 12 months we’ve seen the 9th longest run of growth in the S&P 500 without a 5% decline in its history. Third, I just took a random 5% sample of the S&P 500 companies, and nearly all of the sample was at or near their 52-week high, regardless of whether they’d reported strong profits for YE 2003. Fourth, P/E ratios are still very high compared to historical averages. The market has recovered, and companies are making money, but stock price recovery has vastly outpaced the real economy and its recovery.

You might quibble with these observations, and I hope to have time soon to perform more analysis, but it’s hard to escape the conclusion that the Fed’s program of lower rates has worked. The real economy has gotten as much stimulus out of interest rates as it’s going to, if it’s really true that GDP is growing around 4 percent. At this point, low interest rates are simply acting to increase speculation, not as a stimulus. It’s time to cool things off, albeit slowly, and let the recovery be a “real recovery” and not devolve into speculation. The recovery doesn’t need another correction to cause the bears to scurry back into hibernation and corporate boards to pull back in expansion and investment plans.

How strong was job growth in March?

The presidential candidates are squaring off on March job growth, which seems stronger than previous months with what Bush describes as “308,000 new jobs.” In order to evaluate their views, I looked at the Bureau of Labor Statistics “Employment Situation Summary,” which is the source of the job growth number.

Nonfarm payroll did indeed increase by 308,000 in March, with unemployment essentially unchanged at 5.7 percent. So the real question is, why would the unemployment rate be unchanged if — to quote Bush yesterday — “People are finding jobs….America’s families and workers have reason to be optimistic.”

On the positive side, the BLS report does show that payroll growth was spread across sectors, instead of being concentrated in government hiring, as it was in February. Construction payrolls are up by 71,000 jobs, which is probably to be expected given the onset of spring and construction season. Service industries absorbed most of the growth, with 230,000 jobs in aggregate. These were fairly evenly spread across retail, professional services, education, “leisure and hospitality,” and government.

On the negative side (for economic policy), precisely zero jobs were created in manufacturing in March. Kerry attacked this record yesterday, saying that “there is not a single month of this administration that has seen the creation of a single manufacturing job.” I’m sure that’s true, but it’s unclear to me how Kerry will either, unless his anti-offshoring incentive plan works.

Also, it appears that within the retail sector’s 47,000 new jobs, retail food stores accounted for 13,000 of that due to the ending of a strike. This is an oddity of using the BLS data for evaluating policies — these are not new jobs, but they’re considered “not fully employed” during the labor dispute. So the real number of new jobs is probably closer to 295,000 in March.

The real key to the lack of strength in this report, however, comes from looking at continued growth in part time work “for economic reasons” (meaning hours were cut or job seekers could only find part time work). The number of persons employed part time for economic reasons increased in March to 4.733 million from 4.328 million in February, a net increase of 298,000 people who aren’t working full time. About half of this increase comes from workers whose hours were cut due to “slack work or business conditions”, and the other half are individuals who could only find part-time work.

If we were to measure unemployment by including the folks who have exhaused their benefits, or have stopped looking for work because they haven’t found a job in over a year, or have accepted part time work instead of full time work, the rate would 9.9 percent, not 5.7 percent. This is down 0.1 percent from last year at this time, and essentially unchanged throughout the last 12 months (except for a brief improvement last month due to government hiring).

In sum, the numbers are showing only microscopic improvement, and mostly through the expedient of not looking at “under employment” too closely. The “jobless recovery” continues in March. Bush can (and will!) spin these numbers to portray himself as leading a strong economic recovery, but the picture hasn’t changed. The broader economy is still fairly flat, and it’s merely the stock market that’s hot right now, in a little “mini-bubble.” But that’s another story entirely…