There is an old saying in the markets, “Sell Rosh Hashana, Buy Yom Kippur”, and when Yom Kippur falls on the first Friday of the month and coincides with a strong monthly jobs report, there is wisdom in the adage.
Each month we focus on the jobs report and try to tell you everything you need to know; let’s go. The economy added 248,000 net new jobs in September. The unemployment rate dropped from 6.1% to 5.9%, falling below the 6% level for the first time since July 2008. Most estimates had called for job gains in the range of 210,000 to 220,000.
In August the jobs report was far less than expected, coming in at just 142,000 jobs, however, today the August report was revised up to 180,000. And the July number was revised higher from 212,000 to 243,000. So, the two month revisions added a combined 69,000 more jobs than previously reported. The gain in payrolls over the last six months was the strongest for any six-month period since before the 2007-09 recession.
Employment is now up 2.63 million year-over-year. The economy has added 2,040,00 jobs year to date. At the current pace, the economy will add about 2.7 million jobs this year. It looks like 2014 is on track for the best total nonfarm and private sector employment growth since 1999. Total employment is now 1.07 million above the pre-recession peak. Private payroll employment increased 236,000 from August to September, and private employment is now 1,547,000 above the previous peak. Private employment is up 10.34 million from the low.
The Labor Force Participation rate dropped in September to 62.7% from 62.8%, not a big move, but enough to give a boost to the headline unemployment rate of 5.9%. Unemployment declined by 329,000 to 9.3 million and more than 200,000 people got jobs. There are two reasons why the unemployment rate can drop: more people getting jobs or fewer people in the labor pool; today’s report was a combination.
The number of people participating in the labor market is now at a 36 year low; you have to go back to 1978. Part of the reason people leave the work force is because of demographics; the population is aging and people are retiring, sometimes because they want to and sometimes because they just can’t find work. A Federal Reserve paper puts half of the decline to the aging of the baby-boom generation. While there are more older workers than ever, due to increased longevity, better health, and the need to work due to destroyed wealth from the Great Recession, this cohort is still retiring in great numbers.
That same Federal Reserve paper put as much as 1 percentage point of the decline from its 2000 peak of 67.3% due to cyclical factors; that is, people who previously wanted to work and now are discouraged.
The number of persons working part time for economic reasons decreased in September to 7.1 million from 7.2 million in August. These are people working part-time but they would like full-time work, or their hours have been cut back, or they just can’t find full-time positions. These workers are included in the alternate measure of labor underutilization, U-6 that decreased to 11.8% in September from 12.0% in August. This is the lowest level for U-6 since October 2008.
And there are still about 2.9 million people who have been unemployed for more than 6 months and are still looking for a job. This number has been trending lower but is still very high. Many people who have been unemployed for more than 26 weeks lose benefits and just fall off the charts. One in five workers was laid off in the past five years and about 22% of those who lost their jobs still haven’t found another one. Those who did find work had a difficult time with their job search and the effects of unemployment. Nearly 40% said it took more than seven months to find employment and about one in five of laid-off workers said all they could find was a temporary position. And 46% of the estimated 30 million layoff victims who found new jobs said they paid less than their old ones. While job growth has been consistent, it has been insufficient to produce enough full-time jobs for everyone. This has also impacted wages.
Average hourly earnings for all employees on private nonfarm payrolls, at $24.53, down 1 penny in September, but weekly earnings rose by more than $2 because they put in longer hours. The average workweek in manufacturing rose to 42.1 hours in September, near its highest level in more than 60 years. The average workweek across all sectors rose to a post-recession high. Eventually, employers will hire new workers rather than pay overtime, but we’re not there yet. Over the year, average hourly earnings have risen by 2.0%. In September, average hourly earnings of private-sector production and nonsupervisory employees were unchanged at $20.67. For the 80% of workers who aren’t supervisors, however, average weekly pay fell about $2. So, the lower unemployment rate has not yet translated into wage pressure.
Part-time workers have been part of the reason for slow-growing wages. The high number of part-time workers, especially given the broad number that would prefer full-time work, represents a significant underutilization of labor resources which is dampening wage growth. As the job market continues to improve, there is an opportunity for more of these part-time employees to move into full-time work. Eventually these employers are going to have to resolve their resource needs by hiring a qualified worker in the position.
Employment increased in every broad business sector, from manufacturing to hospitality. Services added 207,000 jobs, while manufacturing added just 4,000. The strongest gains were in professional and business, with gains of 81,000, however one quarter of those positions were filled by temp jobs; retail added 35,000 jobs after 5,000 were lost in August. Leisure and hospitality added 33,000; these are sectors that emphasize hourly employees with low benefits; these are also areas that have been leading job gains in the recovery, which might explain stagnant wages. Education and health services added 32,000; construction gained 16,000; finance added 12,000. Government added a net of 12,000 jobs; state and local governments added 14,000 jobs; federal lost 2,000. That’s a major turnaround from the draconian cuts we saw early in the cycle, which was a major drag. State and local government employment is now up 143,000 from the bottom, but still 601,000 below the peak. State and local governments lost jobs for 4 straight years. Federal government layoffs are down 25,000 for the year but it looks like the rate of decline is slowing slightly with just 2,000 federal government job layoffs in September.
Consider these facts from the National Employment Law Project: Lower-wage industries constituted 22 percent of recession losses, but 44 percent of recovery growth. Mid-wage industries constituted 37 percent of recession losses, but only 26 percent of recovery growth. Higher-wage industries constituted 41 percent of recession losses, and 30 percent of recovery growth. Today, there are nearly two million fewer jobs in mid- and higher-wage industries than there were before the recession took hold, while there are 1.85 million more jobs in lower-wage industries. Service-providing industries such as food services and drinking places, administrative and support services, and retail trade have led private sector job growth during the recovery. These industries, which pay relatively low wages, accounted for 39 percent of the private sector employment increase over the past four years.
The September jobs picture was affected by a handful of onetime events, like the return to work of about 20,000 New England grocery store employees who walked out in July, and the loss of jobs at shuttered Atlantic City casinos.
Fed officials are going to have a hard time judging the health of the labor market. The unemployment rate is falling toward the range that Fed officials regard as normal more quickly than they had expected. Most Fed officials predicted in September that the rate would be no lower than 5.9 percent at the end of the year, but the latest data also shows that hourly wages rose just 2 percent over the last 12 months, suggesting that it was still unusually easy for companies to hire workers. In other words there is still considerable slack in the labor market.
The thinking is that the Fed is aiming for 5.5% unemployment, maybe a bit lower, as the target where a tighter labor market leads to faster wage growth and subsequent cost pressures feed through to higher inflation. This is the key reason the Federal Reserve has historically been nervous about keeping its foot pressed on the accelerator when unemployment got this low. But in reality, we don’t know when the wage pressure will kick in based upon the unemployment rate. After all, at the end of the Clinton administration, unemployment was below 4 percent, while inflation remained low and stable. Perhaps we should be looking at a combination of the unemployment rate and the increase in wages above and beyond the inflation rate before we start worrying about wage pressure.
Add in other variables, such as the participation rate, and the fed may need to rethink their target for unemployment, maybe below 5%. In September, 232,000 more people reported being employed and 329,000 fewer people reported being unemployed. The improving job market does not seem to be pulling people who left the labor force over the last few years back into it. In fact the size of the labor force actually ticked down by 97,000 in September. What we really should be looking at is an economy where everyone who wants a job has a good opportunity to get a job.
Fed chairwoman Janet Yellen said last month that she still saw clear problems in the labor market, and that the Fed’s stimulus campaign was still helping to ease those problems. As long as inflation remains sluggish, officials see relatively little risk; they would rather err on the side of pushing a little too hard to create jobs than retreat prematurely.
The economy has added jobs for 55 consecutive months. The September report of 248,000 jobs and 5.9% unemployment was better than expected. It was a very good report. We still have a long way to go, but we are headed in the right direction.