According to the latest labor market report, U.S. jobs numbers are pointing to an economy that is nowhere near ready for a rise in interest rates. Robust jobs “growth” is simply not there, given the weak manufacturing sector and a troubling inflation outlook. Instead, it appears U.S. jobs growth is moving at its slowest pace since 2013, dragging down the U.S. economy.
Where’s the Jobs Growth in the U.S. Economy?
With the unemployment rate remaining at 5.5% for March 2015, unchanged from February, the U.S. labor market appears healthy. But that small number is misleading. There are some big numbers in the latest nonfarm payrolls data you should pay attention to.
For just a moment, let’s delve into a little Economics 101. Of about 250 million working-age Americans, there are 157 million in the labor force. Of those in the labor force, about 148 million are employed. The remainder are unemployed—about nine million Americans—and that’s how we arrive at the unemployment rate: the unemployed divided by the labor force. (Source: Bureau of Labor Statistics, April 3, 2015.)
About 30% of all unemployed, or 2.6 million, are long-term unemployed, meaning they’ve been out of work for six months or more. Of the 250 million working-age Americans, 93 million don’t even enter the labor force and aren’t taken into account in the unemployment calculation. Of those employed, there are 6.7 million who are working part-time involuntarily. (Source: Ibid.) These are big numbers that shouldn’t go unnoticed.
Factors Affecting U.S. Jobs Numbers: Is Weather to Blame?
The current jobs report also came with revisions for previous months. For February, the jobs gain of 295,000 was revised down 31,000, while January’s number was also revised lower by 38,000. Poof! That’s 69,000 jobs gone—well, jobs that didn’t actually exist.
Some economists have blamed the weak jobs numbers on the weather, similar to the “polar vortex,” which wreaked havoc on the U.S. last winter. That winter’s poor weather was held responsible for the economy’s two-percent contraction in the first quarter of 2014. (Source: Bureau of Economic Analysis web site, last accessed April 7, 2015.) Are jobs affected by unforgiving weather this time around as well?
That’s really the million-dollar question, but the Bureau of Labor Statistics (BLS) provides a clear answer—NO. The bureau keeps track of the number of workers who usually work full-time, but had to reduce their hours due to bad weather. For example, last year in February, a total of 601,000 employed workers stayed home due severe weather. This year (2015) was clearly much milder as only 328,000 workers reduced their hours in February due to inclement weather. (Source: Bureau of Labor Statistics web site, last accessed April 8, 2015.) So, employed individuals worked this winter, but the labor market slack remains.
One must really question that if the weather isn’t the reason behind the poor labor market conditions, then why is the labor market stalling? And will it impact the U.S. economy?
Weak U.S. Jobs Growth: Its Negative Effects on the Economy
U.S. jobs growth, or the lack thereof, and the truly stagnant jobs market rears its ugly head in the less-than-spectacular U.S. manufacturing sector and in the inflation outlook.
Year-to-date, the retail industry has added 60,000 jobs. What happened in more economically critical areas of the jobs market? Well, manufacturing has only added 1,000 jobs, the information industry mustered a 9,000-job gain, financial services added 15,000 jobs, and the construction industry gained 18,000 workers. Over the same period, in the first three months of this year, retail has added 40% more jobs than the above-mentioned industries combined. (Source: Bureau of Labor Statistics, April 3, 2015.)
In other words, significant jobs creation in low-wage-paying sectors and extremely low jobs growth in higher-paying sectors is a combination you don’t want to have when looking for growth in an economy.
However, weakness in an economically critical industry like manufacturing is more than just a short-term trend. Capacity utilization, seen as a measure of slack in the economy, has recovered from its 2009 lows, but has been stagnant throughout the 2000s. (Source: Board of Governors of the Federal Reserve System, March 16, 2015.)
To date, the manufacturing recovery has been largely led by a rise in the production of consumer durable goods. During the depths of the recession, consumers put off spending on big-ticket items, like automobiles and home appliances, and revived purchases throughout the recovery. The manufacturing of these has likely peaked and low interest rates that were used to finance these purchases will not be around forever.
But isn’t manufacturing just one part of the whole? What’s the bigger picture?
Let’s take a step back…
A tightening labor market should result in firms competing for workers, pushing up wages. Prices are a key economic signal and wages paid to workers are just that—a price. So in which direction is the overall price level headed? Sadly, prices remain subdued.
The consumer price index (CPI), a measure of inflation, rose zero percent on an annual basis in February of 2015. While prices for food were up three percent, gasoline was down 33%, and electricity rates were up another three percent—the net effect was zero. (Source: Bureau of Labor Statistics, March 24, 2015.) More importantly, expectations of future inflation are at an all-time low. According to the Federal Reserve Bank of Cleveland, the markets are expecting inflation to stay below two percent even 10 years from now. (Source: Federal Reserve Bank of Cleveland, March 24, 2015.) That’s not a healthy sign, nor does it suggest the U.S. economy will be marching at full steam ahead.
A strong labor market would translate into higher wages and simultaneously push up other prices. Rising prices haven’t materialized in a concrete way and are contributing to market confusion. Investors are hanging onto every word from Federal Reserve Chair Janet Yellen regarding the timing of the coming interest rate hikes. Volatility and confusion are building, leading to a mere one-percent rise in the S&P 500 for the year.
What does this mean? Investors looking to put money to work in the markets should use caution. It’s the only prudent move for them to make given that the Federal Reserve is likely to raise interest rates at its June or September meeting. Higher interest costs will be a shock to a market used to a zero-percent cost of borrowing.