Willie Powell & my blog on today's (confusing) jobs numbers. We put the last year in context. Contrary to widespread belief, job growth has been near expectations--as surprisingly strong labor demand offsets surprisingly weak labor supply. A 🧵 piie.com/blogs/realtime…
To understand what was expected we use the median forecast from the Survey of Professional Forecasters. Other forecasts were similar. Overall, has slightly outpaced. Here is avg monthly jobs for 2021:
Nov 2020 forecast: 432K/month
May 2021 forecast: 562K/month
Actual: 555K/month
Similar story for unemployment. Back in May (the first forecast that incorporated the American Rescue Plan) the SPF expected the UR to be about 4.9% in Nov, instead it was 4.2%.
(Note, they don’t forecast labor force participation but likely would be worse than expected.)
But not everything has played out as expected, there have been two big surprises: a decline in labor supply and an increase in labor demand. They've roughly offset each other for employment but both have led to higher nominal wages.
(Technical note: we think of labor supply/demand as functions of *real* wages. I'm showing nominal due to a combo of wage illusion and expectation of transitory inflation. Both assumptions becoming increasingly untenable.)
Willie and I decompose the 1.5 pp decline in LFPR since COVID hit and find it is roughly one-third due to population aging, one-fifth due to ongoing weakness, and nearly half is "other." That "other" is both men and women, working age and retirement age.
At the same time there were 0.6 unemployed per job opening, a very tight labor market by that metric.
Different labor market indicators sending different signals. EPOP is still relatively slack, UR more balanced, & U/V and quits very tight. Which is right? The latter two have a lot of merit and worth taking seriously as Willie & I discussed before piie.com/blogs/realtime…
The net result of this is nominal wages well above trend, something unusual if all you looked at is unemployment. Overall, those gains are being eaten by inflation—except for lower-wage workers who are seeing real gains, albeit at a slower pace than before COVID.
Overall, the economy is 5 million jobs short of where it was expected to be prior to COVID. The gap is closing but fiscal and monetary policy should still be accommodative—as they are very likely to be. FIN.
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The problem recently has been in both goods and services. Core goods inflation has typically been about zero but in the run-up to this year had deflation. Now tariff-driven inflation.
And at the same time core services inflation has picked up.
A market slowdown in the pace of job gains, with 22K added in August, bringing the three month average to 29K.
On a percentage basis have not seen job growth this slow outside of recessionary periods in more than sixty years.
The unemployment rate rose from 4.2% to 4.3% (unrounded was a smaller increase).
Wage growth was strong and average hours steady.
All of these are consistent with a marked slowdown in labor supply (due to immigration policy) combined with a continued slight softness in labor demand (as evidenced by the unemployment rate which has been steadily rising at about 0.03 percentage point per month for 2-1/2 years.
But two reasons to be less worried than headline: (1) transitory tariffs & (2) some of this is imputed from rising stock market.
Here are the full set of numbers I'll talk about.
Particularly notable is how much lower market core has been than overall core at every horizon. Note regular core includes imputed items, notably portfolio management fees where the price goes up when the stock market goes up.
Market core is both better predicted by slack and a better predictor of future inflation. It has moved sideways this year. But given that tariffs are (hopefully temporarily) pushing inflation up that suggests that underlying inflation is going down.
The jobs slowdown is here with 73K jobs in July & large downward revisions to May & June bringing the average to 35K/month.
Not quite as bad as you might think because steady-state job growth is much lower in a low net immigration world but unemployment still gradually rising.
A small portion of the weaker jobs numbers in recent months are Federal cuts.
But the bigger issues is the slowdown in private job creation.
My latest @nytopinion attempts to answer the question, "The Tariffs Kicked In. The Sky Didn’t Fall. Were the Economists Wrong?"
Part of my argument is the economy actually has slowed & inflation has picked up, as you would expect.
Plus Trump called off some tariffs and lags.
But there are two broader lessons here:
1. U.S. economy is mostly domestic services. Trade matters but it doesn't matter as much as some of the hype might make you think. (And I confess, I do suffer from TDS, tariff derangement syndrome.)
2. Much of macro is small on a percentage basis. But small things really matter a lot.
0.5% off one year's growth rate and $1,000 per household per year forever are the same. But the former sounds small and the later makes it clear it is a large unforced error.