May jobs report disappoints

I warned you last month that the Disappointing April jobs report may reflect global economic slowdown:

In April, the International Monetary Fund (IMF) warned the world economy is growing too slowly:

The “increasingly disappointing” world economy is facing the threat of a “synchronised slowdown” and mounting risks including another bout of financial market turmoil and a political backlash against globalization, the International Monetary Fund has warned.

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The IMF said the world economy was increasingly vulnerable to “downside risks” including further market turmoil in the wake of this year’s China-led downturn as well as the political consequences of lackluster growth since the 2008 global financial crisis. [EU “austerity” measures were abandoned only last year. European austerity is over.]

“Growth has been too slow for too long,” said Maurice Obstfeld, the IMF’s chief economist, warning of a widespread sense that too many people were being left behind.

Looming on the horizon is the June 23 referendum in Britain to leave the EU (the “Brexit”), which if it passes portends the possible demise of the EU. EU referendum: Europeans in Britain fear Brexit vote. See also, ‘Brexit’ Vote: Why Britain Could Quit E.U. and Why America Cares.

The May jobs report continues to reflect that slow down and is below what economists had projected.  Steve Benen has the May jobs report. Job market’s hot streak comes to a screeching halt in May:

Headed into this morning, many projected U.S. job growth of about 158,000 in May. Unfortunately, the actual number was much, much worse.

The Bureau of Labor Statistics reported this morning that the U.S. economy added a woeful 38,000 jobs in May, the worst monthly total since September 2010, nearly six years ago. The overall unemployment rate dropped to 4.7%, though that’s cold comfort given the number of jobs created.

As for the revisions: March job totals were revised down, from 208,000 to 186,000, while April’s totals were also revised down, from 160,000 to 123,000. Combined, that’s a loss of 59,000.

Let’s go ahead and state the obvious: this isn’t good. In fact, it’s one of the worst jobs reports — if not the worst — since the end of the Great Recession. But let’s also make clear that there’s no reason to panic. May’s job totals will be revised twice more; the impact of the Verizon strike matters; and in recent years, we’ve seen other sharp drops in job totals, only to have the employment market bounce back.

Here’s another chart, this one showing monthly job losses/gains in just the private sector since the start of the Great Recession.

Still, a report this bad is cause for concern, and the anxiety is compounded by the fact that should the economy need a [stimulus] jolt, the Republican-led Congress won’t give it one.

Justin Wolfers writes for The Upshot at the New York Times that The Jobs Report Is Not Quite as Terrible as It Looks:

The latest employment report — typically the most timely and accurate measure of the state of the business cycle — suggests that the economy is slowing. Employers added only 38,000 jobs in May, and revisions suggest that they created 59,000 fewer jobs over the previous two months than initial estimates suggested.

It is worth bearing in mind that this is noisy data, and the economy rarely zigs or zags as often or as dramatically as any initial set of numbers suggest. A better gauge of the underlying rate of jobs growth is to take an average over the past three months. By that measure, the labor market is creating around 116,000 jobs per month. This is a notable slowdown from jobs growth in the 150,000-250,000 range over most of the past five years. But it’s a slowdown and not a sudden stop.

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It is likely that this month’s report overstates the extent of the slowdown. A strike at Verizon cut payrolls by about 35,000. A mild winter led to higher employment levels in the first part of the year, which leads to lower growth as employment has since reverted to seasonal norms. Then again, Jonathan Wright, a professor of economics at Johns Hopkins, has published an improved algorithm for adjusting for seasonal fluctuations, and it suggests this report actually overstated jobs growth by about 40,000.

If all of these adjustments suggest that it’s hard to know what the underlying pace of jobs growth is, then you are correct. These numbers are imprecise estimates, and they come with a margin of error of plus or minus 100,000.

No matter what the true numbers are, the jobs report should be interpreted in the context of other indicators that do not show as speedy a slowdown. Putting it all together, the outlook is less rosy, but by no means terrible.

The economy still appears to be reducing unemployment.

There was a time when the working-age population was growing so rapidly that if the underlying rate of monthly jobs growth slipped to 100,000, that would not only be disappointing, but it would also point to rising unemployment. But that’s not today’s reality.

As the number of baby boomers entering retirement continues to rise, the number of jobs the economy needs to create to keep pace with population growth has fallen sharply. A reasonable estimate is that the economy needs to produce somewhere between 70,000 and 90,000 jobs per month to keep the unemployment rate stable. (The Council of Economic Advisers estimates 77,000.) Even after today’s report, it seems likely the underlying pace of growth remains above this.

That is, the economy is still growing faster than its long-run potential rate of growth, and the recovery is continuing.

It’s not that things are getting worse, it’s that they’re getting better more slowly.

Moreover, unemployment is now at historically low levels. The last time the economy registered an unemployment rate this low was November 2007, on the eve of the Great Recession.

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Average wage growth of only 2.5 percent over the past year suggests there remains a lot of potential for the labor market to improve without sparking inflation.

But at some point, slower employment growth is an inevitability.

Forecasters have long suggested that as the economy approaches full employment, jobs growth must slow. By this reckoning, the economy cannot continue to create jobs more rapidly than the labor force is growing without the emergence of bottlenecks. If this is right, perhaps we should get used to seeing employment growth closer to 100,000 per month.

The disappointing news, then, is that the day of reckoning may be a step closer than we had thought.

Jared Bernstein writes at the Washington Post, Okay, that was a lousy jobs report. Now what are we gonna do about it?

So here’s the big question: What can policymakers do to help? Put aside for now whether they actually want to do anything, vs. squabbling about whatever is the political nonsense-du-jour. Imagine, for a moment, a functional system that took seriously warning signs like those in today’s report.

First, there are a number of interesting and potentially helpful economic mechanisms that occur on their own. When the U.S. economy weakens, foreign investors are less interested in holding dollars. Additionally, if they think the weakness means the Federal Reserve is not going to raise rates (which further increases the value of the dollar), they’ll unload their dollars in currency markets and its value against other currencies will fall.

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Similarly, when things look risky, investors jump from stocks to bonds, and this lowers bond yields, as you see in the next figure (when nervousness induces greater demand for bonds, their price goes up and their yield goes down).

But why do I call these tumbles “helpful?” Well, a cheaper dollar is a more competitive dollar, and that makes a big difference for our manufacturers. In fact, the strength of the dollar in recent months has hurt the factory sector, and durable manufacturing (steel, cars … the heavier stuff) was down 18,000 in May. Over the past 12 months, this important sector has shed 80,000 jobs, a sharp reversal from the addition of 120,000 jobs in the prior 12 months. The stronger dollar, which makes our exports less price-competitive, is a major factor in this unfortunate turnaround and thus the more competitive (a much better term than “weaker”) dollar should help push the other way.

Lower interest rates make investing more attractive, a point with two very strong corollaries right now.

First, my guess is that today’s weak jobs numbers, and more important, the weakening trend in payroll gains discussed above, take a Fed rate hike for June off the table. Thursday, the futures’ market probability of a June hike was about 20 percent. After the release, it quickly tanked to 4 percent.

That’s as it should be, but the problem is, even at low rates, private investment has been “meh,” i.e., not nearly as strong as you’d predict given the low cost of borrowing. Why? Good question, and one which economists don’t have a good answer to yet, though my own view is that long-term weak income growth for all but those at the top of scale is playing a role.

At any rate, whatever the reason, there’s a natural solution to this problem: When private sector investment is weak, the public sector can step in and make up the difference by investing in public infrastructure. That’s an especially great idea when, a) borrowing costs are low … check. b) we seriously need the work on our neglected stock of public goods … double-check. And c) labor demand is flagging, as in today’s report … checkmate!

There’s a wide set of projects worthy of such investment right now, but my favorite two are repairing unsafe water systems and attending to our long-ignored public schools. Both need serious work and both have real, tangible connections to all of our lives.

Now, let’s relax those assumptions about functional politics and earnest policymakers who truly want to help. Clearly, we need to knock these policymakers out of their do-nothing comfort zones on infrastructure investment.

And therein lies the problem: a less-than-less-than-do-nothing Tea-Publican Congress that is ideologically wedded to failed austerity economics. Tea-Publicans have been a drag on economic development and job creation, and infrastructure investment. Kick them out of office and restore economic and fiscal sanity to policy.