Jobs: A Forecasting Challenge
It's a difficult time to make predictions in economics or politics. Start with the most unconventional presidential campaign in generations, add sharp swings in economic data, and stir the mix with nervous investors. Frustrated business prognosticators may soon be receiving sympathy from weather forecasters.
The release of the June jobs report from the Bureau of Labor Statistics (BLS) fits this recent trend perfectly. May's job report was a shocker, with analysts predicting 164,000 jobs created while only 38,000 were reported. Then, a June rebound blew past the Bloomberg estimate of 180,000 jobs, to stun economists at 287,000. May's numbers were revised even lower to just 11,000 jobs, while April's were revised upward by 21,000, leaving a net downward revision of 6,000 jobs.
Thus, each of the past two job estimates have been off by over 100,000, with average job growth over the last three months at a modest 147,000. The error is nearly the size of the measurement.
How does one make sense of such job data? As a recent blog in The Guardian suggested, "Stop responding to it like Pavlov's dog." The best way is to look at broader trends and compare different measures of the jobs environment.
One positive trend is the broad-based nature of recent job gains. Stronger sustained growth is more likely when one sector is not carrying the entire burden.
The service sector has carried the bulk of job growth, but growth is generally spread across all sectors with one glaring exception: mining (which includes the oil industry). Since September 2014, the drop in oil prices has pummeled this sector with a net loss of 211,000 jobs. Contrast that with the 313,000 new jobs in retail trade over the first six months of 2016.
On the other side of the equation, the unemployment rate rose from 4.7% to 4.9% and the number of unemployed Americans rose by 347,000 to reach 7.8 million. That may seem counterintuitive given large job growth, but those figures are correcting outlier numbers from May. The unemployment rate dropped to 4.7% in May with the worst monthly job growth numbers in years.
The U-6 unemployment numbers, which include the underemployed ("marginally attached workers and those working part time for economic reasons") have been fluctuating between 9.9 and 9.7% since October 2015, but finally broke through, falling to 9.6% in June. 587,000 fewer Americans were employed part-time for economic reasons, overcoming a small increase in marginally attached workers.
The labor force participation rate ticked up slightly to 62.7%, staying within the fluctuation between 62.6% and 63.0% that has been in place since October 2013.
Wages are still rising, fueling hopes that momentum in wage growth can lead to increased consumer spending and more robust economic growth. A modest 2-cent increase in average hourly earnings in June raises the wage increase over the year to 2.6%, slightly outpacing core inflation (2.2% in May).
For now, however, the economic story remains essentially the same: an economy growing slowly over the long term with modest but steady job growth and large monthly fluctuations that mask broader trends. Wage growth may be the key to all this. If wage growth accelerates just enough to avoid sparking a corresponding (or greater) rise in inflation, the difference in higher wages and low inflation means greater spending power for Americans — and the greater likelihood of an economic boost via increased consumer spending.
Interest Rates and the Broader Economy
No discussion of a jobs report would be complete without speculation about the Federal Reserve and the effect on interest rates. Taken on its own, the June jobs report would be a strong factor toward an interest rate hike. However, the 2016 average so far of 171,500 new jobs per month suggests that we are not adding enough new jobs to match current population growth. Moreover, 2016 growth to date is well below the 228,000+ monthly growth rate of 2015.
Other positive signs, such as low claims for unemployment benefits and a high number of unfilled jobs (5.8 million), are likely counteracted by slow wage growth and uncertainty brought on by Great Britain's vote to leave the European Union (Brexit). Thus, while a rate hike later this year remains a possibility, it is unlikely to happen soon. Besides, any move on rates right before the election will be put in a political spotlight regardless of efforts to separate the two.
Taking Political Advantage
While economists try to take the broader view when analyzing economic data, most voters do not. Democrats must be thrilled about the upbeat jobs report. It will logically give them momentum going into their convention this month, and deflects attention from the stinging rebuke given to Hillary Clinton blast week by FBI Director James Comey over her careless e-mail practices. Since the May revision did not drift into negative territory, the Democrats can legitimately claim 76 consecutive months of private sector job growth under their control of the Oval Office.
Republicans could counter that growth has been historically slow for a recovery phase, real median income is below that of 2006, and that wages are barely keeping pace with core inflation — that is, if their presumptive nominee can avoid shifting the subject to Saddam Hussein, Stars of David, border walls, the unfairness of the press, or whatever seems to be traveling through his mind at any point in time.
Of course, any convention momentum can (and probably will) be erased with whatever economic data is released right before the election. With all the rhetoric, incentives, and unpredictable factors in play by then, analysts may be reduced to analysis by dartboard and Magic 8-Ball. Doesn't "Reply Hazy, Try Again" seem to apply?
Just as the May jobs report alone was not cause for alarm, the June jobs report is not cause for popping Champagne corks. Nonetheless, it's a clearly positive sign, and when combined with other economic data – such as the May retail sales jump of 0.5% — the June jobs report indicates continued growth — and at least some indication that growth could begin to accelerate.
External factors such as Brexit could always apply the economic brakes, but the US economy seems surprisingly resilient to these shocks. In the case of Brexit, virtually all the US market losses have been recovered in a matter of a few weeks.
Increased uncertainties of the global economy don't necessarily produce direct fluctuations in the jobs numbers like they do in the stock market, but the uncertainty makes the long-term effects just as difficult to predict for employers as it is for analysts. That affects employers' decisions on hiring and expansion, thus eventually showing up as uncertainty in the surveys used to compile the jobs report.
Will the jobs report continue to be volatile, or will it settle into a more predictable and stable growth pattern as the election approaches? We can't tell. Our Magic 8-Ball says "Ask Again Later."