The Labor Market is Recovering Well and the Case Strengthens for the Fed to Normalize

by: Zach Bethune, Thomas Cooley, Peter Rupert

The Bureau of Labor Statistics release of the October jobs report showed continued steady improvement in the US labor market. Total non-farm payroll employment increased by 214,000, just slightly below the average monthly gain of 222,000 observed over the previous twelve months. Moreover, September employment gains were revised up by 8,000.

empchgm-2014-11-07

While the gains were broad-based, the bulk of the increase occurred in private service sector at 181,000. Employers are increasing their work force at both the extensive margin (jobs) and the intensive margin (hours). Average weekly hours increased slightly as did average hourly earnings.

avghours-2014-11-07

ahe-2014-11-07

The official unemployment rate moved down to 5.8%, the lowest rate since July, 2008, and the U-6 rate (Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force) fell to 11.5%. The employment to population ratio and labor force participation increased.

uu6rate-2014-11-07

epr-2014-11-07

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Transition Rate Up for Long-term Unemployed…

While the median unemployment duration ticked up in October from 31.5 to 32.7 weeks, the rate at which workers are finding jobs has shown steady improvement. Since early 2014, the unemployment to employment transition rate has increased for all workers, particularly for those unemployed less than 14 weeks.

UE-rate-duration-2014-10-03

The number of employees working part-time for economic reasons (PTER) has also declined as the number of persons stating they could only find part-time employment fell by 115,000. This group of workers has been a focus of the Fed in describing the ‘slack’ still existent in the labor market.

parttimefrac-2014-11-07

In the figures below, we show the rate at which these workers either return to unemployment or find full-time work. The transition rate into unemployment has entirely returned to its pre-recession level. PTER workers are not losing their jobs as frequently as during the depths of the recession. However, we do still see that these workers aren’t finding full-time employment at the rate they once did before 2007. In fact, the transition rate from PTER into full-time employment hasn’t shown any signs of improving in the previous 5 years, despite accommodative monetary policy.

rate-pter-unmp-2014-10-28

rate-pter-fter-2014-10-28

 

 

This is all evidence of a healthy, recovering labor market.  Some of the overhang of the great recession will be with us for a long time. For instance, people unemployed for long durations are going to move only very slowly back to employment because long spells of unemployment erode skills and diminish employability.  Stimulus policies will not impact these workers very much – only targeted skill building programs will.

 

A Fed Call to Arms?

Given that the labor market now seems reliably recovered and GDP growth is steadily positive it seems to be time for Fed  to put aside its fear of the consequences and restore normalcy to monetary policy.  It is important not only because of the dangers of waiting too long but also because of the hidden costs of the current policy. Keeping the Federal Funds rate at zero for an extended period has distorted economic decisions and financial markets as investors search for yield and seem to take on more risk. It has also arguably increased income inequality precisely because of the wealth effect the policy was designed to create. Moving back to a normal monetary policy need not be disruptive and should enhance the Fed’s credibility going forward.  The graph below shows the Federal Funds rate implied by the Fed’s earlier announced goal of a 6.5% unemployment rate. While everyone realizes that is not the current goal it illustrates the case for a return to conventional monetary policy.

taylor-rule-2014-11-08 taylor-rule-deviation-2014-11-08

 

Q3 GDP: Continued (Sporadic) Recovery

by Zach Bethune, Thomas Cooley and Peter Rupert

GDP Report

The BEA announced in the advance estimate that real GDP increased at a s.a.a.r. of 3.5% for 2014 Q3. The estimate is down over a percentage point from the 4.6% growth rate in the second quarter, although it is still in line with the average pace of growth during the current recovery of 2.16%.

gdprealchgm-2014-10-30

 

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The growth in GDP was led by an increase of 1.8% in personal consumption expenditures which also cooled off from its 2.5% rate in the second quarter. Other components contributing to the increase were exports (7.8%), nonresidential fixed investment (5.5%), and both federal (10.0%) and state and local (1.3%) government spending. The increase in federal defense spending (16.0%) was the largest since 2009 Q2. Defense spending and inventories have a habit of reversing in subsequent quarters so it is not necessarily a robust improvement in the outlook.

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Real personal income increased at an annual rate of 3.2%, up slightly from its second quarter growth rate of 2.9%.

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ahe-2014-11-01 eci-2014-11-01

 

 

 

 

 

A day before the BEA release, the FOMC released this statement on October 29. The FOMC ended Q3, but kept the possibility that if things deteriorated they could drag it out again. The statement was guarded when talking about recent conditions (highlighted text is ours):

…economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow.

 

The most significant early signal of improvements in the labor market came from the employment cost index ( abroad measure that includes benefits) which, after months of staying flat, showed a sharp spike up in recent months.  Average hourly earnings are also moving higher in recent months.  Fed watchers will be watching this closely in the coming months to see if it portends increasing price pressure elsewhere in the economy. Nevertheless, the most likely outcome for the near future is that inflation will continue to be below target and interest rates will continue at their current level.

More Jobs Follow More Q2 GDP

 

by: Zach Bethune, Thomas Cooley, Peter Rupert

The past week has seen upward revisions to the initial estimate of Q2 GDP: from 4.0% growth to 4.2% growth in the second estimate to 4.6% growth for the final estimate, following a negative growth rate in Q1. That report was followed today by the September Jobs report that showed an addition to total non-farm payroll employment of 248,0000.  These are all positive signs. The key question is whether they show enough improvement in the labor market to stiffen the resolve of the Fed to ease its foot off the accelerator.

LABOR MARKETS

The Establishment Survey from the BLS released on October 3 indicates that Total Nonfarm Employment increased 248,000 in September, slightly beating expectations that ranged from 200k to 220k. Private employment increased 236,000 and 207,000 of that was in service producing jobs. In addition, July employment was revised up by 31,000 and August up 38,000.

empchgm-2014-10-03

The Fed has indicated that there is still slack in the labor market, evidently the sentiment reflects part-time workers. In Yellen’s speech at Jackson Hole on August 22, the word “slack” was used about 22 times and “part-time” 7 times. Indeed, those working part-time for economic reasons has fallen to its lowest level, (6.99 million) since November, 2008, roughly a 25% decline since the peak when nearly 9.2 million workers were employed part-time for economic reasons.

parttime-2014-10-03

However, the rate at which those workers are exiting into full time employment hasn’t shown any signs of recovery. In normal times that rate is around 0.45. Since the recession is has fallen and has stayed around 0.37.

rate-pter-fter-2014-10-03

The employment to population ratio seems stuck at 59%…the third straight report with that reading.

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The size of the labor force shrank slightly, down 97,000. Combined with the employment increase, the unemployment rate nudged down to 5.9%. This is the first time below 6% since 2008 but it is partly due to the further drop in labor force participation.

unrate-2014-10-03While a 5.9% unemployment is much closer to normal, the average time spent in unemployment remains elevated. Notice, the median unemployment duration more closely tracks the unemployment rate than the mean. This tells us that there remains a substantial pool of long-term unemployed.

uduration-2014-10-03

To get a better picture, we can look at the rate at which unemployed workers find jobs, broken down by the time they have spent in unemployment in the figure below. The job finding rate for workers with more than 27 weeks of unemployment (green line) has shown very slow improvement. It remains 20% below its level in December 2007. For comparison, the job finding rate for ‘short-term’ unemployed workers, or those less than 5 weeks, is only about 1.3% below its level in December 2007.

UE-rate-duration-2014-10-03The evidence above, combined with the fact that we still don’t see any significant upward pressure on wages, is a clear indication that the labor market still isn’t fully recovered. The prospects for workers that have been unemployed for more than 27 weeks or for workers that took part-time jobs in the absence of finding full time employment remain dim.

 

GDP

The final estimate for Q2 real GDP revealed an upward revision to 4.6% compared to the 2nd estimate of 4.2% and initial estimate of 4.0%. Real GDP for Q1 fell 2.1%.

gdprealchgm-2014-10-02

While the bounce in the revision is certainly welcome, the recovery still looks much different from those in the past, as can be seen below. Current values of real GDP are substantially below the longer-run linear trend…and not showing any convergence.

rgdp-level-2014-10-02

Personal consumption expenditures continue at a sluggish pace, increasing 2.5%, that is, contributing 1.75 percentage points to the 4.6% increase.

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However, there was overall strength in the report. Real Gross Private Domestic Investment was up 19.1% from the previous quarter and is nearing the highest recorded level in 2006:Q1.

investment-level-2014-10-03

Implications

The latest two reports signal continued growth with substantial strengthening. Such continued strength might push some policy makers to rethink the timing of “liftoff” for the Fed Funds Rate. While many have indicated something like mid-2015, another strong showing like we had this week could alter that thinking. But the strengthening of the dollar and the decline in import prices decrease concerns about price pressures and mitigate against a change in stance.

Employment Report and Second Estimate for Q2 GDP: The Dog Days of The Recovery

 

by: Zach Bethune, Thomas Cooley, Peter Rupert

The employment report from the BLS release this morning sobered up many who had anticipated a healthy jobs report: payroll employment increased a lean 142k. The forecasters were looking at employment to increase by about 220k. In addition, employment over the past two months was revised down a total of 28k. This is a disappointment given that monthly job growth has averaged 226,000 jobs in the first seven months of the year. Aside from the downturn in hiring activity the labor market picture remained largely unchanged.  It is neither robust nor stagnant.

empchgm-2014-09-05

Although the unemployment rate ticked down slightly, from 6.2 to 6.1, the labor force fell by 64k.

uu6rate-2014-09-05

lfp-2014-09-05

Average hours and average hourly earnings were basically flat.

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Much of the commentary from the Fed has revolved around the slack labor market and the latest report may affect the stance of monetary policy going forward. For example, from the latest FOMC statement

“If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.”

Last week the second estimate for Q2 GDP released by the BEA on August 28 revised up GDP growth from 4.0% to 4.2%. Business fixed investment largely led the way, contributing roughly 1 percentage point to overall growth.

gdprealchgm-2014-08-29

Personal Income was released on August 29. It showed an increase of .2 % in July.

The recovery continues but at a very slow pace compared to past recoveries. We finish again with the bar chart showing the growth rate of GDP during the current recovery compared with the growth rate during past recoveries.  The stagnation question is still open.

 

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pcebarmonthly-2014-08-30expansion-growth2014-07-30

Slack in the Labor Market: Who are the involuntary part-time workers and what are their outcomes?

by: Zach Bethune, Thomas Cooley, Peter Rupert

The establishment data issued this morning by the BLS showed continued gains in the labor market with establishments reporting an increase in payrolls of 209,000 workers. While it is slightly lower than the last few months, with slower growth in the service sector (140,000), goods producing performed better than the last few months, increasing 58,000. The diffusion index, however, fell from 65.3 to 61.9, meaning slightly fewer firms reporting employment gains as compared to last month.

empchgm-2014-08-01

Average weekly hours has remained unchanged over the past three months, sitting at 34.5.

avghours-2014-08-01

The household data revealed a slight increase in the unemployment rate, from 6.1% to 6.2%, with the number of unemployed persons rising 197,000 and the civilian labor force increasing by 329,000. So while the labor force expanded, the hiring did not keep pace, leading to an overall increase in the unemployment rate.

It is also worth noting that, even though employment is increasing, it is not creating upward pressure on wages. Average hourly earnings remained essentially stagnant the past month and have increased very little over the past year.  This is an important reason why the Fed doesn’t see increased inflation pressure coming from the labor market.

Slack in the Labor Market: Who are the involuntary part-time workers and what are their outcomes?

A couple of weeks ago, the Federal Reserve submitted their semiannual Monetary Policy Report to congress in which they outline their current stance on the state of the economy and how that weighs on their decisions about monetary policy.

Following several months of positive reports on the labor market , tepid first quarter GDP growth and strong second quarter GDP growth, the central question for policy makers remains: Is ‘liftoff’ of the federal funds rate near?

The answer to that question in June was no. The answer in July is also no. The expectation appears to be to keep the target for the federal funds rate between 0 and 1/4 percent “for a considerable period after the asset purchase program ends”. You don’t have to read very far into the report to Congress or this week’s FOMC announcement to see why the Fed is so hesitant to move rates. From the first paragraph of the summary (emphasis added):

The overall condition of the labor market continued to improve during the first half of 2014. Gains in payroll employment picked up to an average monthly pace of about 230,000, and the unemployment rate fell to 6.1 percent in June, nearly 4 percentage points below its peak in 2009. Notwithstanding those improvements, a broad array of labor market indicators—such as labor force participation, hiring and quit rates, and the number of people working part time for economic reasons—generally suggests that significant slack remains in the labor market. Continued slow increases in most measures of labor compensation also corroborate the view that labor resources are not being fully utilized.

The July statement from the FOMC highlights the continued concern about labor market conditions (emphasis added):

Information received since the Federal Open Market Committee met in June indicates that growth in economic activity rebounded in the second quarter. Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources.

The July statement adds:

The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

While it is true that unemployment has come down substantially since 2009 and workers are finding jobs, they aren’t the kind of jobs you (or the FOMC) would expect from a healthy labor market. A large fraction of those finding work are those that find part-time jobs despite the fact that they would like to be working full-time, known as “involuntary part-time workers,” that is, employed part-time for economic reasons.
pter-2014-07-18

It is not uncommon in any state of the labor market to find a fraction of part-time workers to be involuntarily working part-time. Not all workers that want full-time work will get it–at least not right away; a part-time job may serve as a stepping stone to full-time work.

However, during the last recession the number of involuntary part-time workers more than doubled. There currently remains a historically high number of involuntary part-time workers. We use data from the CPS monthly survey to ask who composes this group, what types of jobs they hold, and how they transition out of part-time work.

Who are the involuntary part-time workers?

Below we compare the composition of involuntary part-time workers (jobs) across time. To do so, we use micro data from the monthly Current Population Survey (CPS) from 1997 to June 2014. For each month, we identify those workers that are currently working part-time and indicate that they would like to work full-time but cannot because of economic reasons. We ask how the pool of involuntary part-time workers has changed during the recession across 4 characteristics: sex, age, weekly hours, and weekly wages.

PTER-compare2014-08-01

The figure above plots the percentage change in each variable (e.g., age) from its 2007 value for 2009 and 2014. Notice the first ‘bar’ of each variable is set at 0 to represent the values in 2007. We show each variable’s actual value next to the columns. Before the recession, the involuntary part-time workers were equally represented between men and women, were on average 39.8 years of age, worked about 22.5 hours a week, and made $7,570 a week.

At the depth of the recession, in 2009, the pool of involuntary part-time workers shifted towards men (the share of men increased to 53%) and older workers. Hours decreased slightly to 22.36. Average wages increased to $8,490 a week, potentially representing a shift in the types of part-time jobs.

Since 2009, the composition of involuntary part-time workers has mostly returned back to normal. The exception is the average age of these workers which remains elevated.

Do involuntary part-time workers eventually find full-time jobs?

The answer is, on average, yes. However, since the recession the incidence of finding a full-time job has fallen and remains low. The longitudinal aspect of the CPS survey allows us to follow households over a little more than a year. Below we plot the fraction of all workers who were working part-time for economic reasons a year ago, that reported working full-time in the current period. This represents the probability, or transition rate, of leaving part-time work and finding a full-time job.

rate-pter-fter-2014-07-18

In normal times this transition rate is around 0.45, meaning that 45% of all workers who work part-time but want a full-time job will find one over the year. During the recession, this rate plummeted to 0.35 and has stayed close to 0.38 since. It’s taking much longer for the labor market to clear these involuntary workers into full-time. (If we interpret these rates as Poisson, the average length of time it takes has increased from 2.2 years to around 2.8 years, or 1/.45 to 1/.35.)

Along other margins, the transition rates of involuntary part-time workers have returned to normal, which is good news. They aren’t going into unemployment as quickly as in 2009. While the rate jumped up during the recession it has since returned to around 0.06.

rate-pter-unmp-2014-07-18

There is also no discernible trend of these workers dropping out of the labor force. The transition rate from part-time for economic reasons to out of the labor force has remained close to 0.1.
rate-pter-nlif-2014-07-18

The considerable time it is taking for part-time workers to find a full time job is precisely the ‘slack’ the FOMC is thinking about when it is deciding to stay firm on monetary policy. While the unemployment rate has returned to more acceptable levels, there are many measures that continue to suggest the labor market is not ‘healthy’ and keeps the FOMC on the fence.

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