Is US Job Growth Accelerating?

The February employment report was unambiguously positive. Sure, the labor force participation rate ticked down 0.10% to 63.5%, matching its lowest level in more than 30 years. But that is not a significant divergence from its average of the last 12 months or so. Additionally, at 58.6%, the employment-to-population ratio remained among the lowest of the last 30 years. While low participation and population-to-employment rates are absolutely cause for long-term concern, neither figure was materially lower than its average level of the last year and the economy added 236,000 jobs. As such, the February report, as a single data point, was certainly positive. Yet the fact remains that the US added 355,000 jobs in the first two months of 2013, about 39% fewer than the 582,000 added during the first two months of 2012. While the first two months of this year are still subject to revision, it’s unlikely that revisions would add anything resembling the 227,000 job difference between this year and last year. Additionally, while the first two months of 2013 appear far better than the first two months of 2011, when the economy added 265,000 jobs, the economy added 509,000 from February through April of that year after a weak January. In short, the first quarter of 2013 is very likely to see fewer jobs added than the first quarter of 2012 and the economy would have to add 209,500 jobs in each of the next two months to match the first four months of 2011.

 

We decided to review the performance of the employed market since the start of 2011. While the recovery began in the second half of 2009, the economy continued to lose jobs throughout the year and the data for 2010 is distorted due to the hiring and layoffs associated with the decennial census. Over the last 26 months, the economy has added an average of 179,000 jobs with a median of 170,000. While that wouldn’t be bad for the tail end of a normal recovery, it’s downright weak given the fact that the US economy lost 8.736 million jobs from February 2008 through February 2010. We note that it is not unusual for the economy to continue to shed jobs early in a recovery or to add jobs in the early months of a recession. While the economy has added an average of 179,000 per month over the last 26 months, the gains have been erratic, ranging from 69,000 in January of 2011 to 311,000 in January of 2012. We also note that the second best month, a gain of 304,000 jobs, occurred in April of 2011, three months after the lowest figure, and three months ahead of the second lowest. In short, the US economy has added jobs for 26 consecutive months, but there has been no discernible trend in the pace of job growth. About all we can say at this point about February’s employment report is that the number of jobs gained was the fifth largest in the last 26 months, placing it in the top quintile over that period.  
 

 

The monthly jobs report can be very volatile. As such, we decided to look at the data on a rolling quarterly basis, rolling by month. Once again, we see a significant lack of consistency. The average number of jobs gained over rolling three month periods during the last 26 months was 543,000 with a median of 555,000. The best three months period witnessed a gain of 812,000 jobs while the worst was a gain of 324,000. Over the three month through this past February, the economy added 574,000 jobs, just above the median level over the 24 rolling three-month periods in question. That number was lower than the three months through January, which itself was lower than the final three months of 2012. In fact, the gains in the last three months were only good for the 10^th best over the 24 rolling three-month periods. In short, over the last three months the US jobs market performed slightly better than it had over the typical three month period over the last 26 months.

Another issue to consider is whether the depth of the recession in the 4^th quarter of 2008 and the 1st quarter of 2009 has distorted seasonal adjustments. These two quarters were by far the worst of the contraction and historically deep contractions have also witnessed steep recoveries. However, this recovery has been very shallow. As a result, there have been no large positive quarters of growth offsetting the steep declines in the 4^th quarter of 2008 and the 1^st quarter of 2009. ECRI (Economic Cycle Research Institute) has suggested that this may well be resulting in an upward bias to seasonal reports during the 4^th and 1^st quarters of the year as the recession data is seen by the adjustment process as a permanent seasonal weakness. This would result in an upward bias in the adjustment process. In short, the seasonal adjustment process may well be overcompensating for perceived seasonal weakness, thus making 4^th and 1^st quarter data look better than it is. That may well explain the strength in the 4^th and 1^st quarters that seems to dissipate in the 2^nd and 3^rd quarters.

In a recent article, ECRI noted that to a reasonable method for addressing the possibility that seasonal adjustments are exerting upward pressure on the data is to review annual growth rates, which they did for the employment data (http://www.businesscycle.com/ecri-news-events/news-details/economic-cycle-research-recession-in-the-yo-yo-years). Using data from the Bureau of Labor Statistics, we have recreated two graphs from ECRI’s article. The graphs indicate the annual change in total non-farm payrolls and the annual change in the household survey. The former is used to determine the number of jobs gained or lost while the latter is used to determine the unemployment rate. Both data sets indicate that year-over-year employment growth is slowing. Year-over-year growth in non-farm payrolls peaked in February of last year at 1.9%, with a gain this past February, which is subject to revision, of 1.5%. Meanwhile, the household survey indicates a more significant weakening of employment growth. After peaking at 2.2% in June of 2012, it has declined significantly since last October, registering a gain of 1% year-over-year in February.  

 

 

The February employment report was unambiguously positive, yet it remains to be seen whether the US job market is establishing a trend toward a strong employment market. The job market showed similar signs of improvement early in 2011 and 2012 only to slow significantly through the middle of the year and then strengthen once again late in the year. We are not suggesting that employment is rolling over. On the other hand, talk of a strengthening job market that will support growth in consumer spending is premature and the job market may indeed be weakening. In short, evidence suggests caution in counting on a strengthening employment market as a trigger for a deeper, healthier expansion.