Monday, August 12, 2013

The Myth of the Accelerating US Job Market

On August 2nd, the Bureau of Labor Statistics released the July employment report. The economy added 162,000 jobs, 13,000 fewer than expected and the fewest since March. Revisions to May and June indicated that the economy added 26,000 fewer jobs during those months than previously estimated. Through the first seven months of the year, the US economy added an average of 192,000 jobs per month. While that is the best performance over the first seven months of the year since 2006, the average is skewed by a 332,000 job gain in February. April was the only other month in which the number of jobs added exceeded the average. While the unemployment rate fell from 7.6% to 7.4%, this was partially due to the 0.10% decline in the labor participation rate, which, at 63.4%, remained among the lowest levels of the last 30+ years. The employment to population ratio remained the same at 58.7%, also among the lowest levels of the last 30 years.
While the US economy is adding jobs, the narrative of the accelerating job market is a myth. How can that be, you ask, given that we have added more jobs in the first seven months of 2013 than in any year since 2006? First, remember that job growth in 2007 and 2010 was exceptionally weak, averaging less than 100,000 jobs per month. Secondly, remember that the US economy lost an average of 361,000 jobs per month from 2008 through 2009. Finally, the rate of change on a year-over year basis has remained rather constant over the last 18 months. The rate of job growth peaked at 1.9% year-over-year in February 2009 and has ranged from 1.5% to 1.8% since then (Chart 1). In short, the economy is adding jobs, but the rate at which it is doing so stopped accelerating 18 months ago!

Furthermore, the weakness in the US job market is not limited to the number of jobs being added to the economy. It is also a function of the types of jobs being added. Too many of this recovery’s job gains have been in low paying sectors of the economy. Of the 162,000 jobs added in July, 47,000 were in retail employment and another 38,000 were in food services and drinking establishments. That is fully 52% of the jobs gained and these are typically low wage positions. Over the past 12 months retail and food and beverage jobs have accounted for 352,000 and 381,000 new jobs, respectively. Combined that is about 32% of all new jobs. Simply put, the US has added an abundance of low wage, high turnover jobs to the economy in the last 12 months. This is neither a picture of robust job growth nor a recipe for income growth and consumption.  
Also issued last week was a report from the Bureau of Economic Analysis detailing personal incomes and expenditures in June. In the year through June, incomes rose 3.1% while an inflation gauge, the Personal Consumption Expenditures price index, climbed 1.3%. In other words, after adjusting for inflation, incomes were up about 1.8%. During this recovery, nominal income growth has remained weak and real growth has been boosted by a lack of inflation. In fact, real incomes in the US have been on a decidedly downward track since the late 1990s (Chart 2). Furthermore, the decline in real incomes in 2012 is rather disconcerting given the massive jump in dividend income in the 4th quarter of the year, the second largest on record, that resulted from the pulling forward of bonuses and dividends due to potential tax implications of the fiscal cliff. Worse yet is the average rate of real income growth over rolling three year periods (with a 12-month roll). Don’t be fooled by the upturn in the last two data points. This simply reflects the fact that the US economy underwent its steepest contraction since the Great Depression during 18 of the 36 months that ended in 2010. The average real (i.e. inflation-adjusted) income gain through the three years ending in 2012 was 1.83%. That period included three years of recovery and ended with the second largest quarterly gain in dividend income in history, yet real income growth was lower than any period from 1992 through 2008 (Chart 3). Simply put, real income growth has been anemic, the job market is not accelerating, and the jobs the US economy is adding are poor income generators.