After several months of weak jobs numbers, April’s 288,000 and upward revision of February and March numbers were a solid plus for the economy. Since total hours worked were 2.3% higher than a year ago, the overall level of labor utilization if maintained would be broadly consistent with 2.5% to 3.0% GDP growth in the current quarter which is about what one would expect after the first quarter’s depressed figure preliminarily estimated at 0.1%.
Job gains were widespread with virtually all sectors participating except the federal government.
So far so good for the economy, but one good month for this volatile series does not materially change the outlook for the year ahead. Other data continue to show considerable slack in the labor market. The headline unemployment rate declined from 6.7% to 6.3% but this number continues to overstate the extent of improvement as it mainly reflects the 806,000 people (0.4% of the labor force) who dropped out in April and stopped looking for a job. A drop out number this great is shocking, but should not be attributed entirely to weak labor market conditions because it partly reflects the demographics of an aging population. Other signs of labor market weakness are still there, such as the unusually large number of long-time unemployed and involuntary part-time workers, the latter ticking up again in April. In addition there were 783,000 discouraged people who did not look for work in April although marginally attached to the labor force, about the same number as a year ago, because they felt jobs were not available, but who wanted to work and had looked for work in the last 12 months.
The long-term unemployed (6 months or more out of work), currently numbering 3.7 million, are of particular concern. The total has gradually declined from a peak of 6.8 million in 2010, the highest since the Great Depression. Economists have estimated that only 1 in 10 eventually get full time jobs, a considerably larger number get part-time work, but the largest part it is feared drop out of the labor force contributing to the shocking fall in the participation rate that at 62.8% is about 4 percentage points below the long term average. There is great concern that many of these people will never work again resulting in a permanent loss of potential output.
Of great immediate concern is the fact that Congress has refused to renew unemployment benefits beyond the maximum of 26 weeks. The number losing benefits averaging about $280 per week is expected to reach about 5 million by year-end, which translates into a loss of consumer purchasing power at an annual rate that rises to over $70 billion by the end of this year.
Although the average number of hours worked per week remained unchanged in April, the surge in hiring added 0.3% to aggregate hours worked in the economy as compared to March, and 2.3% as compared to April 2013. Although wages were flat in April, they were 1.9% higher than a year ago (+0.4% after inflation adjustment) and that may help to sustain the consumer spending that accounts for 70% of GDP.
“May help”, instead of “will help”, because the skewed income distribution in our economy and major differences in the balance sheets and access to credit among different segments of the population make it by no means certain that these small wage and job gains will translate into solid increases in aggregate consumer demand that will propel the economy forward. Hopefully we will one day see these monthly employment and income figures broken down by income groups, and accompanied by equally detailed data on asset values and debt levels among different income groups.
As for the market reaction to these numbers, my guess is that it will be fairly neutral. On the one hand it clearly bolsters views that we have a solid recovery ahead over the rest of the year, but on the other hand it will heighten concerns that the Fed may accelerate the taper and begin to raise the Fed funds rate --- withdraw stimulus -- faster than had been anticipated. The 288,000 jobs number comes close to the level that could tip the balance in favor of an early return to higher interest rates, and hence lower stock prices, but it was only one month’s data. Two or three months with 300,000 or more jobs created would likely tip the scales and send the stock market down another 10% or 15%. But as long as the Fed continues to see the need for extraordinary monetary accommodation, as it does at present, stocks should remain buoyant though probably not exuberant.
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