Thinking dark thoughts
While many excuses for the weak figures are possible— and will duly be set out below—the fact is that strong job creation, which has averaged 200,000 monthly since the US labour market began expanding, has provided the clearest and most consistent evidence to negate the past year’s declines in industrial production and other indicators cited to support claims that a US recession was imminent or may already have begun. While the case for a recession remains unconvincing, those of us whose main counter-argument has been the virtuous circle of employment growth leading to income growth, leading to consumption and still more employment, must recall John Maynard Keynes’s famous dictum: “When the facts change, I change my mind.”
The key question is whether the facts really have changed. Or were Friday’s shocking figures just a temporary aberration, a lagging indicator of the seasonal soft patch already revealed by first quarter GDP figures? Or maybe it was simply a random blip to be expected every now and then in a series whose sampling error is officially stated as plus/minus 115,000 at the 90% confidence level. This means that if the true increase in employment is 200,000 then a report that is either below 85,000 or above 315,000 can be expected every year or so.
As it happens, Friday’s headline figure of 38,000 was actually 72,000 once adjusted for the 34,000 jobs that were temporarily subtracted due to the Verizon strike which was resolved a few days after the survey date. Once we add back these jobs the “unprecedented” data for May actually looks no worse than the temporary setbacks that have occurred since 2010 with roughly the annual frequency expected: in March 2015 (84,000), December 2013 (45,000), April 2012 (75,000) and May and July 2011 (73,000 and 70,000). The possibility that May’s payrolls were simply a statistical aberration is supported by the very low level of initial unemployment claims and strong hiring intentions reported by the National Federation of Independent Businesses and many proprietary surveys. But unfortunately, a purely statistical explanation for May’s grim figure is undercut by the weak job growth also reported for April, revised down to just 123,000. It is this sequence of two consecutive months of much weaker than average job growth that gives real cause for concern.
Which brings us to the economic forces that could be behind an abrupt employment slowdown, if Friday’s data do not turn out to be just a statistical blip. The grimmest explanation is the one that Charles has frequently suggested: misguided monetary policies and manipulated prices in financial markets signals may have caused such extreme misallocation of resources that the US economy is now sliding into a severe recession caused by collapsing profits, falling wages and extreme pessimism among consumers and private entrepreneurs.
But three more benign possibilities are worth considering, at least until we see whether May’s very weak performance is confirmed in subsequent months:
1) A highly plausible, even inevitable, reason for a slowdown in job growth is that the US economy is now close to full employment. Even taking account of May’s very poor performance, job creation this year has averaged more than 150,000 monthly. That is well above the number of roughly 100,000 cited by Janet Yellen in her speeches as the job creation necessary to match US demographic expansion. At some point, a slowdown to around that pace of job creation was bound to happen—and perhaps that point has arrived.
2) There has long been a contradiction ever since 2010 between fairly strong employment growth and unusually weak GDP growth. The result has been abysmal productivity performance, despite the obvious advances in technology occurring in so many sectors of the US economy. Perhaps this productivity gap is now beginning to narrow. This could mean US GDP continuing to grow at the rate of 2-3% established since early 2009 and real wages starting to rise significantly, while employment substantially slows.
3) Finally, there is the possibility that the US economy has genuinely weakened in a lagged response to several shocks that occurred in the second half of last year: the correction in stock markets, the panic over China, the collapse of oil prices, the strengthening of the dollar and the loss of confidence in emerging markets. To these upheavals could be added the political uncertainties created by the Brexit referendum, the European refugee crisis and the unexpected twists of the US presidential campaign. Counteracting all these pressures, we now have the near-certainty that monetary policy will remain extremely relaxed, with the rate hike previously expected in June or July now off the agenda—unless, of course, next month’s employment statistics completely offset or revise out of existence the grim news of last week’s payroll report. That was the most plausible explanation for Wall Street’s bullish reaction to the “shock, horror” news on Friday—and unless there is further bad news from the US economy or global politics, the bulls still have a good chance of being proved right.