Politics trumps jobs

So, it was a false alarm. By that I do not mean the Brexit vote, which remains, for reasons explained at the end of this note, the biggest threat to the world economy and to risk assets since the global financial crisis. The false alarm was the brief panic about a US recession caused by the slump in employment growth reported last month.

As I said at the time, there were four possible explanations for the shockingly weak May payrolls. Sampling error alone means that monthly reports will understate true employment growth by 115,000 roughly once every year. Secondly, as the US approaches full employment, monthly job creation is bound to slow from the 200,000 monthly average since 2010 to around the 100,000 rate implied by labor market demographics. Thirdly, productivity may be picking up from the abysmal and anomalous levels of the past few years, and if so 2% to 3% GDP growth would be consistent with slower employment growth. Finally, the US economy really could be sliding into a recession, or at least hitting some serious speed bumps, perhaps because of the policy mistakes and capital misallocations suggested by Charles.

While just one additional data point is not sufficient to draw definitive conclusions, Friday’s blowout payroll report of 287,000 (or 252,000 when adjusted for returning Verizon strikers) supports the first purely statistical explanation (see chart). It is also consistent with the idea of a gradual tapering of job growth towards a steady-state path well below 200,000, since the average monthly job growth (adjusted for the Verizon