Job fizzle hides gains
“The odds are that there’s still a sustainable economic upturn under way.”
In a scenario we’ve seen before, an encouraging spurt of U.S. economic expansion has given way to what some see as a disappointing fizzle, marked by a sharp drop in the pace of job growth.
With yesterday’s news that employment south of the border grew by only 115,000 in April, far below the anticipated 160,000, stock markets in the U.S. and Canada fell as investors feared that the U.S. is bogging down in another period of substandard growth.
Happily, that interpretation is almost certainly wrong. While U.S. growth has slowed since winter, possibly putting a temporary chill on Canada, the odds are that there’s still a sustainable economic upturn under way.
The evidence is all over the place, if you know where to look.
First, take a look at the job numbers themselves. They’ve established a pattern for several months now of being revised upward. (unlike Canadian job figures, U.S. ones are subject to revision).
Thus the feeble job number for April could end up much higher once it is revised. March employment, for example, came in originally at a disappointing 120,000, but the revised March figure announced yesterday is a much more robust 154,000.
Why the upward revisions? Because U.S. job numbers are compiled from employer payrolls and the hardest jobs to count are those that are scattered among large numbers of little firms, a group that now accounts for a big chunk of the new employment.
After a couple of years when big business was driving employment gains, small business is finally beginning to expand, responding to a long-awaited thawing of bank credit. (Big concerns don’t depend nearly as much on bank loans, since they can issue bonds or new shares to raise money.)
With small business finally optimistic enough to hire, its job gains are harder to count, forcing statisticians to rely partly on estimates. When the real numbers come in stronger than expected, this results in upward revisions, notes Paul Ashworth, chief U.S. economist at Capital Economics.
Of course, the picture isn’t entirely bright.
Yesterday’s U.S. unemployment rate edged down one tick to 8.1 per cent, but only because some people dropped out of the labour force. This can be a sign of discouragement among those who can’t find jobs that fit their skills.
On the other hand, says Ashworth, it’s unwise to rely only on this pessimistic interpretation. The participation rate, which measures the percentage of adult workers in the labour force, has been falling ever since 2000, he notes.
Some reasons: the phenomenon of women establishing careers pushed up the rate for years, but about a decade ago, it seems, about as many women had entered the workforce as wanted to be there. Among younger adults, many are remaining in school longer and longer.
And finally, baby boomers are starting to retire.
Since workers, for whatever reason, don’t seem to be entering the labour force in response to job growth, Douglas Porter, deputy chief economist at BMO Capital Markets, believes that unemployment could fall faster than many expect this year.
He notes that with only 151,000 jobs per month created on average over the past year, unemployment has fallen all the way to 8.1 per cent from last May’s 9.0 per cent.
Porter and several other analysts believe that job gains will actually be stronger than this over the remainder of this year, averaging somewhere between 150,000 and 200,000 jobs per month. Monthly gains that average 176,000 could leave unemployment just below 7.9 per cent by year-end, estimates Sophia Koropeckyj of Moody’s Analytics.
One analyst with a stellar record of explaining what’s going on in the U.S. economy, Ian Shepherdson of High Frequency Economics, is more optimistic. His forecast is for average job creation in the neighbourhood of 230,000 per month.
So, apart from the possibility that some small-company jobs were initially overlooked, why did April look so bad? Analysts point to two culprits: a period of high gas prices, which are now falling, and the very warm winter weather, which stole some job creation from spring months as construction and other seasonal industries were able to hire early.
Looking ahead, though, things look better.
A good predictor of future hiring, the number of new claims for unemployment benefits, has just dropped sharply, suggesting a firming job market.
At the same time, there are strong indications that the supply of bank credit and, equally important, the demand for it from households and businesses is growing strongly. This suggests a sustained uptrend in growth and job creation.
Of course, we shouldn’t get too excited. The pace of these gains is still modest by the standards of past recoveries, something that is predictable in the wake of a severe financial collapse. However, it does seem clear that the trend is positive.
jbryan@montrealgazette.com