Unemployment in the US is back down to five-decade lows of 3.5%. That’s the latest from the Bureau of Labor Statistics (BLS) employment situation report released on Friday.
Despite the surge in the federal funds rate throughout 2022, the job numbers seem to be going from strength to strength, with the BLS’s reporting showing an increase of 223,000 in nonfarm payrolls (NFP) for the month of December.
This was well above consensus estimates of 200,000 but moderated from initial November data of 263,000.
Is that good news? Great news? More like incomplete news.
What did the report say?
The average job creation per month for 2022 was 375,000, as opposed to between 150,000-200,000 prior to lockdowns.
The sharp rise in job creation in the past two years follows the mass layoffs and great resignation that occurred amid the viral outbreaks.
In December, jobs gains were made primarily in leisure and hospitality (67,000), health care (55,000), construction (28,000), and social assistance (20,000).
Although still above the pre-pandemic trend, the monthly jobs number is clearly settling into a declining trend over the past few months.
Source: BLS; October and November data reflect downward revisions
Crucially, average hourly earnings continued to rise, increasing by 0.3% in December, and up 4.6% over the year.
The annual and monthly average hourly earnings moderated from 4.8% and 0.4% in November, respectively.
Source: Bureau of Labor Statistics
Even though wage growth has been occurring, this is well below CPI (which you can read about here), resulting in a loss of earning power.
As wage growth continues to moderate, surveys suggest that consumer expenditure expectations are waning (commentary of which is available here).
The BLS’s employment situation report publishes two different indicators – employment level and nonfarm payrolls (jobs), which each come from separate surveys – the household survey and the establishment survey, respectively.
The two measures do not imply the same thing.
Roughly, employment refers to persons (16 years or above) who have worked 1 hour or more over the week in which the survey was conducted. This could be in a professional organization, their own company, or a farm.
In the case of a family enterprise, unpaid workers are also included if they work more than 15 hours during the week.
Employment also includes workers who were temporarily absent from work under a variety of scenarios including vacation, illness, personal issues, and a host of other reasons.
The key point is that while tallying up the employment number, each worker is only counted once, even if they are working in multiple jobs.
On the other hand, nonfarm payrolls drawn from the establishment survey theoretically count all US workers leaving out farm employees and some other categories such as proprietors, private household employees and unpaid volunteers.
However, this number is vulnerable to double counting, especially if workers are employed in multiple jobs at once.
The employment level could also be susceptible to overcounting or disguising underemployment, given that in many cases the respondents need only have worked one hour to qualify.
The total employed population of the United States in December 2022 was measured at 159,244,000.
Total employment has risen by 717,000 since November 2022, when it was pegged at 158,527,000.
That sounds pretty impressive until we realize that the numerical strength of part-time workers increased by 592,000, or nearly 83% of that 717,000.
Of these part-time workers, 190,000 comprise those who are available for full-time work but had to settle for a part-time schedule.
402,000 workers did so due to childcare issues, family, or personal obligations, or joining school or training, among other reasons.
Perhaps more importantly, full-time employment has continued to decline in the US, having slipped from its peak this year of 132,743,000 in May, to 132,299,000 in the most recent report.
Source: BLS, FRED Database
That means 444,000 full-time positions have disappeared in the US over the past 7 months, as opposed to the idea that recent jobs reports have been relentlessly resilient in the face of unprecedented tightening.
Full-time roles were virtually unchanged in December, having declined by 1,000.
However, since May, the total employment level has risen by 945,000, even though, as discussed, full-time roles have been squeezed.
This implies that an increasing number of people are being let go from full-time work, taking up part-time positions, or even accepting additional work to support themselves and their families amid rising living costs.
This suggests that the strong employment headlines we are seeing are primarily a function of the uptake of part-time workers, while full-time roles are going off the market.
Perhaps being anxious about future economic prospects, companies and businesses are more comfortable engaging fractional workers than previously thought.
Mike Shedlock, a well-known economic blogger and registered investment advisor, has been one of the strongest proponents of the idea that the job market has been weak, stating,
This is not strong employment growth… The internal details have been weak for 9 month…
The latest numbers also saw revisions that reduced employment increases in October and November by a total of 28,000.
Moreover, average hours worked fell by 0.1 hours during a week, demonstrating further weakness.
This is the second consecutive month of declining work hours. A tenth of an hour may not sound like much but multiply it by 159,244,000 employees and it’s 15,924,400 hours less work.
U-3 versus U-6
The US government calculates multiple measures of unemployment.
The most popular is U-3 and as discussed, is at historic lows of 3.5%.
While the unemployment rate has been under 4% since February 2022, the number of unemployed persons dropped by 278,000, to a total of 5,722,000 in December.
The U-6 on the other hand is rarely invoked, and yet, it gives a much more accurate picture of the job market.
It includes the unemployed as in U-3, but also the underemployed, those who have returned to school or have lost work due to disability.
At present, U-6 is at 6.5%, nearly double U-3, and signals a much higher degree of distress in the labour market than has ordinarily been acknowledged.
Although both measures are at historic lows, that’s when we remember the volume of exits from the labour force over the last few years.
Source: FRED Database
Since the pandemic, there has been an exodus of workers from the labour force due to factors such as retirement, health concerns, strong portfolio returns in the financial markets and a rising proportion of discouraged workers.
This trend is a source of distortion for unemployment rates and are making them appear better than they actually are.
In the latest Fed minutes, FOMC members acknowledged that certain measures of employment other than U3 indicated that the job market may not be as robust as portrayed by headline numbers.
Fed policymakers acknowledged that restoring price stability sustainably may not be as easily achievable as earlier thought, noting that,
…risks to the inflation projection as skewed to the upside.
This has only added fuel to the fire, with market participants already doubting the institution’s resolve to maintain its stated rate pathway.
Given the continuing weakness in the employment situation, not to mention the sinking housing market (which you can read about here), the pullback in manufacturing activity and the “compressed lag” effect (an article on which is available here on Invezz), the economy is all set to take the plunge into even harder times.
Small businesses are already gravely suffering under the weight of higher rates and have witnessed a slew of closures.
Although, the Fed called for greater flexibility and optionality moving ahead, the institution is now in precarious territory, although not entirely unexpectedly.
The likelihood that it will resist the urge to loosen monetary policy is relatively low.
In the long run, the rising number of retirees will also lead to more pressure on wages, which likely means that inflation isn’t done with us yet.
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