Is fear about the future of Eurozone eating into U.S. recovery? This certainly could be the case if the recent sentiment among investors away from the stock market and into the less profitable but more stable U.S. treasuries is any indicator. But parking money in safe assets like US treasuries starves the economy of investment, leading to slower economic growth and prolonged unemployment. One thing is certain: as long as the Eurozone problems remain a source of uncertainty, recovery will remain anemic.
The latest BLS employment report reveals that the U.S. economy created only 69,000 jobs in May, far below the 150,000 consensus expectation. The unemployment rate has increased slightly to 8.2%. While the Bureau of Economic Analysis released its first quarter 2012 GDP figure of 1.9 percent actual growth rate versus the projected 2.2 percent estimate. Earnings also remain below inflation. The numbers add up to serious weakness in the economy.
Weakness in the labor market with a silver lining in manufacturing
The number of long term unemployed (those who have been looking for work for more than 26 weeks) rose from 5.1 to 5.4 million and accounted for 42.8 percent of the total unemployed. The labor force participation rate has increased by .2 percent to 63.8 percent, but the increase offsets April’s decline — the bottom line is that the rate has not changed significantly.
The labor force participation rate is significant in that it mathematically changes the unemployment rate (the more people drop out of the labor force, or stop participating, the lower the unemployment rate will be) and affects how many jobs the economy needs to produce to return to a lower unemployment rate, such as that seen before the 2008 crisis. Atlanta Fed’s neat post shows that the higher the labor force participation rate is, the more jobs per month need to be created to return to 7.5 unemployment rate by 2013. If you use this nifty calculator, to reach 7.5 percent unemployment rate a year from now, the economy needs to produce 185,321 jobs a month. To reach a more realistic target of 8 percent unemployment a year from now, we need at least 124,316 jobs a month.
While the baby boom generation leaving the workforce is one factor responsible for the decline in labor force participation seen in recent years, especially worrisome is the decline in the labor force participation of those in the 16-24 age group. In the 1970s, nearly 70 percent of those in the 16-24 age range were working; today only about 55 percent are. In the 24-54 age group, labor force participation dropped to 75.2 percent, well below the historic low of 78.2 percent.
Standard wisdom suggests that the reason for the low labor force participation of young workers is that many of these workers are in college, but a recent study by the Economic Policy Institute concludes, “There is no evidence that young high school graduates have been able to “shelter in school” from the labor market effects of the Great Recession; college and university enrollment rates for both men and women have not meaningfully departed from their long-term trend since the start of the Great Recession.” Many young workers are simply staying home because there are either no jobs or the jobs that are available do not pay enough; both signs of a very weak job market, regardless of any other employment indicators.
The reason why this is particularly alarming in the case of those in the 16-24 age range is that the longer these young workers remain out of the job market, the less likely they are even to enter it. But where would a significant number of Americans who never entered the job market go, once they reached their 30s and 40s?
The number of those employed part time but seeking full time employment rose to 8.1 million. Those marginally attached increased in number to 2.4 million, up from 2.2 million in May of last year. The broadest measure of unemployment (U-6) has risen from 14.5 percent in Aril to 14.8 percent for May. If you look at the chart of U-6, notice that we’re, despite a downward trend, still so much higher than we were were at the height of the 1990s recession.
Still, this measure may underestimate the true unemployment picture because the broadest measure does not include those who have dropped out of the labor force. The number of those not in the labor force has risen from 85,864 in May of last year to 87,968. Of those, the number who are willing and able to return to the labor force has risen from 6,821 in May of last year to 6,835. The bottom line is that there are millions who, in addition to those officially unemployed (around 12 million) wish to work.
Below is a chart showing the percent of those who are working part time because they can’t find full time work or because they had their hours cut back. Bottom line: jobs-wise, we’re more or less where we were at the height of the 1980s recession (compare the position of the red boxes). What’s interesting is that, given the U-6 rate and the information from the chart below, we’re not officially in a recession even if the job market certainly seems to be where it was during previous recessions.
The bright spot in the report is the trend in manufacturing, which saw gains on average of about 41,00 jobs in the first quarter of this year and 12,000 in May. Since January 2010, manufacturing employment generated nearly half a million jobs. Overall, the economy is struggling to produce jobs.
The two surveys
Some have noted the positive 422, 000 job growth in the BLS household survey. Some background is necessary here to appreciate what his may or may not mean.
The BLS measures the employment and unemployment picture in two very different ways. One is the establishment or the payroll survey (showing a gain of 69,000 for May), which measures employment based on payroll records of a sample of businesses across the county. The other method is the household survey, which measures employment ( at 8.2% in May) based on questions posed to a sample of households across the country. The chart below shows the difference between the two estimates. USPRIV is the payroll survey; LNS12035019 is the household survey. For May, the household estimate is higher, possibly reflecting more self-employment among American workers.
The GDP has been revised downward to 1.9 percent. This is from the 2.20 percent projected growth rate of the economy. Below is the GDP chart comparing real and nominal GDP. Slow growth is bad news for unemployment because a slowly growing economy will not create wealth, which translates into fewer jobs being created.
Weak earnings and low wage jobs: dropping out can be a better option
Even if you do have a job, you’re not making enough, on average, to stay above inflation. Overall, average hourly wage earnings have failed to keep up with inflation, as the chart below shows.
Related to weak earnings is the issue of low wage jobs, or jobs that pay less than $10 an hour. Normally such jobs served as training ground for new workers, most of whom were teens, or as transitional employment. Consequently, there was substantial turnover in that sector. But recent trends are seeing stickiness in that low wage sector, suggesting that the low wage job is becoming a life-time job for many who lack the skills or the education to compete for better paying work. Since 1979, the share of workers working low wage jobs has risen from 22 percent to 28 percent by 2009, far beyond the fraction of workers working in low wage jobs in other advanced economies.
These are not jobs that will ever offer anything approaching a middle class lifestyle or even keep one above poverty. (someone earning $10 an hour working full time for a total of 2,000 hours a year will make less than the official poverty level of 22,891.)
Given these realities of low wage work and overall failure of wages on average to keep up with inflation, one can speculate why the labor force participation rate has been falling: those with little education and few skills, with little or no experience, are consigned to low wage work and poverty. One way out is to drop out altogether.
Where are these people vanishing to? Many are going to school, but that’s not where the bulk of them are. With a nonexistent welfare safety net, many are opting for disability, as shown by the chart above constructed by Julie Hotchkiss of the Atlanta Fed. Perhaps the most interesting it the mysterious “Other” category.
Applications for disability have tripled in the last decade to 3 million a year, with the biggest increase seen in mental health disability claims because mental conditions are among the difficult to verify conditions that make it easier to qualify for benefits. One report suggests that 5 million workers have left the working world for disability since 2008.
The SSDI program provides 1,000 a month of income on average, which is about what a low wage job pays — and the best part is that you don’t have to do any work. This is a good option in a bad economy for those who lack stills or education or opportunity to get an education — they are assured a lifetime of free money. See this story about a 27 year old woman on mental health disability.
It all adds up to a very soft recovery and a troubled jobs picture.
Add to this the fact of the record low (-1.2%) spread on five year United States Treasury Inflation-Protected Security (TIPS) and you get the feeling that the top 1 percent is fearing an economy that’s likely to get even worse. Indeed, that we’re looking down the barrel of another crisis.