Monetary policy is a thankless task these days. The trends are muddled, the numbers are in doubt, and every new data point unleashes a torrent of debate about what comes next as well as what just drove by. It doesn’t help that the stakes are fairly high too, i.e., inflation may or may not be a resurging threat.
Today’s October employment report delivers a fresh batch of numbers and new supply of fuzzy outlooks. Nonfarm payroll jobs rose by a seasonally adjusted 92,000 last month, the Bureau of Labor Statistics reported today. That’s the lowest since October 2005, when the blowback from Hurricane Katrina temporarily impaired the jobs machine. With no scapegoat this time around, last month’s thin rise in employment looks like the byproduct of a slowing economy. Jared Bernstein the Economic Policy Institute assumes this view, and offers some analysis today on that score.
But the more you look at the latest jobs report, the more nuanced it appears. Yes, an increase of just 92,000 new jobs looks discouraging and dangerously close to levels that look like a precursor to recession. On the other hand, the unemployment rate fell to 4.4% last month–the lowest since May 2001. One question to ask: are the foundations of recession laid on the back of falling unemployment? Since June 2003, when unemployment in the current cycle peaked at 6.3%, the trend ever since has been fairly consistently down.
At some point the trend will end, and no doubt we’re closer to the finish now than we were a year ago. Economic cycles haven’t been banished, despite the Fed’s best efforts. Then again, the magnitude of the cycles are smoother and less volatile, courtesy of central bank decisions that arguably have become more enlightened over the years. The goal of keeping expansions alive longer and minimizing the fallout from contractions has found a degree of success over the years. But such success has its costs, including the fact that employment booms aren’t what they used to be, which suggests that contractions may be milder and shorter too.
The counterspin is that the unemployment rate understates those looking for work. But the flaws were present in the past as well, and so the unemployment rate over time offers a fairly consistent profile of trend, flawed though it may be in terms of the absolute numbers. In any case, it’s reasonable to assume that the trend is reliably accurate; if so, the trend clearly reflects declining numbers of unemployed.
It’s also instructive to look at a breakdown of the employment picture last month. Virtually all of the weakness in the jobs picture comes in the so-called goods-producing areas of construction and manufacturing. Combined, the two groups shed 60,000 jobs in October. But goods-producing employment is a fraction of total nonfarm employment at about 16%. Suffice to say, employment trends in the United States aren’t dependent on what unfolds in the goods-producing industries. Manufacturing employment has been declining for years and so at this late dates it’s not persuasive to declare that the economy’s in trouble solely because this industry’s losing workers. That’s been true for 20 years or so, and yet the economy seems to have weathered the trend.
So, where’s the growth? Services, of course. The services sector overall harbors 84% of nonfarm employment. As a result, if you want a representive sample of employment trends in America, look first and foremost to services industries, such as retail trade, professional and business services, and education and healthcare businesses. By that measure, the trend is up. Services employment rose 152,000 last month. That’s a 1.6% jump, the fastest since March. Job creation is services, in other words, is alive and well, and for the moment at least the pace of creation is accelerating.
All of which leads us back to the Federal Reserve, which, we submit, faces more evidence today that the labor market continues to percolate, a trend that makes the notion of cutting interest rates that much more remote. Yes, there’s a risk that fallout from real estate may still deliver more pain. But the question is whether the pain will overwhelm the jobs machine now on view in the services sector? Judging by the latest numbers, the answer seems to be “no.” But pessimism, like its counterpart in hope, also springs eternal.