A year ago, as the Fed was about to embark on its third large-scale asset purchase program (QE3), the policy focus shifted to the labor market. In announcing QE3, the Federal Open Market Committee indicated that purchases would continue “if the outlook for the labor market does not improve substantially.” A year later, how much improvement have we seen?
Recall that the employment report is comprised of two separate surveys: an Establishment Survey, which yields data on nonfarm payrolls, hours, and earnings, and a Household Survey, which gives us the unemployment rate. The first covers about 145,000 businesses and government agencies representing around 557,000 individual worksites. The government has to make some estimate about business formation, but figures are benchmarked once a year to payroll tax receipts (and revisions tend to be small). The Household Survey is based on a sample of about 60,000 households. That doesn’t sound like a lot, but it’s enough to generate reasonable measures of ratios, such as the unemployment rate and labor force participation.
The unemployment rate peaked at 10.0% in October 2009 and fell to 7.4% in July of this year. However, most of that decline was due to a decrease in labor force participation. Some of that, perhaps a quarter, is demographics. As the baby-boom generation moves into retirement, the participation rate will fall. However, most of the decline in participation is due to discouraged workers. If an individual gives up looking for a job, that person is no longer officially “unemployed.”
There is also a lot of underemployment. One measure is part-time employment. There have been many stories about a “rise” in part-time employment, and most of these have tied that to the Affordable Care Act. Talk to any small business owner and you’re likely to get an earful about the “prohibitive” costs of Obamacare. Yet, you’re not seeing that in labor market data. Over 70% of part-time employment is “voluntary.” This includes teenagers, college students, and those with childcare or healthcare issues. The rest are either working part-time because of slack demand or part-time employment may have been the only thing available. The percentage working part-time due to economic slack has been trending lower as the recovery has advanced. The percentage working part-time because that was the only thing available has been trending flat over the last few years, notably at a higher level than before the recession. There’s no evidence that the ACA has boosted part-time employment, but it may have prevented a decline in part-time employment. Small business owners say they do not have a clear idea of their future labor costs. However, they face many other issues besides healthcare costs. Credit to small businesses is still relatively tight, and those that have the resources are reluctant to expand until they see a sustained increase in the demand for the goods and services they produce.
The growth in nonfarm payrolls and the unemployment rate are important gauges of labor market strength. However, Federal Reserve officials will consider a wide range of indicators as they decide whether to begin reducing the pace of asset purchases and by how much. Fed Vice Chair Janet Yellen has indicated that hiring and quit rates are still relatively low, suggesting that the job market is far from “strong.”
A month ago, Yellen was seen as the likely successor to Ben Bernanke. However, the odds have now swung in favor of Larry Summers, who has strong support in the Obama administration. Both candidates are highly qualified to lead the Fed and monetary policy would not evolve much differently between the two. Yellen tends to be more soft-spoken and would lead by consensus. Summers would be more confrontational. I spoke to one reporter who was giddy about the prospect of Summers as chairman. There would be a lot more to write about.
© Raymond James