The U.S. Economy Is Producing Too Many Jobs

by: Steven Hansen

This week Fed Chairman Ben Bernanke critiqued the labor situation in the USA, and concluded:

…..conditions remain far from normal, as shown, for example, by the high level of long-term unemployment and the fact that jobs and hours worked remain well below pre-crisis peaks, even without adjusting for growth in the labor force. Moreover, we cannot yet be sure that the recent pace of improvement in the labor market will be sustained.

It was interesting to me that most pundits and general observers of the employment situation did not have any concerns - and it leads one to wonder why the Chairman would open this Pandora's box in public. [For those interested in understanding how the Fed looks at the labor market, his speech offered insights.] Most economic projections have uncertainty.

One of the major points the Chairman made was the unexplained deviation of employment from Okun's law.

That rule of thumb describes the observed relationship between changes in the unemployment rate and the growth rate of real gross domestic product (GDP). Okun noted that, because of ongoing increases in the size of the labor force and in the level of productivity, real GDP growth close to the rate of growth of its potential is normally required just to hold the unemployment rate steady. To reduce the unemployment rate, therefore, the economy must grow at a pace above its potential.

A graphical look at Okun's law - GDP vs the unemployment rate - showing the divergence beginning in 2010.

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Using jobs growth as the metric, the economy should be expanding more rapidly. Karl Smith posted this week at Econintersect:

Based on both the growth in payrolls and the decline in unemployment historical patterns would lead us to expect real GDP growth of around 4% and nominal GDP growth of around 6.5 - 7%.

Econintersect uses a non-monetary methodology to forecast jobs growth (a non-monetary approach to Okun's Law) - yet we are faced with the same puzzle with the deviation since late 2010. Point blank: the economy is producing more jobs than the economic dynamics since 2000 would have indicated.

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Yet despite Okun's Law, the jobs grow in 2012 is accelerating and is finally on a trajectory away from a "less good" growth rate. A simple chart using the BLS non-adjusted data demonstrates. When data is analyzed year-over-year it provides a simple seasonal adjustment.

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From mid-2010 through December of 2011, the change in the rate of employment growth remained in a downtrend or a stall pattern. Traction began with the January data - and continued into February.

Two months of improving data is not a trend - but it is definitely not a negative sign. Chairman Bernanke seems concerned that there is a disconnect between expectations and reality. It seems the Chairman favors the formula, and the excess jobs creation is just an temporary deviation.

As a skeptic of the use of historical data in the New Normal, I choose not to look this gift horse in the mouth.

Other Economic News this Week:

The Econintersect economic forecast for April 2012 was released on Saturday showing a less good growth. There has been a slight degradation in our government and finished goods pulse points.

ECRI has called a recession. Their data looks ahead at least 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown but the recession start has been revised to hit around mid-year 2012.

This week ECRI's WLI index value is zero - the best index value since August 2011. This is the tenth week of index improvement. This index is now indicating the economy six months from today will be the same as today.

Initial unemployment claims series (seasonally adjusted) was completely revised from 2007 onwards. Therefore it is ludicrous to even talk about ups and downs this week. Consider this week is a baseline week. Note the Department of Labor press release says the 4 week moving average fell 3,500 to 365,000 (last week the 4 week moving average was 355,000 so in reality this is an increase of 10,000).

Old initial weekly unemployment claims from last week:

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The "new" initial weekly unemployment claims:

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Data released this week which contained economically intuitive components (forward looking) were rail movements and CFNAI. Depending on the color of your glasses, one could draw several conclusions - my take is that all is still good but I am at a higher alert level looking for any economic outliers as the data is mixed.

Bankruptcies this Week: DRI, Thomas Group

Failed Banks this Week:

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.