America is creating jobs — but they’re not well-paid jobs, and they don’t seem to be going to the previously unemployed.
Today’s headline figure is certainly impressive: 195,000 new jobs were created in June, in the wake of a super-strong 207,000 new jobs in May. But the headline unemployment rate went nowhere, stuck at 7.6%, while the broadest measure of underemployment, the U6 unemployment rate, saw a worrying and substantial rise, to 14.3% from 13.8%.
Good jobs, like those in government, continue to get cut, while most of the jobs growth came in the most low-wage sectors, like hospitality. And while the data on wages was pretty healthy, remember that wage data applies overwhelmingly to people who have been employed for some time, rather than to people newly entering the workforce. Basically, if you’re employed, you’re doing OK, but if you’re underemployed, the options available to you — the new jobs being created — are pretty underwhelming. Partly as a result, the number of discouraged workers — people who have given up looking for work because they can find nothing available — has gone up, sharply, to more than 1 million.
This report is going to have no visible effect on Fed policy. The Fed has no employment-growth target: the thing it cares about, on the jobs front, is unemployment. So when it comes to measures like tapering and rate hikes, the survey which matters most is the household survey — the employment status of American households — rather than the establishment survey, which measures the size of total US payrolls. Theoretically, the two surveys are two different ways of measuring the same thing, but in practice we’re seeing in the jobs report exactly the same thing that we’ve been seeing for most of the recovery: businesses reporting healthy numbers, with workers in general, and people looking for work in particular, seeing little benefit as a result.
The markets are jittery, on this illiquid holiday weekend, with the yield on the 10-year bond soaring more than 20bp to almost 2.7%. By the standards of recent history, that’s extremely high — but it’s worth remembering that on an absolute level, it’s still very low. The combination of aggressive monetary policy and a very weak economy managed to bring rates down to unsustainably low levels, and the bounce back to something a bit more normal was always more likely than not to be chaotic and weirdly timed.
But that said, the rise in long-term rates will surely only serve to delay, at the margin, any tapering by the Fed. Monetary conditions are already significantly tighter now than they were a month ago; the last thing the Fed needs to do, with unemployment still well above target at 7.6%, is try to make them tighter still by tapering. The doves on the FOMC will of course want to keep the current accommodative stance unchanged, while the hawks will for the time being be placated with the idea that the bond market is doing their job for them.
Ultimately, however, neither Fed policy nor long-term interest rates are actually going to have much effect on the unemployment rate. US corporations are loaded up with cash; they don’t need to borrow money to invest in new jobs, and insofar as they do need to borrow money, most of them have already done so, locking in the low rates we saw a few months ago. As a result, the path that the borrowing rate takes from here on in is not going to determine the velocity with which we reach the key Fed levels of 7% and 6.5% unemployment. (The first is the point at which the Fed starts thinking about tapering; the second is the point at which the Fed starts thinking about raising the Fed funds rate.)
So what’s left? Fiscal policy could help, in terms of reducing unemployment, but it won’t: the sequester is still in effect, and Congress has zero willingness to use government money to create jobs.
Which means that job growth, from here on in, is entirely going to be a function of the private sector. When, and how, will America’s cash-rich and profitable corporations start using the money they’re making to hire Americans who are currently unemployed? The healthy headline figures in the establishment survey indicate that we’re moving in the right direction, albeit not fast enough. And the stock market will help, too: companies will need to start growing in order to justify their current share prices. With any luck, corporate growth will mean employment growth.
As for the government, the base-case scenario is essentially neglect. The legislature will do nothing to improve things, while the Fed will do nothing to hinder the recovery. The ball is in America’s court.