The Denominator Prevails

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The BLS reported what was on the surface another lackluster payroll report. All the headline numbers conformed to the slowed economy view of 2016. The Establishment Survey gained just 156k in December, following an upward revised 204k in November. The 6-month average, a far more appropriate interpretation given inherent statistical volatility month to month, is just 189k. The Household Survey has gained only 189k total, not per month, over the last three months, where the number of full-time jobs estimated within it has been flat since July.

That possible shift coincides with what is perhaps the most important internal aspect of the payroll report, a serious and still developing slowdown in work. The average of weekly hours worked was only 34.3 in December, matching the lowest since 2011 (August 2016).

Year-over-year, hours were up only 0.9%, after rising just 0.3% in November (and contracting in August). For 2016, the year-over-year gain was more than 2% in only four months, just two since May. The 6-month average is a paltry 1.2%, a sharp deceleration from 2.3% to end 2015, and the lowest since the start of QE2 in 2010.

Without hours, earnings continue to be stuck in the same 2% range. The 6-month average of weekly pay for production and non-supervisory employees is exactly 2%, exhibiting still none of the acceleration that is usually found at so-called full employment. In the past, as the unemployment rate neared and dropped below 5%, weekly earnings would rise sharply consistent with the orthodox idea of "slack" being used up. In this case, as had been the case for several years, there isn't the slightest indication of earnings moving up. Instead, it is the lack of acceleration against a sub-5% unemployment rate that does much to damage the credibility of the unemployment rate.

The reason, as always, is because of its denominator. Apart from the 6 months related to SNAP work requirements being re-imposed in a significant number of states, the labor force has been essentially flat since January 2015. Given that it had not expanded all that much before that point, the result is an unemployment rate that is applicable to a narrower and narrower subset.

Since the end of 2012, the labor force has grown by only 1.5 million in the 42 non-SNAP months, and by 2.4 million within those 6 months. Over the same time, 48 months, the civilian non-institutional population gained 10.3 million new people. At best, not even 40% of potential new labor made it into the labor force; at worst, it was something like 1 in 7. This trend is, unfortunately, perfectly consistent with labor and utilization behavior for the whole of the Great "Recession" and its aftermath.

Going back to the pre-crisis peak in November 2007, the civilian non-institutional population has added 21.6 million new potential workers, but the BLS counts only 5.7 million of them in the official labor pool. The unemployment rate is therefore "missing" as many as 16 million, though not all of them would have been working or looking for work.

Economists had convinced themselves that these 16 million didn't matter. The fact that wages and earnings continue to be subdued was always an important indication that this was more wishful thinking than actual analysis. In the severe economic re-evaluation policymakers have done since the middle of last year they have come to realize that rather than being unimportant, these "missing" were all that mattered. They still offer no answer for their part as to why the economy has been so stunted after the Great "Recession", leaving them to suggest only Baby Boomer retirement and skills mismatch (whatever that would be).

I have to believe that this clear labor market slowing in 2016 played a conclusive role as to why the FOMC essentially rewrote the standards for recovery and basic economy. Even as the headline figures slowed in 2015, the unemployment rate was deployed time and time again as if the only statistic that mattered for the future trajectory of the economy even though practically every other economic account signaled trouble and desperate times ahead. After all, an economy actually at full employment would experience significant and obvious acceleration especially after being depressed for so many years prior. The succinct summation of this last gasp, full-recovery view was "transitory", as in temporary weakness.

When softness continued and actually accumulated in 2016, being seen even in the Establishment Survey, policymakers, already faced with a credibility gap, could no longer maintain their prior economic stance. "Transitory" would have meant that QE had worked, just with a delay; the rate hike in December 2016 instead signifies they now view it as if QE could never have worked, because questions about the denominator in the unemployment rate were actually more appropriate than they realized, and more meaningful than almost any other statistic.

I recalled last month where Janet Yellen in 2014 said that she expected 3% to 4% wage gains (not even earnings) "would be normal." With earnings stuck at 2%, and the labor force still stagnant, and now labor utilization declining in broad and concerning fashion, the Fed ended its involvement anyway.

The FOMC has thrown in the towel for all of it. We are at full employment, they have declared, and that means whatever you see today is it. There is no further recovery coming; it's all over and done with, even if that means the most basic tradeoffs once the bedrock of economic associations are all shrunk.

It is the participation rate that everything has gravitated toward over time; from eurodollar futures to the yield curve to retail sales and even GDP, the lack of labor deployment is the lack of economy is the lack of recovery at any point. Though they should not be given much if any credit, it's not nothing that Federal Reserve officials finally figured it out. In that way, it is still important to see how Economics (capital "E") is an impediment to common sense.