U.S. Jobs Update: All Looks Normal

Sep. 02, 2022 4:53 PM ETSPY, IVV, VOO, VTI, DIA, IWM, QQQ5 Comments
Mike Smitka profile picture
Mike Smitka
296 Followers

Summary

  • The latest jobs numbers show the U.S. economy is back to normal.
  • Employment is at the demographics-adjusted trend, not much slack.
  • Participation rates are also back to normal, except for ages 20-24.

Folded sheet of paper with an unemployment graph on

JLGutierrez

Data

I can't get contractors to answer my phone. My son, though, likes his factory job, a 4-day, 12-hour workweek that gives him overtime and a three-day weekend. One of his high-school classmates is in the last year of nursing school. I know a bunch of contractors, they all have had the same complaint for years: they can't get good people to switch.

So we continue to see structural mismatches that affect the economy. Nothing's new there. Coming out of World War II, 15% of the population worked in agriculture and related industries; today it's 1.5%. Manufacturing used to be 33% of employment; it's now 8.4% (see the chart at the bottom).

So here are three charts that back up my claim of normalcy.

Employment

The light blue line is total employment. To put it in context, I do two things. First, I look at the data going back to 2006. You can see the big drops (red!) during the Great Recession, and again during the peak of the pandemic quarantines. After 2010, the recovery was slow but steady. The emphasis should be on slow: it took 9 years to get back to the demographic trend. The bounce back from the pandemic was more dramatic, and quick. Nothing surprising there, but the key is that we are again back to trend, given our aging population.

Employment

Employment (BLS Data and Author's Calculations)

Participation

Another way to approach the issue is to look at participation rates. An almost constant share of the population of men and women aged 25-59 were in the labor force in the decade leading up to 2007, so I use the level of January 2007 as the base. (I don't detail here, but since 1948, participation by the high-school age bracket dropped from one-half to one-third, while the share of those 60 and older has risen fairly steadily since 1994, when data on older age brackets was first included in the monthly reports.)

Again, what we see is that participation in the labor force by prime age workers is back to trend. Unlike during the Great Recession, that happened quickly.

Participation Rates

BLS Data, Author's Calculations

Labor Force Dynamics

We see the same thing if we look at labor force dynamics. Job losses are as low as they've been in the 40-plus years of data. Unemployment is low. Frictional unemployment - the black line reflecting job changes - is as low as ever. So the economy has little slack. Again, no news.

Entry & Exit from Labor Force

BLS Data, Author's Calculations

Conclusions

There's nothing in the current data release to indicate either an overheated economy, or the start of a recession. Instead, what we see is a return to normal.

So from an inflation standpoint, there's nothing in this jobs report to support any change in direction. Investors instead need to delve into the details of what is rising, and falling, and why. The start of our inflation stemmed from the side effects of the pandemic. Early on, the shortage of new and especially used cars accounted for half of the price increases. We're not out of the woods yet, as pandemic-related supply chain issues continue to have an impact, but I expect that to change in the next 6 months, with price drops replacing price increases. It's harder to know what will happen to energy prices, given the global nature of price-setting and the uncertainties around the economic side effects of Putin's invasion of Ukraine.

But that's not the jobs report, so I'll stop now.

Cautions

One is a warning that we shouldn't bet on the re-shoring of manufacturing - there just isn't the capacity to do so given the dominance of services in our economy (which is true as well for Europe, Japan and Korea, and increasingly of China).

Manufacturing and Healthcare Shares

Manufacturing is a Small Share (BLS Data and author's calculations)

Second, price increases are now more widespread. Will that change when car prices start declining? Here's the "flexible" price index from the Federal Reserve Bank of Atlanta. When energy and automotive prices turn down, will other inflation components follow? But again, those aren't issues tied to today's jobs report.

Flexible Price Index

Federal Reserve Bank of Atlanta and FRED

This article was written by

Mike Smitka profile picture
296 Followers
I'm a retired academic economist. Over the decades I have focused on research on the auto industry and on the Japanese economy. But I was also a banker and worked in factories, and for the past 27 years have visited suppliers for business case and engineering presentations on innovations, as a judge for the Automotive News PACE awards. As such, I've visited about 50 suppliers, in Korea, Japan, the US, Canada and France. (I've visited another 50 or so via other activities.) I'm also on the steering committee of the GERPISA consortium of auto industry researchers, and was on the committee planning their annual global conference in Detroit, which was replaced by a virtual conference. I am active in the Industry Studies Association. I'm the co-author of Smitka and Warrian (2017), A Profile of the Global Auto Industry: Innovation and Dynamics, now available via Amazon as an inexpensive eBook.I first lived in Tokyo in 1975, after graduating from Harvard with a degree in East Asian Studies. My econ PhD is from Yale; the Nobel Laureate Oliver Williamson was my dissertation chair. I've spent 7 years in Japan, and have spent 2 months or more in China, Korea, Germany and the Philippines. I read, write and speak Japanese, and read German and Chinese.My current research interests are technology in the automotive supply chain, and the geography of the Chinese industry. My investing is passive, via my university's TIAA retirement plan.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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