Thoughts on Jobs Day

Today’s jobs report is a lot like the last one and the one before: mixed signals.  The unemployment rate is unchanged at 5.5 percent. Payroll growth is positive but timid at 126,000 when economists had apparently expected twice that.  Seven cents were added to the average hourly wage, which is faster than normal. And finally, worst of all, continuing the trend of the past 5 years, the labor force declined by nearly 100,000 people.

Those are mixed signals, but it is exactly what I expected. The most alarming central fact of the economy’s new normal is that it is bleeding people. Here’s a quick and dirty facts from BLS data on the labor force participation rate overall (LFPR) and the rate for people between the ages of 25-54.  This disproves the contention that the change is just about demographics.

-3.5  = Change in LFPR since 2007
-2.2  = Change in LFPR 25-54 since 2007
+1.1  = Change in Unemployment rate since 2007

When the Federal Reserve looks at today’s report, it has to conclude that this may be as good as it gets. Frankly, you do not want to see the unemployment rate get much lower than 5.5 or else it will signal an overheating economy.  The last time the unemployment rate went below 5 percent, it was 2005. But they were being pushed down by ultra low (at the time) interest rates set by the Fed in 2003. Real estate markets were inflated. Starting in mid 2004 – when the unemployment rate was exactly what it is today (5.5%) – the Fed began raising interest rates, which it did multiple times to cool the engine. We all know how that ended. Consider:

-3.4  = Change in LFPR since 2004
-1.8  = Change in LFPR 25-54 since 2004
+0.0  = Change in Unemployment rate since 2004

This is the new normal. So why is LFPR down three and a half percent?  That’s the magic question.

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