Market watchers got two seemingly contradictory bits of information late last week. First, the unemployment rate hits 4.5% in March; that’s as good a number as we have had since the recession began 9 years ago and it’s well inside the “full employment” levels that the US economy sees in the best of times. So, that’s good news. Here’s the bad news: nonfarm payrolls climbed by 98,000. That’s a lot less job growth than the current trend and about half as many jobs as were expected (analyst expectations were 180,000 new jobs created).
So, less hiring but better unemployment? How does that happen? Is the employment picture getting better or worse? What information will help us determine the answer to this question? First, let’s consider alternative measures of unemployment. There is a theory that unemployment is secretly much worse, but the Federal Government massages the numbers to benefit the reported, headline unemployment rate(U-3) while sacrificing unemployment measures that are more strict or more lenient (U-1 through U-6). This doesn’t seem to be the issue: no matter which definition of unemployment you use (i.e. whether you include discouraged workers or part time workers and other criteria that separate the U1-U6 unemployment ratios); the rate of change between the different levels of unemployment is roughly constant between the different measures.
What else? Well, there is more than one input that goes into the unemployment rate. An instance of this would be labor force participation. Forbes reports that 78.5% of all working age people are in the workforce, that’s the highest participation rate since the 2008 recession. However, there is a large demographic, the baby boomers, which are getting out of the workforce due to age. Given low projected increases in working age population for the short and medium term, about a 1% or so, it could be that a long term rate of 100,000 new jobs created per month is sufficient to maintain a low unemployment rate if there is a significant ongoing decrease in total labor force participation due to retirees.
Finally, it could simply be that the weak job creation number of lost month was a “blip” – a statistical outlier caused by seasonal effects. Next month, the job creation numbers could return to the ongoing trend. Similarly, the quick drop to 4.5% could go back up to a perfectly healthy 4.7% unemployment rate next month. We’ll have to wait until next month to know if this theory holds water. Even without corroboration, analysts who focus on the long term (from Barron’s to the Wall Street Journal), seem to be gravitating towards this theory. The incongruity of the job creation and employment numbers are driven by l trends and last month’s numbers won’t matter much in the long term.