Understanding the Monthly Employment Report

A week ago, the BLS released labor-market data for August. Usually a big event for markets, the jobless rate was unchanged at 4.9%, which most economists believe to be consistent with full employment. Meanwhile, more closely watched payroll employment increased by 151,000. That was down from its three-month moving average of 232,000 and below forecasters’ expectations.

Most interesting about the August data is the response of the experts who are paid to figure out, in real time, the most important implications of incoming evidence. Last Friday, the assessment of J.J. Kinahan for Forbes was typical: “There were greater expectations for Friday’s monthly jobs report, but the numbers didn’t deliver…. Suddenly, a September [interest] rate hike seems far less likely, at least judging from the futures market’s reaction to the jobs data. Immediately after the jobs report, chances of a Fed rate hike in September, as measured by futures at the Chicago Mercantile Exchange, fell to 12%, from 27% right before the jobs number.”

The consensus interpretation does almost nothing to help us understand what is going on in the U.S. economy. The problem could be that immediate-response analysts, as well as the Merc, do not know what the proper benchmark employment number is at this point in the business cycle. (By benchmark I mean the employment growth that is neutral with respect to labor-market tightness.) If so, their ignorance is surprising. Benchmark jobs growth is easy to calculate.

Benchmark employment increase. The BLS regularly and confidently projects (in circumstances of full employment) the size of the civilian labor force a decade ahead. By definition, the labor force is comprised of persons 16 or older who either have a job or are actively seeking one. In the current projection, the average annual labor-force increase is 780,000. Since almost all of the persons who will be aged 16 in 2025 are already alive and mortality tables are reliable, the margin of error around that estimate is very small. More critically, we also know that trend total employment growth will additionally average close to 780,000 through 2025, a conclusion that follows from the definition of unemployment and the current starting point at full employment.

We have come up with something very important to stabilization policymakers: a reliable benchmark for how much total employment in the U.S. needs to grow over time to prevent the joblessness from rising. Let’s be high-side cautious and use 75,000 to 80,000 net new jobs per month.

Knowledge of the employment-growth benchmark is needed for the adequate interpretation of the macro meaning last Friday’s employment report. It was easy to derive. Why doesn’t everybody know it? At first blush, last Friday’s analysis appears to indicate that the experts do not understand how the calibrate the crucial jobs benchmark. What else would explain their quick, unanimous conclusion that employment growth more than twice as fast as necessary to keep the joblessness at its current full-employment level would cause the Fed to delay increasing its near-zero target interest rate?

Federal Reserve. There is another explanation. It is more kind to Wall Street experts but more worrisome for the rest of us. The experts may believe that a majority of policymakers at the central bank, for whatever reason, are committed to dismiss evidence of continuing tightening of the labor market beyond full employment in order to maintain near-zero overnight lending rates.

If true, the alternative explanation alters the relevant questions. Has the Fed forgotten that a near-zero interest rate is a policy reserved for macroeconomic emergencies along the lines of the perilous 2008-09 instability that threatened depression? In no way can the U.S. economy in 2016 be understood as being in macro crisis.

Has the central bank forgotten that maintaining arbitrary crisis-level interest rates well into a period of full employment badly distorts a specialized market economy? There is range of problems here that can only be illustrated in a short essay. One of the best known worries is the huge build-up in liquidity and its implications for future price inflation. Also well-known are asset-price bubbles, such as the historic housing-price boom preceding the Great Recession. One of the most pressing problems is huge adjustment to inadequate earnings needed by risk-adverse households who want to save and businesses who manage portfolios of low-risk financial assets. It is time for the Fed to justify pushing a significant portion of the economy into a higher-risk profile than they desire or is proper. This problem class is illustrative of the continuing difficulty at the Fed, especially since Greenspan, in coming to grips with their responsibilities with respect to financial-sector efficiency.

Conclusion. I once worked as a senior economist at the Board of Governors of the Federal Reserve. One of my responsibilities was to report on and interpret the monthly employment report, typically a high-point of the weekly state-of-the-economy Board briefings. Later, some time after I left full-time Fed employment, I was (for twenty years) the Permanent Secretary for The Federal Advisory Council of the Board of Governors, which is tasked by the legislation that created the Fed to advise the Board on a broad range of stabilization and regulatory policymaking. If I were still in either position, you can be certain that the mismatch between the continued near-zero (macro-emergency level) interest-rate policy and the evidence on the state of the U.S. economy, as well as the net costs of that mismatch, would not be ignored.

Blog Type: Policy/Topical Chicago, Illinois