The U.S. added an enormous 242,000 jobs in February, smashing the forecasts of many economists.
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It’s seen as wonderful news by many – indicating that the U.S. economy is in great health and everything is rosy and beautiful. The unemployment rate – another measure tracked by all those interested in the state of the economy –remained low at 4.9%. This would seem to add further fuel to the fire that the U.S. economy is roaring.
But if the economy is in such good health…why is there still so much anxiety and fear in the markets? Is there more to the latest jobs report than assumed at first glance?
When news outlets talk about the 242,000 new jobs, they’re referring to a statistic provided by the U.S. Bureau of Labor Statistics. The BLS reports on the total number of paid workers of any business and this statistic is called total non-farm payroll employment. It’s called non-farm because…well these guys aren’t working on a farm. All-together, non-farm payrolls account for 80% of the total workforce.
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When this statistic increases, the interpretation is that businesses are hiring and the economy is growing. If it is decreasing, then obviously it would suggest the opposite is true.
242,000 is, no doubt, a lot of jobs. However…we need to put numbers into context. In January 2016 there were 143,318,000 people on non-farm payrolls. 143.3 million people were employed. The corresponding number for February was 143,560,000. That represents an increase of 242,000 jobs, or put another way – an increase of 0.17% month over month. Somehow 0.17% doesn’t have the same ring to it as 242,000 but that’s the game the media plays. We just have to be aware of it.
So what does it really mean?
We need to understand the backdrop against which this whole economic drama is playing out.
It just so happens that much of the financial community is wrapped up in what the Fed is going to do in regards to interest rates. Will they raise rates? If so, how much and when?
The reason there’s so much attention on interest rates is because everyone’s worried about a recession. 2016 started very weak (we had a 9% drop in the states and 20% globally) and oil prices continue to be low – prompting a lot of speculation about a fall from grace for the American economy – as well as the world in general.
The interest rate in question is the rate at which banks are allowed to borrow money – which in turn gets passed on to the consumers. So, if it suddenly costs more for banks to borrow, they’ll have to find a way to compensate for that increased cost. The way they compensate is by passing on the cost to their customers.
If the economy is like a car engine, then credit (the ability to borrow money) acts as the lubricant. Being able to lend money to those who need it keeps the engine going. The worry is that if money isn’t as freely available, it’ll act as a stranglehold on the economy…choking out economic growth faster than Nate Diaz submitted Connor McGregor at UFC 196 last weekend.
When borrowing money becomes more expensive for consumers, then less of them tend to borrow money. If that happens, the economy could suffer.
Cause for concern?
Luckily for us, U.S. non-farm payrolls employment has been pretty steady and climbing slowly since 2008. We’re out of the woods, right?
Yeah, maybe. Except there are a few worrying trends to take into account.
The first is that the labor force participation rate is at its lowest since the late 70s. So even though there are tons of people employed right now – what’s strange is that the amount of people who are working (of those who can work) is at an all-time low. The percentage of adult Americans working or actively looking for a job is about 63%.
There are many reasons for this. Younger people, maybe finding themselves shut out of the job market or for other reasons, are electing to go to school rather than work. Older people, part of the baby boomer generation, are retiring en masse and not being replaced in the same numbers.
The truth is that the labor participation rate has been declining since 2000 – a trend that’s sped up since 2008 and the Great Recession.
The second is that average wages are declining. People’s salaries are shrinking – that’s not a good thing. Since 2000, for the highest and lowest wage earners, household income has declined by an average of about 8%. While the top 40% has seen their wages increase slightly since 2008…the bottom 60% has not been so lucky.
These trends paint a different picture to the all-guns firing American economy that the mainstream media would like to portray. While the unemployment rate remains low, the fact is that the unemployment rate is artificially inflated in the way it’s calculated – not taking into account the people who are discouraged from working and have essentially stopped looking. If there are 100 people, 50 of whom are working and 50 who are not then the unemployment rate is 50% (50/100); however if we were to exclude 45 of the 50 people who are not working on the basis that they are “discouraged workers,” then we could conclude that the unemployment rate is actually 9% (5/55).
That’s what the official statistics are doing. By shrinking the pool of unemployed people that we use to calculate the metric, we are inflating our measure. Combine that with the reality that people are making less money than before and we see the true picture. There are lot of people who have dropped out of the work force, unable to find a job, a lot of people biding their time and the people who are working, well they are making less money for their trouble.
That’s why investors are so anxious about the economy and why every increase in employment and decrease in the unemployment rate is bandied about as the next big thing since sliced bread. One side is worried about the underlying trends and the other is trying to hype up the market.
Don’t get caught up!