Tag Archives: unemployment

Another Mediocre Jobs Report

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US monthly job changes, total private and total government, December 2010 to June 2012

The Bureau of Labor Statistics released its regular monthly jobs report this morning, and for the third straight month it indicated a positive but low rate of private sector (and total) job growth.  Government jobs continued to be cut, thus bringing down total job growth and acting as a drag on overall jobs.  While government jobs fell by just 4,000 in the initial estimate for June (led by Federal Government job cuts of 7,000), the earlier government job cut estimates for April and May were revised sharply upwards to a cut of 17,000 government jobs in April and a cut of 28,000 government jobs in May.  This scaling back of government continues to act as a drag on the economy.

Total (private and government) job growth was an estimated 80,000 in May, about the same as a revised 77,000 total in May.  But as was indicated in my June 1 posting on this blog on the May jobs report, the US labor force is growing at a rate of about 83,000 per month (based on the average growth over the last 10 years, so as to get away from the month to month fluctuations).  Hence no progress is being made on reducing the number of unemployed, and the reported unemployment rate (based on the separate Household survey; the jobs numbers come from an survey of Establishments) was unchanged at the still high 8.2%.

None of this is good for the economy, nor for Obama’s re-election prospects.  But while Romney and his Republican colleagues will reiterate their strong criticism of Obama’s policies, asserting that an explosion of government under Obama is the cause of this poorly performing job market, their arguments are simply inconsistent with the facts.  Government jobs (primarily at the state and local level) have indeed contracted sharply during the period Obama has been in office.

It is instructive to compare job growth during the Obama period to that of Bush, Jr., during his first term:

Net Job Growth Private Sector Government Sector
Obama:  January 2009 to June 2012 +160,000 -633,000
Bush:  January 2001 to June 2004 -1,790,000 +766,000

Jobs in the private sector are now slightly higher, by 160,000, than when Obama took office in January 2009.  The recovery from the free-fall in jobs that was underway when Obama was sworn in is now complete, although there is still a long ways to go to catch up with what would have been normal growth during this period.

In contrast, at the same point in Bush’s first term there were almost 1.8 million fewer private jobs than when he took office.  Yet while Romney harshly criticizes job performance under Obama, he praises the policies under Bush.

And there is a sharp contrast not only in private job growth but also in growth in the number of government jobs.  Since Obama took office, 633,000 government jobs (primarily state and local) have been cut.  In contrast, for the similar period during the Bush first term, government added 766,000 employees.

Had government jobs followed the same path under Obama as it had under Bush, there would now be 1.4 million more workers in the public sector.  1.4 million more workers employed would, by itself, have brought down the overall unemployment rate from 8.2% to 7.3%.  But there would also be multiplier effects in an economy with its still high unemployment, as the newly employed school teachers, policemen, firemen, and other public workers spend their earnings in their communities.  Assuming a conservative multiplier of just two (that is, one newly employed additional worker for each newly employed public worker; many economists would estimate the multiplier is in fact higher than two in conditions of high unemployment), the overall unemployment rate would be only 6.4%.  The economy would be approaching full employment, which is normally taken to be unemployment in the 5 to 6% range.

The scaling back of government has been devastating for the job market during the period Obama has been in office.  Yet through repetition, the common view is that government has exploded during Obama’s term.

Employment is Deteriorating

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US weekly initial claims for unemployment insurance, June 18, 2011, to June 16, 2012

The Bureau of Labor Statistics released this morning its regular weekly report on the number of American workers who had filed initial claims for unemployment insurance.  Although there is a good deal of noise in this weekly data (so some analysts focus on the four-week moving average rather than on the weekly figures themselves), the report provides a useful early indication of developments in the labor market.

It is now clear that the labor market situation is deteriorating.  The graph above shows the figures (for both the weekly initial claims and for the four-week moving average) for the last year.  The trend was improving (weekly initial claims were falling) until mid to late March of this year.  But it is now clear that there was a turn at that point, with the employment situation since then worsening.  Using the four-week moving average, initial claims for unemployment insurance rose from 363,000 in late March, to 386,250 in the most recent figure.

Keep in mind that with normal churn in the labor market, there will always be initial claims for unemployment insurance.  Even with the economy at full employment, weekly initial claims will be at about 310,000 to 320,000 given the size of and extent of turnover in the US labor force (see the figure below for the numbers in 2006 and early 2007, before the downturn).  And the rise in the weekly rate of initial claims for unemployment insurance could still be consistent with positive net job growth each month.  The labor force is growing over time, although with significant month to month fluctuation in the number of people entering and leaving the labor force.

Nevertheless, the turnaround and sustained increase in the weekly figure on initial claims for unemployment insurance is likely to be a signal that the unemployment rate may now start to rise for a period.  This can be seen by looking at the initial claims figure in a longer term context, and correlating that with the overall unemployment rate.

US weekly initial claims for unemployment insurance, July 1, 2006, to June 16, 2012

US unemployment rate, July 2006 to May 2012

The first figure shows the weekly initial claims figure (four-week moving average) for the period from July 1, 2006, to now.  The second shows the unemployment rate.  The sharp rise in the initial claims figure in the last year of the Bush Administration is clear, with a peak reached just after Obama took office.  With new measures such as the Stimulus Bill (passed in February 2009) and other actions (such as continued aggressive measures by the US Federal Reserve Board), the economy started to turn around, and new claims for unemployment insurance began to diminish.  But while the weekly pace was reduced, it was still high, and the overall rate of unemployment continued to rise for a period before starting to fall.

The recovery has been weak, however.  As noted previously in this blog (such as here, and here), fiscal drag from falling government expenditures (mainly at the state and local level, but also weakness at the federal level) can by itself account for this slow and weak recovery.  And as seen in the figure above, in this weak recovery there have been two periods (between May and August 2010, and between March and June 2011) when initial claims reversed its downward path and began to rise for a period.  In each of these times, the unemployment rate also then started to rise for about half a year (from June to November 2010, and from March to June/July/August 2011).

The blip upwards of the unemployment rate last month to 8.2% from the earlier 8.1%, might therefore not be a fluke, but rather a signal of further weakness to come.  Such a rise in the unemployment rate in the half year before an election should be particularly worrisome to any incumbent seeking re-election.  And all this is unfortunately also consistent with the prediction made in this blog in January (see posting here), that despite what looked like an acceleration of growth in the second half of 2011, growth in 2012 could be weak.  It appears that is what is happening.

Fiscal Drag Continues to Pull Down the Economy

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Private employment, government employment, December 2010 to May 2012

A pair of disappointing reports, from this morning (June 1) and yesterday (May 31), indicate that the economy continues to grow only slowly, with consequent slow growth in employment and indeed a small rise in the rate of unemployment to 8.2% from 8.1% last month.  Posts on this blog in January, on GDP growth and on employment, had flagged that growth, which at that time appeared to be improving, could well fall back in 2012.  Unfortunately, that appears to be happening.  Cut-backs in government spending account for a major part of that disappointing growth.

The Bureau of Labor Statistics, in its June 1 release this morning on employment, found that total US employment grew in May by a net 69,000 jobs, with an increase of 82,000 private jobs and a fall of 13,000 government jobs.  Based on the growth rate of the labor force over the ten year period of 2002 to 2012 (there is a good deal of fluctuation in monthly figures), the labor force is growing at about 83,000 workers per month on average.  Employment growth in May of just 69,000 jobs does not keep up with this, much less make a dent in the still high unemployment.

The figures released this morning were also disappointing in the revised numbers they showed for April.  Last month, the initial estimates were that April total employment had risen by 115,000 jobs, with private jobs growing by 130,000.  These were already not good, but the revised estimates issued this morning based on more complete data indicate total jobs in April grew by only 77,000 jobs, with private jobs growing by just 87,000 jobs.  With the May numbers of 69,000 and 82,000 for total and private jobs, respectively, we now have two months of disappointing job growth.  Unless the May numbers are significantly revised when more complete data becomes available, we cannot say that this is only a one month fluke.

As one can note from these numbers, private job growth has been consistently above total job growth.  That is because government continues to cut back on the number of workers it employs, despite assertions by Mitt Romney and other Republicans that government has been growing.  The graph above shows the monthly changes in employment of both private and government employees over the last year and a half, where one sees that government employment has been falling in all but two of these months.  Note that the government figures in the graph are for total government, including at the state and local level.  But the underlying figures show that the fall has been in employment both at the federal and at the state and local levels.

This steady fall in government employment depresses overall job growth, and adds up over time.  Between January 2009, when Obama was inaugurated, and May 2012, total government jobs fell by 607,000.  In contrast, over January 2005 and May 2008, the comparable period in Bush’s second term, total government employment rose by 743,000.  If government employment had been allowed to grow as much during the Obama period as it had during the Bush period, the difference would have been an additional 1.35 million jobs.   This difference alone would have brought the unemployment rate down from the current 8.2%, to just 7.3%.  But one would expect with the still depressed economy, with unemployment high, that increased government employment would have spurred some private job growth.  Assuming conservatively a multiplier of two (i.e. there would be one additional private job for each additional government job, to produce what the now employed government workers will spend on), the unemployment rate would have dropped to just 6.5%.

That is, had government employment been allowed to grow during the Obama period by as much as it had during the comparable Bush period, unemployment would have dropped to 6.5%.  With full employment generally considered to be in the range of 5 to 6% currently, this would have brought employment most of the way to full employment.

The other disappointing report was on estimated GDP growth in the first quarter of 2012, released by the Bureau of Economic Analysis on May 31.  This was the regular first revision of the initial estimate of GDP growth that had been released a month ago.  The initial estimate of GDP growth in the first quarter of 2012 was discussed in a posting on this blog in April.  The initial estimate was that GDP had grown at a 2.2% annualized rate in the first quarter.  This estimate has now been revised downward to 1.9%.

The revision is not large, but is not in a good direction.  And it is interesting to note that two-thirds of that downward change (0.2% points of the 0.3% points reduction) was due to a downward revised figure on government spending.  Government spending was already falling, and the initial estimate, discussed in the blog post cited above, was that it took 0.6% points away from what GDP growth would have been.  The revised estimate increases that reduction to 0.8% points of GDP.  Government spending on goods and services (for all government, including state and local) is estimated to have declined at an annualized rate of 3.9% in the first quarter, similar to the 4.2% rate fall in the fourth quarter of 2011.

The reduction in government demand for goods and services leads to a reduction in GDP in present circumstances since unemployment is high, there is substantial excess capacity, and hence goods and services produced for sale to government will not come from goods and services that could be sold elsewhere.  There is plenty of capacity to produce whatever people demand, and the problem is there is no demand for additional goods and services to be sold elsewhere.

This fall in government spending, especially in the last half year (i.e. the fourth quarter of 2011 and the first quarter of 2012), can explain a large part of the recent slow growth.  As noted above, the revised GDP estimates indicate that the fall in government spending in the first quarter of 2012 subtracted 0.8% points from what GDP growth would have been.  There was a similar 0.8% point reduction in the fourth quarter of 2011.

But far from simply not falling, government spending will grow in a normally growing economy.  Hence the basis of comparison should not be to zero government spending growth, but rather something positive.  One comparison to use would be the growth seen during the Bush administration.  Over 2001 to 2008, government spending growth on average accounted for 0.42% points of GDP growth at an annualized rate.  Keep in mind that this spending growth is for all government, not simply federal spending (which was high), but also state and local government spending.  Also, government spending in the GDP accounts is for direct goods and services only, and excludes spending via transfers (such as Social Security).

Finally, government spending growth in periods such as now, when unemployment is high and there is excess capacity, will have a multiplier impact, for the reasons discussed above.  A reasonable and conservative multiplier to use would be a multiplier of two.

The table below summarizes the impact of these assumptions for what growth would have been in 2011Q4 and 2012Q1:

      Annualized growth rate of GDP 2011Q4 2012Q1
GDP Growth Observed 3.0 1.9
GDP Growth if Government had not contracted 3.8 2.6
GDP Growth if Government had grown at the Bush rate 4.2 3.1
GDP Growth if Government had grown at the Bush rate, with a multiplier of two 5.5 4.3

GDP growth as actually happened was at a 3.0% rate in the fourth quarter of 2011 and 1.9% in the first quarter of 2012.  Had reductions in government spending not taken away 0.8% points from these growth rates in each of these two periods, growth would have been 3.8% and 2.6% respectively.  But this implicitly places government spending growth at zero.  Had government been allowed to grow as it had between 2001 and 2008 during the Bush terms, growth would have been 4.2% and 3.1% even with no multiplier.  With a multiplier of two, the rates would have been 5.5% and 4.3% respectively.

Such growth rates of about 5% on average is what the economy needs if it is to recover.  At 2% or so, growth is insufficient to create sufficient demand for labor to bring down unemployment on a sustainable basis, as we have just seen in the report this morning.  And a 2% growth rate is so modest that it is vulnerable to shocks, such as from Europe (where Germany and the EU still have not addressed what needs to be done to resolve the Euro crisis), or from a spike in oil prices (should the Iran situation blow up, literally), or even from swings in inventories (as discussed before in this blog).

With government contracting as it has, despite the high unemployment and excess capacity, fiscal drag is acting as a severe constraint on economic growth.  There is a not a small danger that growth could slip back to negative rates, and that is not good for an incumbent President in an election year.