Friday's employment report was bad – but it wasn’t the unmitigated disaster that the consensus seems to have spun it into. It is true that there were no bright spots. It is true that the net number of new jobs added was worse than consensus and indeed worse than some of the more pessimistic expectations. But 142k new jobs is not a recessionary collapse (yet). Let us remember that one or two months every year fall below that figure (see chart, source Bloomberg).
Folks, it’s just not a robust recovery and never has been. It has been slow and steady, and now it is probably petering out, but…let’s not jump off the buildings just yet. In fact, one of my favorite indicators during this period while the unemployment rate has been falling but the general perception of the employment picture has been poor has been the “Not in labor force, want a job now” series, which shows people who are discouraged enough to not be looking for work, but would take a job if it was offered. As the chart below shows, that number is far above the lows from the last couple of expansions, and so has been a good check on the improvement in the unemployment rate. Now, however, we must also recognize that it is near the recent lows.
So not all of the “job market internals” are flashing red. True, none of them are exactly flashing green, either! Nor have they really ever been, in this cycle.
At the same time, it is incredible to me that the ex-Chairman of the Fed is taking a victory lap, claiming in the Wall Street Journal that his policies led to a non-inflationary decline in the unemployment rate. Surely a professional economist ought to know the difference between correlation and causality. It is absolute madness to claim that the Fed’s policies did nothing for the price level but had a huge effect on the real economy. That is almost exactly opposite of what generations of monetary policy experience teaches us: that monetary policy has almost no effect on real variables but only affects the price level.
The unemployment rate declined for two reasons: the first is that just as no tree grows to the sky, no hole is bottomless. Eventually, even without any intervention at all, the business cycle takes over and recessions end. The second reason in this case is that the federal government ran (and continues to run) massive fiscal deficits, which demonstrably affect near-term growth. Yes, those deficits merely rearrange growth, stealing growth from the future to improve growth today, but if current growth is given by Y=C+I+G+(X-M) there is no way that the Fed can claim what is the biggest contribution over the last few years, percentage-wise. Madness, I say.
Is the economy headed for recession? In all likelihood, yes. But this employment number was not the first nor even the best sign of that possibility.