Thursday, July 3, 2014

Ignore The June Employment Data

  • The June employment numbers are noise.
  • Employment growth remains slow.
  • There is little risk of an inflation shock.

How should we interpret the strong employment growth figures for June? Does it suggest that the economy is accelerating, or even overheating? My answer is no to both. Employment growth remains slow, and the economy is not overheating.

Between 2003 and 2008, total employment grew from 130 million to 138 million. Over the next two years the economy shed 8 million jobs and employment returned to 130 million. Since 2010, the economy has added back the 8 million jobs that were lost in the recession, and we are just above where we were six years ago. It has been a long and painful recovery, which reflects poorly on the stewardship of the FOMC (which consistently ignores its full employment mandate).

Since the Crash, employment on a YoY basis has been growing at between 1.5% and 2.0%. The June number, on a YoY basis, remains within range at 1.8%. On an annualized basis, monthly employment growth during the recovery has averaged below 2%, with a range between 0.6% and 3.3%. The June growth number was 2.5%, well within range. There is thus not a lot of information content in the June number; I see it as noise, just like the shrinkage of the economy in 1Q14.

The economy and employment (nominal) continue to be stuck in second gear, growing far below the levels achieved before the Crash. I attribute this to the combination of sluggish money growth (~6%) and the slow recovery of the credit cycle. For the economy to accelerate to escape velocity will require faster money growth (9%) and much stronger housing activity. In other words, the economy has not yet recovered from the trauma of 2008.

There is still substantial slack in the labor market. The participation rate has not recovered at all. The broad measure of unemployment (U6) is at 12%, far above the 8% level before the Crash. Ten million workers have no jobs. Therefore, I would be very surprised if the June employment number has any effect on monetary policy. The Fed has not yet achieved full employment, nominal growth remains very slow, and capacity is not constrained. What would change the Fed’s mind would be a sustained rise in core inflation, but I don’t expect this given the economy’s weakness and the slack in the labor market. (The employment cost index grew at a 0.6% annual rate in 1Q14.)

Investment Conclusion
The big drop in nominal GDP in 1Q14, and the big spike in employment in June are both noise. Nothing has changed: inflation remains low and the Fed is unlikely to tighten in the foreseeable future. For the capital market, this means that there is very little risk of an inflation spike that would cause stock and bond prices to decline. We are living in a new world of permanently slow growth and low interest rates.

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