It's Simple: Weak Growth, Weak Jobs
So much for the June interest rate hike. And I wouldn’t hold my breath for July either.
U.S. nonfarm job growth has been slowing dramatically since February, when net payroll job creation was a healthy 233,000 through the latest report for May, which revealed an unexpected and eye-opening 38,000 net gain in jobs. Even if you factor in the 35,000 who are on strike in the telecommunications sector, that’s a dismal number. Job weakness was across the board, with poor performance in manufacturing, retail trade, and construction. Other economic data from these sectors suggested something better in terms of hiring. But the employment numbers are unequivocal and should force a rethinking of just where the U.S. economy is right now.
In a number of respects, the household survey was even more disturbing. I am one of a number of economists who have been flagging an “interesting” increase from the nearly 40-year low in the labor force participation rate that has been taking place since September 2015. But the participation rate increase reversed course in March and in May the labor force fell by nearly 460,000, the reason for the sharp decline in the unemployment rate to 4.7%. Other household survey data point to weakness as well. The Bureau of Labor Statistics notes that the number of persons working part time for economic reasons increased by a substantial 468,000 after showing little change since November.
While there have been periods of curious dissonance between the economy and the labor market in recent years, these data paint a clear and consistent picture. The underlying growth rate of the U.S. economy is currently less than 1%. Even with sluggish labor productivity performance, that is not sufficient to keep employment gains on what anyone would consider to be a healthy track.
While periods of economic trouble are normal, there are a number of unique concerns at the moment. To begin with, post-2009 economic growth has been so weak and uneven that there is the nagging sense that we still have not fully recovered from the Great Recession. Along a number of metrics, it is more than nagging. Manufacturing, for example, still has not regained its pre-recession level of output. Secondly, the normal countercyclical tools that we use to fight weakness and recession are tied up in various kinds of knots. Nobody even knows what fiscal policy is anymore. And monetary policy is basically spent short of a number of unconventional tools, such as helicopter money, that are the subject of intense debate with little consensus.
Finally, the economy is bumping up against structural constraints that have been a long time in coming. The supply of labor is getting to be an increasingly difficult problem. The slide in productivity performance is turning into a crisis of its own. These require different kinds of policy solutions than we have used in recent decades. But we need to start by taking our head out of the clouds and realizing that the American economy, at least right now, is not in great shape.