Yesterday the Bureau of Labor Statistics reported their latest labor data for the month of August. It was a miss by all accounts. The US economy experienced a net gain of 151,000 non-farm jobs in the month compared to 180,000 that was expected by consensus estimates. This miss was equally felt in the “private” jobs statistic. Just 126,000 private non-farm jobs were added in August compared to 175,000 that were expected. Matters were made worse when average hourly earnings increased just 0.1% compared with an 0.2% forecasted increase, and the average work week for Americans declined 0.1 hours to 34.3 compared to an expected increase of 0.1 to 34.5 hours. Finally, the headline unemployment rate was expected to decline to 4.8%, yet it remained unchanged at 4.9% as the civilian labor force participation rate also remained steady at 62.8%. Altogether, this report was a disappointment and an important element of consideration as we continue looking towards the future.
It is my opinion that this report shows us the underlying weakness to our economy. Recently updated estimates of Q2 GDP show the reason for this. In the chart below we can see that if it weren’t for personal consumption spending (consumer purchases) then we very easily could have had an even smaller GDP print than the already atrocious 1.1% growth witnessed in the second quarter.
Almost 100% of that 1.1% GDP growth was attributable to personal consumption, except for a slight contribution from exports. For this reason, it is paramount that our labor situation stay healthy. However, there are serious signs of weakness that have been developing. One such sign is the most recent labor report as described above, but that report is not by its lonesome.
One indicator with wavering positive and negative signals has been the Part Time for Non-economic/Economic Reasons Indicator that I created and track on my newly created Charts page. This metric tracks the ratio of people working part time for non-economic reasons to people working part-time for economic reasons. I updated the indicator after yesterday’s labor report and the latest reading was somewhat surprising. The latest reading in August for the indicator dropped to 1.13. Anything above 1 indicates expansion or an otherwise healthy labor market so this is a positive number still. However, reading into the number a bit more is insightful. The month-over-month change was a drop of 0.04259. This is a big drop. In fact, I had to go all the way back to mid-recession in 2009 to find a month-over-month drop of larger magnitude. Therefore, the takeaway from this indicator is a cautious one. While 1.13 is a healthy reading, that number could easily turn into a contraction signal in due time if this latest month’s trend were to continue.
Another point of interest in our investigation of the labor market is productivity. If we simplify economic growth down to its bare-bone elements then we can consider that the economy can grow in one of two ways. If we have static productivity then we can increase the number of inputs to our production in order to increase output. In other words, we can increase our labor (create jobs) and capital (business investment) inputs to increase our output. The other way we might obtain economic growth is by holding our inputs constant and instead increase productivity. Simply put, if today a person can produce one unit of a good and tomorrow they can produce two thanks to technological change, for example, then productivity has increased. With these two scenarios in mind we can consider the following chart:
This chart depicts the Bureau of Labor Statistics’ measure of productivity in our economy that is calculated by dividing real output by the number of hours worked by all workers. On the very far right of the graph we can see the last three readings were negative. In fact, the BLS announced this past week that second quarter productivity growth declined at an annual rate of 0.6%. This marks the third consecutive quarter of negative productivity growth. Examine the entire graph above and you will note that this has only happened two other times since 1948: 1973-74 and 1979 (Both occurred during or at the onset of recession). So consider for a moment what this three quarter decline in productivity means. Our labor market is supposedly healthy, yet each additional unit of labor added to our economy is less productive than before.
Exaggerating for a moment, suppose a business owner needs 10 units of work done. If the productivity of a single worker is 10 units then the business owner need only hire a single worker. But if productivity of each worker declines to 5 units of work then that business owner must now hire two workers. Obama would love to brag that two new jobs have been created and that it is wonderful, but I would argue that our country would be much better off if productivity per worker were 10 units and we created that single job because then that second worker would be free to produce more output at some other business. The potential of our economy is always higher with more productivity. So, conclusion: woohoo we’ve created jobs over the past three quarters but at the cost of lower productivity. Thus, when our economy adds 151,000 jobs like we did in August we can’t interpret that gain the same as we did a year ago before the drop in productivity because those 151,000 workers are essentially translating into less output than had they been hired a year ago.