The monthly jobs report comes out tomorrow. So we’ll get a better view of who’s employed, and who’s not.
But some prominent movers and shakers in the finance world, including outgoing PIMCO CEO Mohammed El Erian, are suggesting we ought to give less weight to that employment rate number.
DETHRONING KING INDICATOR?
Why might the long reigning king of economic indicators need to be dethroned?
Well, many people in finance focus on the unemployment rate because of the Federal Reserve. The Fed has said (…in so many words…), “the economy’s got issues, we’re not going to even think about pushing up interest rates in the economy until the unemployment rate gets down to 6.5 percent.”
Trouble is, we’re near that threshold.
“But we’re not there for the right reasons,” says Kevin Logan, Chief U.S. Economist with HSBC. The unemployment rate is almost down to 6.5%, but the economy has still got problems.
For example, one reason the unemployment rate is going down is because a lot of people are giving up looking for work. Another reason is that a lot of baby boomers are retiring.
“It’s very hard to make a rule that’s good for all time,” says Neal Soss, Chief Economist with Credit Suisse. “Mothers can do that, but you can’t do it when you’re managing an economy of 350 million Americans.”
As a result, Soss says, the Fed is giving the unemployment rate “much less weight, and I think that means it’s less consequential for financial markets.”
He adds that the unemployment rate and other indicators like the labor force participation rate suffer from “statistical problems.” The unemployment rate and labor force participation rate are calculated “as if all the people who are in the older, retiring age brackets were still effectively available for work,” says Soss. “We really ought to give them less weight as a gauge of economic performance,” at least without the proper context.
SO WHAT SHOULD WE BE LOOKING AT?
So what should we be looking at – not just for a glimpse into Fed policy, but for a look at how the economy’s doing?
Well, really, the answer is…. everything else in the jobs report. Because there is a LOT of stuff.
“The unemployment rate might give an unintentionally optimistic view for people who are not paying attention to all of the other statistics produced in these reports,” says Gary Burtless, a labor economist with the Brookings Institution.
How many people are involuntarily working short hours? What is the labor participation rate compared to what we would expect at full employment? How much has the employment rate returned to the rate we would predict, given how old the population is?
Total hours worked and data on wages are also included in the jobs report.
“Those are numbers that are very easy to tease out and they give us a complete indication of the health of the job market.”
Credit Suisse’s Soss and HSBC’s Logan both agree that fully fleshed out numbers are still useful to the Fed, and to understanding the economy.
Both say the Fed, with the unemployment picture still recovering very slow, may focus on inflation as an important threshold for policy action. However, inflation is a long-term, slow-moving indicator, and not as reflective of instantaneous conditions in the economy.
YEAH, YEAH HOLISTIC VIEW, LOTS OF FACTORS, I GET IT.
NOW WHAT’S THE ONE BEST NUMBER WE SHOULD LOOK FOR?
If you had to pick one number, it’d be the payroll numbers – that’s how many people are employed – full time, part time, all of it.
“The reason for that,” says HSBC’s Logan, “is that things are produced when more people work, the economy grows when more people work; payroll won’t grow if the economy is stagnant.”
“The report in its entirety will continue to be very important,” says Logan. “The payroll data, hours data, wage data, will continue to drive market opinion,” as well as Fed policy.
SO WHAT ARE THE JOBS NUMBERS – ALL OF THEM – SAYING?
Well we haven’t seen tomorrow’s jobs report, but right now: “We’re seeing a very weak recovery,” says Michael Farr, president and chief investment officer at investment firm Farr Miller & Washington. “We’ve seen a huge surge in part-time jobs versus full-time jobs,” he says.
Part time jobs are better than no jobs, but with part time employees, employers don’t have to pay out benefits or pay as much money.
“It’s not as healthy for the economy because those folks don’t earn as much, they don’t have as much money in their hands, they don’t buy things, and so manufacturers don’t have to make as much.”
Through November things were looking up, but December fell far below everyone’s expectations. Payroll increased by 74,000 people – analysts were expecting an increase of 200,000.
The big question is whether December’s numbers were just a weird quirk of weather, or statistical sampling, or if they reflect a trend.
Tomorrow’s numbers will give us a clue.
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