April Unemployment Rate Masks Bigger Problems

The mainstream media can’t stop raving about last Friday’s unemployment report for April. And there is no question that the report was significantly stronger than expected. The headline unemployment rate plunged from 6.7% in March to 6.3% last month. No one predicted that.

The report revealed that 288,000 new jobs were created in April, the highest monthly number in two years, and another sign that the economy is accelerating after a brutal winter. The Bureau of Labor Statistics (BLS) revised upward its estimates of new jobs created in March and February by 36,000.

The job gains in April, marking the fourth-best month of growth since the recovery began in mid-2009, were indeed encouraging. After revisions to prior estimates as noted above, job growth over the past three months has averaged 238,000 – well above last year’s pace – and the latest numbers confirm that April’s new jobs were widespread across the economy.

Hiring last month was broad-based and included more higher-paying jobs: Manufacturing gained 12,000 positions. Construction added 32,000. Professional and technical services, which include accounting and engineering positions, gained 25,100 jobs.

Not surprisingly, the media proclaimed that the economy is likely returning to the above-trend growth seen in the 3Q of last year when GDP growth hit a surprising 4.1% (annual rate). Never mind that 4Q GDP fell to 2.6% and 1Q GDP to only 0.1% – which may be revised to a negative number later this month.

As is usually the case, a deeper look into the data tells a little different story than the one offered up by the media. Here I go again, dragging you into such things as the “labor force participation rate” and the like.

The significant drop in the unemployment rate to 6.3% reflected a sharp contraction in the pool of American workers, with far fewer people seeking jobs. That sent the labor force participation rate back to a three-decade low of 62.8%, down from 63.2% in March, puzzling economists and policy makers who have been expecting participation to pick up as jobs increased.

FRED

Even worse, the labor force participation rate in April for Americans ages 25 to 29 hit the lowest level ever recorded since 1982, when the BLS started tracking such data. The actual number of Americans, ages 25 to 29, not participating in the labor force hit a record high in April as well, with 4,280,000 not working.

All told, the BLS reported that 806,000 Americans dropped out of the labor force last month, and that’s the number which largely caused the headline unemployment rate to plunge to 6.3%. If you drop out of the labor force, the BLS does not count you as unemployed.

In addition, workers’ wages, which have been stagnant for years, budged little last month despite the apparent hiring spree. Wages rose just 1.9% from a year earlier, limiting Americans’ ability to significantly raise their living standards.

Then there’s the question of short-term unemployment (26 weeks or less) versus long-term joblessness (27 weeks or more).  Persistent long-term unemployment has been a defining characteristic of the current expansion. The jobless rate for workers unemployed 27 weeks or more stood at 2.2% in April, which is significantly higher than the 1.0% average for the 1980-2007 period.

UnemploymentThe short-term unemployment rate, by contrast, was at 4.1% in April, which was below its long-term average of 5.1%, as shown in the chart at left. This dichotomy leads to two very different pictures of structural unemployment in the economy.

Basically, it tells us that long-term unemployment is more than twice as high as in the past because the job market is requiring new skills that the long-term unemployed don’t have, and/or that new jobs are being created in places that would require the unemployed persons to relocate. Obviously, this is bad news for the long-term unemployed.

While the April unemployment report was better than expected in terms of the headline unemployment rate and the 288,000 net new jobs created, it continued to be bad news for young people and older folks who are out of work.

Finally, I’m seeing some early forecasts that suggest the economy is rebounding much stronger than expected in the current April-June quarter. I’ve actually seen estimates as high as 4% for 2Q GDP growth. That would be a huge improvement from the 1Q growth of only 0.1%, so I have my doubts. We won’t see the first estimate of 2Q growth until late July. I’ll keep my eye on upcoming economic reports and will keep you posted.





Posted 05-12-2014 1:06 PM by Gary D. Halbert
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