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November 05, 2012
Reading Labor Markets
When the September employment report was released on October 5, the top-line payroll employment gain for the month, as reported in the U.S. Bureau of Labor Statistics' (BLS) establishment survey, logged in at 114,000. Under standard assumptions, a number of this magnitude would be barely enough to absorb the growth of the labor force and keep the unemployment rate constant. In contrast, in that same October 5 report we learned from the BLS household survey that the measured unemployment rate fell from 8.1 percent in August to 7.8 percent in September.
According to Friday's BLS report on the employment situation for October, the top-line payroll employment gain for the month from the establishment survey was 171,000. At that pace—which is also the current average gain for the past three months—the Atlanta Fed jobs calculator suggests the unemployment rate should fall another one-half of a percentage point over the next year. At the same time, according to the BLS household survey, the unemployment rate rose from 7.8 percent in September to 7.9 percent in October.
This is as good an illustration as any to explain why, on November 1, Atlanta Fed President Dennis Lockhart said the following in a speech to the Chattanooga Tennessee Downtown Rotary Club:
In its post-meeting statement on September 13, the FOMC said, "If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability."...
For policy purposes, I think it's appropriate to be cautious about relying on a single indicator of labor market trends—for example, the unemployment rate—to determine whether the condition of "substantial improvement" has been met.
As the FOMC went into its September meeting, the official BLS statistics indicated that net U.S. job creation in August was a mere 92,000. That number is below the “all else equal” threshold of about 100,000 jobs required to keep the unemployment rate from rising, and that information is what Fed policymakers had in hand when they met on September 12–13 and decided on the policy action described by President Lockhart.
On Friday, after two revisions, the BLS told us jobs expanded by 192,000 in August, well above the average for the jobs recovery that started in early 2010, 100,000 jobs (more than double) above the initial estimate.
Looking through month-to-month variations is not a lot of help in real-time tea-leaf reading. Here is the 12-month moving average of employment gains, the blue line indicating the way things looked in September, the red line showing the way they look today:
Over time, it remains the case that monthly employment gains are pretty consistently coming in at 150,000 to 160,000 jobs created per month, and that rate has been enough to generate relatively steady declines in the unemployment rate:
That could change, of course, and the last four months of data have generally shown an acceleration in the job-growth trend. But the data definitely were not indicating that trend as it was happening, an unfortunate reality that isn't likely to change. One way to soften the blow of that problem, emphasized in the Lockhart speech, is to keep an eye on as a broad a set of signals as possible:
... let me share a qualitative framework for defining "substantial improvement."
The starting point certainly should be the headline unemployment rate and the payroll jobs number. The interpretation of movements in these two statistics would be enriched and reinforced by a review of additional data elements.
I added the emphasis there, as I think the point bears highlighting. President Lockhart goes on to give examples of what he would look for in determining whether the substantial improvement threshold has been met. Things like reductions in the numbers of marginally attached and discouraged workers, growing labor force participation rates, declining numbers of people who want full-time work but have to settle for part-time, and positive forward indicators like falling initial claims for unemployment insurance.
The Calculated Risk blog continues to be a one-stop shop for a lot of this information—here and here, for example—and overall nothing much overturns the picture of steady, but slow, progress. That would suggest the acceleration of the past several months is probably not a new trend, but a continuation of the same-old same-old. But then again, the track record painfully demonstrates how hard that is to know in real time.
By Dave Altig, executive vice president and research director at the Atlanta Fed
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Listed below are links to blogs that reference Reading Labor Markets :
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- Thoughts on a Long-Run Monetary Policy Framework, Part 4: Flexible Price-Level Targeting in the Big Picture
- Thoughts on a Long-Run Monetary Policy Framework, Part 3: An Example of Flexible Price-Level Targeting
- Thoughts on a Long-Run Monetary Policy Framework, Part 2: The Principle of Bounded Nominal Uncertainty
- Thoughts on a Long-Run Monetary Policy Framework: Framing the Question
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- A First Look at Employment
- Weighting the Wage Growth Tracker
- GDPNow's Forecast: Why Did It Spike Recently?
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