The April employment report of the Labor Department showed a 223,000 change in non-farm payrolls with the unemployment rate dropping to 5.4%, in line with forecasts. Less noticed perhaps in the report were the significant downward revisions to the March employment report, with jobs being revised down by 40,000 to 85,000 for the month. The bond market has taken the news hard, as if April employment exceeded forecasts and March was revised higher, rather than lower. Go figure.
The fascination, though, with the employment report in both equity and debt markets is slightly puzzling. The theory, of course, is that job creation creates income and spending power to drive consumption and GDP. It would also signal improved confidence of businesses, seeking greater employment. But there's a disconnect between theory and practice, with Q1 GDP significantly below the economy's tepid 2% annual pace and forecasts for Q2, equally as grim.
Nevertheless, it's the unemployment rate, that soundbite of 5.4% that seems to catch the attention of bond traders around the globe. This fascination sustains, despite great controversy surrounding the number itself, and the impact of a stubbornly low labor participation rate upon the calculation. If we are trying to measure the propensity of consumers to, well, consume, perhaps the unemployment rate is not the best measure.
In addition to the unemployment rate, the Bureau of Labor Statistics also publishes a ratio of employment to population. This, to our thinking, might be a better representation of the portion of the population that is both generating income and consuming, versus the portion of the population, like children and the elderly, that primarily consume. The latter two groups, in effect, access financial resources to support their spending from parents, savings and governmental spending, rather than through income generation.
This ratio has been stuck, stubbornly, at 59%, give or take a couple of basis points, since 2009. After falling considerably from its levels in the years preceding the financial crisis, the ratio has failed to recover during the economic recovery that began in 2009. There can be many explanations for this, including the advancing of the Baby Boomers into retirement, a process that itself has been linked to the sluggish recovery, rather than the other way around. It can also be linked to the explosion of student loan borrowing, elevating college and post-college attendance. And lastly, it can be attributed to the soaring rates of disability claims, following the Great Recession.
Whatever the explanation, America needs to find a way to employ a greater share of its population and raise the median wage of that employment if the intent is to once again rely upon the consumer to fuel economic growth. The latter will be a subject of a future post.
