The Significance of US Non-farm Payrolls

by George Hatjoullis

The abrupt drop in US employment growth as measured by non-farm payrolls (NFP) has created concern about the US economy. It has also revealed a lack of confidence in what is the state of the US economy at the Federal Reserve. The view emanating from Fed worthies seems to jump about with the last piece of data. Indeed, as is often the case with forecasts, the Fed view has become more volatile than the data. More alarming is the lack of subtlety in the interpretation of the data.

The NFP data tell us the number of jobs added in a month. They do not tell us anything about supply or demand. They do not tell us what is the change in vacancies. They do not tell us anything of the change in working population or in participation rate. The US unemployment rate is, in principle, a much better measure of underlying employment, and hence economic, conditions. It shows (theoretically at least) the number of people wanting work but not in work as a proportion of the total number of people available for work. On Friday, June 3, this fell to 4.7%, a level last seen in 2007.

US unemployment 2006 to May 2016

The mismatch between the two data series suggests that the NFP outcome, far from reflecting US economic weakness, may actually be a sign of strength. Full employment is a concept we do not hear much about these days but it used to signal a point at which labour shortages emerge and measured employment growth is determined by supply and not simply demand. It used to be characterised by growing unfilled vacancies, labour unrest, and rising earnings.

Earnings are growing, albeit not especially fast. Nevertheless , it may be more instructive to focus on earnings growth going forward.

 Average hourly and weekly earnings of all employees on private non-farm payrolls by industry sector, seasonally adjusted

Industry

Average hourly earnings

Average weekly earnings

May 2015

Mar. 2016

Apr. 2016(p)

May 2016(p)

May 2015

Mar. 2016

Apr. 2016(p)

May 2016(p)

Total private

$24.97

$25.45

$25.54

$25.59

$861.47

$875.48

$878.58

$880.30

Goods­producing

26.12

26.66

26.81

26.91

1,052.64

1,069.07

1,080.44

1,084.47

Mining and logging

31.01

31.79

32.05

32.27

1,352.04

1,357.43

1,390.97

1,426.33

Construction

27.34

27.85

27.93

28.04

1,066.26

1,077.80

1,092.06

1,096.36

Manufacturing

25.16

25.74

25.91

25.99

1,024.01

1,045.04

1,054.54

1,060.39

Durable goods

26.52

27.05

27.21

27.27

1,089.97

1,111.76

1,121.05

1,123.52

Nondurable goods

22.79

23.47

23.67

23.79

913.88

934.11

946.80

953.98

Private service­providing

24.70

25.17

25.24

25.29

824.98

838.16

840.49

842.16

Trade, transportation, and utilities

21.79

22.19

22.23

22.25

753.93

761.12

764.71

763.18

Wholesale trade

28.72

29.30

29.41

29.48

1,117.21

1,136.84

1,144.05

1,143.82

Retail trade

17.41

17.80

17.79

17.84

546.67

551.80

553.27

553.04

Transportation and warehousing

22.88

23.06

23.09

23.03

890.03

897.03

895.89

895.87

Utilities

36.94

37.91

38.15

38.01

1,562.56

1,592.22

1,617.56

1,596.42

Information

34.86

36.07

36.24

36.59

1,265.42

1,298.52

1,304.64

1,317.24

Financial activities

31.52

32.14

32.18

32.18

1,185.15

1,208.46

1,209.97

1,206.75

Professional and business services

30.02

30.56

30.66

30.72

1,086.72

1,100.16

1,106.83

1,108.99

Education and health services

25.22

25.57

25.66

25.71

827.22

841.25

841.65

843.29

Leisure and hospitality

14.31

14.70

14.77

14.81

376.35

383.67

385.50

386.54

Other services

22.43

22.75

22.79

22.84

713.27

723.45

727.00

728.60

Footnotes

(p) Preliminary

NOTE: Data have been revised to reflect March 2015 benchmark levels and updated seasonal adjustment factors.

U.S. Bureau of Labor Statistics 

The proportion of firms reporting difficulty in recruiting is also of considerable interest though data are quite hard to find. Anecdotal evidence (for example) suggest that bottlenecks are emerging which is consistent with the unemployment rate. Finally labour unrest should also become more evident if labour market conditions become tight. Ironically the latest NFP data were apparently distorted by a major strike.

There is no definitive conclusion that one can draw at the moment. However, it is worth adjusting perspective and not simply looking at the headline NFP. The unemployment rate is now at levels not seen since 2007 and this diminishes the potential information contained in the NFP data. Earnings, vacancies, and labour unrest need much closer inspection.

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