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Moving in the right direction, but just not there yet

Moving in the right direction, but just not there yet

Jobs will be added this month and wage rates are said to increase, but all eyes are on the labor force participation to see if there are actually signs of the economy picking up.

The focus of this month’s job report is less about the numbers and more about the recurring patterns. 200,000 jobs may be added this month with a 0.3% increase in average hourly earning, but what is of interest to see if the economy is really recovering is the labor force participation.

Last month’s encouraging job report showed an improving American economy. 242k jobs were added and the unemployment rate stood steady at 4.9 %. While the healthcare industry added whooping 57k jobs, mining jobs were severely cut by 18k. The broader picture is still that of recovery- over 2015, the rate of job openings increased from 3.4 to 3.7.

It’s not all good news though. Wages are forecasted to grow this month, making February’s falling wages seem like an outlier. But since there were a lot more people entering the workforce last month, wages are not likely to see a significant increase. Furthermore, despite a rising rate of job openings, the rate of hires has dwindled from 3.8 to 3.5 earlier this year. This means that companies are stalling actual hiring and aren’t eager to bump up pay packages to fill up spots. Instead, they are more likely to wait till they have someone more qualified for the job but on a lower pay.

Diane Swonk, founder of DS economics, said that wage gain has been largely absent during the economy’s recovery. The wage rate has either been stagnant or grown very little. So while a higher wage rate may seem like a cause for celebration, it has to accelerate for it to be significant enough to improve standard of living or see increased consumer spending.

This acceleration may be around the corner. Despite seemingly plummeting hiring rates, people are more willing to quit their jobs, showing increased confidence in finding a new job. The quit rate was 2.9% in December 2015. The last time it was this high was in 2001. This could potentially speed up the wage rate in the next couple of months.

What’s also important to point out is that 70% of the job increases were in low wage service jobs. This does not translate to an increase in consumer spending. It could also lead to lower confidence because month after month numbers suggest economic recovery, but people aren’t actually seeing money in their pockets.

This is why economists are worrying less about job numbers and more about labor force participation and employment to population ratio, especially within certain categories. Steve Blitz, chief economist at ITG, said that he’s paying special attention to the employment to population ratio of 25-34 year olds. “People from this age group are big leverage buyers”, he said, “ So the ratio will help us understand whether auto sales and home sales- which have been on the rise- will continue to trend.”

Labor force participation will continue to rise because more people are returning to the labor force. But Elise Gould, senior economist at Economic Policy Institute, said that the picture is incomplete if missing workers aren’t tracked. Missing workers, which include discouraged workers, are not employed but not counted as unemployed because they are not actively looking for jobs. But because there are so many missing workers and unemployed workers, it gives companies more leeway to pay lower wages, which is why wages are not significantly rising even as unemployment remains stable.

The unemployment rate this month is likely to stay steady at 4.9%. Some predict that it may rise soon. If it does it may be good news because it means more people are looking for jobs. Diane Swonk, founder of DS Economics, is afraid the unemployment rate may drop but hopes it stays steady. “Because if it stays same then it’ll mean more people are participating and that we are re-engaging workers,” she said.

A month does not make a trend and while it seems like the economy is moving in the right direction, these are small steps. The repercussions of a weak global economy have not been fully considered or factored in and changes within the American economy are still minor to boldly spell ‘recovery.’






Posted on

April 6, 2016