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The September Employment Report

Contributed by Raymond James

Nonfarm payrolls rose about as expected last month. However, figures for July and August were revised significantly higher. The unemployment rate fell sharply and unexpectedly, but one should take that with a grain of salt considering the seasonal adjustment issues (the start of the school year). Sifting through the details, the report suggests “more of the same.” Job gains have been roughly consistent with the pace of population growth. However, we’re still not making up much of the ground that was lost during the economic downturn.

Officially, we’ve added 4.726 million jobs since the labor market bottomed in February 2010, and nearly 5.2 million if you take into account the estimated benchmark revision that will be applied in February. That sounds like a lot, but it averages to about 167,000 per month. We need around 120,000 per month to be consistent with the growth in the working-age population.

Government employment has declined since 2008, reflecting pressures in state and local government budgets. Federal government employment is up by 40,000 since December 2008 – not a huge increase, but held back by the contraction in the U.S. Postal Service. The downtrend in state and local government jobs has been a significant headwind for the overall economy, but the pace of job losses slowed sharply earlier this year and we’ve now seen gains in the last few months. If state and local government has bottomed, then that’s one less headwind facing the economy over the intermediate term.

The unemployment rate plunged to 7.8% in September, down from 8.1% in August and 9.0% a year ago – and more than two percentage points lower than two years ago. That sounds impressive, but a lot of the decline in the last two years has been due to a decrease in labor force participation. That wasn’t the case in September. Labor force participation rose. Moreover, the employment/population ratio, the preferred measure of labor force utilization, rose 0.3 percentage point. Still, the trend over the last two years appears roughly flat, consistent with the view that we’re treading water. Job growth has been running a bit ahead of population growth, but not enough to regain many of the jobs lost during the downturn. We need to see monthly payroll gains on the order of 250,000 to 300,000 per month, every month, for two to three years.

Note that the household survey showed employment rising by 873,900 last month, while unemployment fell by 455,000. However, the survey, based on a sample of 60,000 households, does not yield good measures of levels. It does generate reasonable estimates of ratios, such as the unemployment rate, but that’s still only accurate to ±0.2%.

There is some debate about whether unemployment is cyclical or structural, with most economists (and Fed officials) seeing it as cyclical. However, the fear is that cyclical unemployment will turn into structural unemployment over time; hence, the Fed’s haste to get more significant job growth. A further easing of headwinds would help that along.