Westpac’s Elliot Clarke has today delivered a sobering assessment of the US employment landscape, which points to tapering by the Federal Reserve being pushed well into the future:
Last night saw the release of the long-awaited September employment report. The survey was conducted ahead of the shutdown, thus potentially giving a clear indication of underlying momentum before the fiscal shock. Coming in at 148k, the payrolls print disappointed market expectations of around 180k and led many market participants to push their tapering timeline back to March 2014. We remain of the view that tapering is a risk in late 2014, but only if the US economy picks up materially (which we do not currently expect).
Key to our view is the underlying trend apparent in the US labour market data. Starting with payrolls, over the past year, we have seen a marked deceleration in the pace of net job creation. Over the six months to March 2013, nonfarm payrolls reported an average of 208k new jobs per month. The rate of gain decelerated to 182k in the June quarter, then just 143k in the September quarter.
The stepwise decrease in job creation has been due to soft private-sector employment growth, a stark contrast to the macro-employment theme of this recovery: public-sector job losses partly offsetting (at best) solid job growth in the private sector. The end to public-sector job shedding is certainly a welcome development, but it is not one that can be relied upon to persistently stoke aggregate job growth as all levels of government are financially constrained.
The deterioration in private-sector job growth from Q2 to Q3 2013 was largely driven by a marked deceleration in leisure & hospitality and professional & business services job creation. The halt in job creation in leisure & hospitality is not surprising given the poor tone of services consumption through 2013. It stands in contrast to continued solid job growth in the retail sector, supported by solid non-durables spending and strength in durables consumption (primarily cars).
The slowdown in professional & business services is also not surprising given the softening apparent in wholesale durables orders in mid-2013; together these factors point to firms taking a cautious approach to investment and hiring in light of the uncertain outlook – which the shutdown arguably intensified. The high proportion of the jobs growth in this sector due to temporary workers is also consistent with the thesis of business caution: 56% of new jobs in the sector were temporary in Q3, versus 32% in the previous nine months.
Turning to the household survey, 133k new jobs were reportedly created in September, while the unemployment rate rounded down to 7.2% versus 7.3%. What is most relevant in terms of coming to a holistic assessment of labour market conditions are trends in participation (down) and in the employment to population ratio (unchanged at 58.6 in September, up just 0.4ppts from the cycle trough).
Declining participation remains a structural trait of the US labour market, although the reason behind this trend looks to have shifted over the past two years. Last year we showed that the vast majority of the decline in participation since the GFC (end 2006 to end 2011) had been due to younger cohorts reducing their participation in the workforce. Arguably the weak labour market incentivised younger workers to skill up (or reskill), with the expectation that the economy would heal and provide an opportunity to earn a return from this investment.
However, what has been clearly evident throughout the recovery is that opportunities to re-enter the workforce at points commensurate with their new skill level have remained very scarce. This looks to have resulted in many of these individuals remaining outside of the workforce. This has continued to hold down the level of aggregate participation through 2012 and 2013. More recently though, it has been the ageing of the population which has led to the continued decline in the participation rate.
This is a trend that will persist for many years to come: the proportion of the population over the age of 55 is forecast to rise from 32% in 2012 to 37% in 2022, then to 40% by 2060. The impact of the ageing of the population will be primarily statistical in the near-term (a higher weight for this cohort being applied to their much lower participation level). But further out, older workers will have to retire. Abstracting from labour quality issues, without an offset from rising immigration of working-age individuals, the rising dependency ratio will impact potential growth negatively.
Given these near and far concerns, it is little wonder that Chicago Fed President Evans noted last week that he wants to see the unemployment rate fall while the participation rate rises before he is willing to agree to tighter policy. A similar position is likely to be taken by the broader FOMC under the leadership of Chair-elect Yellen, a vocal champion of the labour market.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
