Reading Labor Markets

When the September employment report was released on October 5, the top-line payroll employment gain for the month, as reported in the U.S. Bureau of Labor Statistics’ (BLS) establishment survey, logged in at 114,000. Under standard assumptions, a number of this magnitude would be barely enough to absorb the growth of the labor force and keep the unemployment rate constant. In contrast, in that same October 5 report we learned from the BLS household survey that the measured unemployment rate fell from 8.1 percent in August to 7.8 percent in September.

According to Friday’s BLS report on the employment situation for October, the top-line payroll employment gain for the month from the establishment survey was 171,000. At that pace—which is also the current average gain for the past three months—the Atlanta Fed jobs calculator suggests the unemployment rate should fall another one-half of a percentage point over the next year. At the same time, according to the BLS household survey, the unemployment rate rose from 7.8 percent in September to 7.9 percent in October.

This is as good an illustration as any to explain why, on November 1, Atlanta Fed President Dennis Lockhart said the following in a speech to the Chattanooga Tennessee Downtown Rotary Club:

In its post-meeting statement on September 13, the FOMC said, “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”…

For policy purposes, I think it’s appropriate to be cautious about relying on a single indicator of labor market trends—for example, the unemployment rate—to determine whether the condition of “substantial improvement” has been met.

As the FOMC went into its September meeting, the official BLS statistics indicated that net U.S. job creation in August was a mere 92,000. That number is below the “all else equal” threshold of about 100,000 jobs required to keep the unemployment rate from rising, and that information is what Fed policymakers had in hand when they met on September 12–13 and decided on the policy action described by President Lockhart.

On Friday, after two revisions, the BLS told us jobs expanded by 192,000 in August, well above the average for the jobs recovery that started in early 2010, 100,000 jobs (more than double) above the initial estimate.

Looking through month-to-month variations is not a lot of help in real-time tea-leaf reading. Here is the 12-month moving average of employment gains, the blue line indicating the way things looked in September, the red line showing the way they look today:

Over time, it remains the case that monthly employment gains are pretty consistently coming in at 150,000 to 160,000 jobs created per month, and that rate has been enough to generate relatively steady declines in the unemployment rate:

That could change, of course, and the last four months of data have generally shown an acceleration in the job-growth trend. But the data definitely were not indicating that trend as it was happening, an unfortunate reality that isn’t likely to change. One way to soften the blow of that problem, emphasized in the Lockhart speech, is to keep an eye on as a broad a set of signals as possible:

… let me share a qualitative framework for defining “substantial improvement.”

The starting point certainly should be the headline unemployment rate and the payroll jobs number. The interpretation of movements in these two statistics would be enriched and reinforced by a review of additional data elements.

I added the emphasis there, as I think the point bears highlighting. President Lockhart goes on to give examples of what he would look for in determining whether the substantial improvement threshold has been met. Things like reductions in the numbers of marginally attached and discouraged workers, growing labor force participation rates, declining numbers of people who want full-time work but have to settle for part-time, and positive forward indicators like falling initial claims for unemployment insurance.

The Calculated Risk blog continues to be a one-stop shop for a lot of this information—here and here, for example—and overall nothing much overturns the picture of steady, but slow, progress. That would suggest the acceleration of the past several months is probably not a new trend, but a continuation of the same-old same-old. But then again, the track record painfully demonstrates how hard that is to know in real time.

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About David Altig 91 Articles

Affiliation: Federal Reserve Bank of Atlanta

Dr. David E. Altig is senior vice president and director of research at the Federal Reserve Bank of Atlanta. In addition to advising the Bank president on Monetary policy and related matters, Dr. Altig oversees the Bank's research and public affairs departments. He also serves as a member of the Bank's management and discount committees.

Dr. Altig also serves as an adjunct professor of economics in the graduate school of business at the University of Chicago and the Chinese Executive MBA program sponsored by the University of Minnesota and Lingnan College of Sun Yat-Sen University.

Prior to joining the Atlanta Fed, Dr. Altig served as vice president and associate director of research at the Federal Reserve Bank of Cleveland. He joined the Cleveland Fed in 1991 as an economist before being promoted in 1997. Before joining the Cleveland Fed, Dr. Altig was a faculty member in the department of business economics and public policy at Indiana University. He also has lectured at Ohio State University, Brown University, Case Western Reserve University, Cleveland State University, Duke University, John Carroll University, Kent State University, and the University of Iowa.

Dr. Altig's research is widely published and primarily focused on monetary and fiscal policy issues. His articles have appeared in a variety of journals including the Journal of Money, Credit, and Banking, the American Economic Review, the Journal of Economic Dynamics and Control, and the Journal of Monetary Economics. He has also served as editor for several conference volumes on a wide range of macroeconomic and monetary-economic topics.

Dr. Altig was born in Springfield, Ill., on Aug. 10, 1956. He graduated from the University of Iowa with a bachelor's degree in business administration. He earned his master's and doctoral degrees in economics from Brown University.

He and his wife Pam have four children and three grandchildren.

Visit: David Altig's Page

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