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Maximum Employment Is Within Reach

Confusing Messages Drown Out Solid Jobs Report

By Christine Cooper and Rafael De Anda CoStar Analytics December 8, 2021 | 4:15 AM

The Federal Reserve’s mandate to pursue maximum sustainable employment may already be met. At this point, it could be argued that the economy is nearing full employment — the optimal condition where everyone who wants a job has one. Last week, the Bureau of Labor Statistics reported that the unemployment rate fell to 4.2% in November, down from 4.6% in October and 6.7% a year ago. That is near the level of the natural rate of unemployment, where the only people looking for work are those who recently entered the workforce or are transitioning between jobs.

That good news didn’t make many headlines, though, as most attention went to the divergence between the results of the two surveys used in the report: the household survey that reports on the status of individuals in the household, whether employed, unemployed or not in the labor force, and the establishment survey of firms across the nation reporting on the number of workers on payroll and how much they are paid.

Usually, the differences reported by the surveys are not consequential, but November’s report was stark in the vastly different number of employed persons estimated. Firms reported adding 210,000 positions in November — far below expectations of half a million or so. Those figures are from the establishment survey, which is generally more reliable given its sampling size and annual benchmarking. In contrast, in answer to the household survey, 1.1 million more people reported being employed than in October. These numbers can include the self-employed, unpaid family workers and household help — all of whom are not counted in the establishment survey. The surveys diverged in June as well, but in the opposite direction — firms reported hiring 962,000 more workers than in May while households noted that 18,000 fewer people were employed. So clearly there can be a disconnect, although analysts tend to take more notice when the household survey outpaces the establishment survey, as in this case.

Last week’s jobs report continued another trend seen recently where data for prior months were revised higher. The change in nonfarm jobs during October was revised from 531,000 jobs to 546,000 jobs, and September’s job gains, originally reported at 194,000 jobs, was revised to 312,000 jobs last month and revised higher again to 379,000 jobs this month. Upward revisions were evident in June, July and August as well. Upward revisions to nonfarm payrolls may continue because business formation has been exceptionally strong since the middle of 2020 and could be confounding the deaths-births model the Labor Department uses to estimate the number of new jobs generated by newly opened businesses in the establishment survey.

Applications for new businesses have skyrocketed during the pandemic, as many intrepid individuals ventured out on their own as jobs disappeared. Not all such applications resulted in viable businesses, but many did. The Labor Department models business formations because it takes time for a new business to make its way into the establishment survey, and new businesses are usually growing. In contrast, business that are winding down will show declining payrolls until they close. The Census Bureau estimates that roughly 386,000 businesses are expected to open over the next four quarters based on business formation applications filed in 2021, up from 308,000 in 2020 and 287,000 in 2019. New business owners that do not employ workers are considered employed in the household survey.

Another trend that continued in the jobs report is the robust hiring by transportation and warehousing businesses, as well as professional and technical services firms. Both sectors have exceeded their pre-pandemic employment levels and have among the highest job opening rates, per the Bureau of Labor Statistics Job Openings and Labor Turnover Report, indicating that they may continue to drive job growth in coming months. Retailers, on the other hand, have struggled to fill positions. November marks the start of the holiday shopping season, so seasonal adjustment factors are very large. Seasonally adjusted payrolls in the sector fell by 20,000 positions in November, while non-seasonally adjusted payrolls grew by 332,000 positions.

Indeed, firms in many industries across the nation are having trouble finding workers and are offering higher wages to meet demand, especially among the lower-paying industry sectors such as leisure and hospitality, where hourly pay is now 15.4% higher than a year ago, and retail, 6.1% higher. Economy watchers have been carefully tracking wage gains to see if they turn into faster inflation. But the average hourly wage across all industries rose by 0.3% in November, slower than in any month since March of this year.

Another positive indicator in the November jobs report was the uptick in labor force participation to 61.8%, its highest rate since March 2020 but still below the re-pandemic rate of 63.3%. While there are few people looking for work, many that were employed prior to the pandemic have left the labor force altogether and are slow to return. A mix of permanent and temporary reasons to stay on the sidelines make it difficult to determine if pre-pandemic participation rates will return. A narrower measure of labor force participation that includes people age 25 to 54, or at their prime working age, reached 81.8% in November, compared to 82.9% in February 2020. But the current prime working age population resembles 2017 levels, when the Federal Reserve last began to raise its target federal funds rate.

Overall, the November report made for confusing headlines, but still shows a labor market largely on the mend. With continued strong consumer spending, easing supply-chain constraints, and strength in manufacturing and non-manufacturing surveys, the economy is on strong footing in the fourth quarter.

What We’re Watching ….

The emergence of the omicron coronavirus variant could threaten the fourth-quarter economic boom, especially if, as evidence seems to show, the variant is more virulent and more easily bypasses vaccination and spreads during a time when cold weather drives more people indoors and into closer quarters with others.

More recently, Fed officials have put the term “transitory” aside and indicated they would be willing to taper asset purchases more quickly than originally planned, with discussion of a new timetable starting at their December meeting next week. Given that employment appears to be heading toward full recovery and their inflation target seems to have been met as well, the appetite for continued monetary easing is diminishing.

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