A Good Jobs Number Amid a Weak Economic Recovery
As reported by the Bureau of Labor Statistics (BLS) on June 5th, May was a good month for the labor market. The number of FTE* jobs (which is derived from the BLS “Household Survey”) rose by 284,000, which is nearly identical to the 280,000 increase in payroll employment reported by the “Establishment Survey.”
May’s increase in FTE jobs was 50% greater than the increase in our working age population, which caused America to move 171,000 FTE jobs closer to full employment. If this rate of progress were to continue, the nation would reach full employment in early 2022—a full 22 years after the last time that we were there (April 2000).
Another positive development in May was the reported 397,000 gain in the number of people seeking jobs. However, labor force participation was still lower in May than it had been in January 2015—or in April 1978, for that matter.
The BLS’ preliminary numbers showed that (nominal) weekly wages for all employees rose at an annualized rate of 2.62% in May. This would be fairly decent, if it were to be sustained.
So, all in all, May was a good month for American workers. However, Obama’s recovery turns six at the end of June, so let’s give it an early report card. We’ll assume that June will be just as good a month for jobs as was May, and that 2Q2015 real GDP (RGDP) will come in at the 1.1% annualized growth rate that is currently being predicted by the Federal Reserve’s “GDPNow” tool.
Under these assumptions, RGDP growth during the first 6 years of the Obama recovery will have been abysmal: only 2.15% (annualized). This compares with a real economic growth rate of 4.82% for the comparable period during the Reagan recovery.
The labor market is supposed to improve during an economic recovery, but it deteriorated badly during Obama’s. Labor force participation (LFP) plunged by 2.67 percentage points, knocking this important metric back to the level of early 1978.
At the end of the recession (June 2009), the “headline” (U-3) unemployment rate was 9.5%. Under the assumptions outlined above, it would be 5.6% in June 2015. This 3.9 percentage point reduction in joblessness is almost pure illusion. All but 0.1 percentage points of the decline will have been the result of falling LFP. Adjusted to the LFP of December 2008, all that we will have to show for 6 years of “recovery” is a reduction of the unemployment rate from 9.7% to 9.6%.
The whole point of an economic recovery is to recover what was lost during the preceding recession. With respect to jobs, the Obama recovery has failed miserably.
Since the previous employment peak (November 2007) to June 2015, America’s working age population will have grown by 17.5 million. As of June 2015, on the margin, only 3.9 million of these people will have joined the labor force, and only 1.6 million of them will have found FTE jobs. If America were to have recovered the FTE employment rate that we enjoyed prior to the recession, we would have 9.0 million more people working in June.
Here is another illuminating comparison. It took 55 months for Obama’s recovery to get total FTE employment back to its pre-recession peak. During the Reagan recovery, this took 10 months.
The only thing that can produce full employment and rising wages is fast economic growth. America needs to average at least 3.5% RGDP growth to experience prosperity. This also happens to be the number that will render our Social Security and Medicare programs solvent, with no tax increases and no benefit cuts.
If the president we elect in 2016 serves two terms, he or she will take us through 2024. If RGDP growth for 2015 and 2016 averages the same dismal 2.39% that it did in 2014, America would need to grow at 6.86% during 2017 – 2024 in order to bring the 2001 – 2024 average up to 3.5%.
America could achieve 6.86% growth with the right supply-side economic policies. Assuming “good enough” monetary policy (which we do not now have), all it would take to raise RGDP growth by the required 4.47 percentage points would be to increase nonresidential capital investment within the U.S. by 10.2 percentage points of GDP (from about 16.2% of GDP to 26.4% of GDP). This is equal to about $1.8 trillion/year in terms of today’s GDP.
Perhaps 1.2 percentage points of the required 10.2% could come out of residential investment. (Our misguided policies have caused us to wildly over-invest in housing, which produces a GDP return of only 8.1%, and to under-invest in nonresidential assets, which produce a GDP return of 43.9%.) The other 9.0% of U.S. GDP that would be needed for nonresidential investment amounts to only 2.0% of world GDP, so it should be possible to attract the required capital via policies that encourage investment within the U.S.
Right now, the only Republican presidential candidate that is even talking about the possibility of 7% economic growth is Mike Huckabee (he mentioned this number at Rick Scott’s “Economic Growth Summit” in Orlando on June 2). Huckabee is also the only candidate advocating the FairTax.
Because it eliminates all taxes on savings and investment, the FairTax is the most “pro-growth” tax reform idea there is. The FairTax would move America from having the highest corporate income tax rate in the OECD to having the lowest (i.e., zero). Capital would flood into the U.S. from every corner of the globe. Every major corporation in the world would move its headquarters here. Foreign billionaires would be grounding their yachts on Florida beaches, and pleading for asylum.
Tinkering around the edges of economic policy will not turn the Obama recovery into the powerful economic expansion that America needs. Drastic changes are required to our monetary, tax, and regulatory regimes. This should be the focus of all of the Republican candidates for president in 2016.
*FTE (full-time-equivalent) jobs = full-time jobs + 0.5 part-time jobs
Originally posted on RealClearMarkets.com.