On Jobs, U.S. Is Looking Up to Canada
The Bureau of Labor Statistics reports that the U.S. economy added 175,000 nonfarm payroll jobs in May, beating a consensus forecast of 163,000. The BLS also revised the March and April employment data, subtracting a total of 12,000 from those months' gains. Thanks in part to an increase in the labor force, the unemployment rate rose to 7.6 percent, from 7.5 in April. Meanwhile, average hourly earnings were flat for the month, missing expectations of a 0.2 percent gain.
As has been the case ever since the trough in early 2010, private-sector job creation offset shrinking government employment. There are 45,000 fewer people working for the federal government since February, probably the result of sequestration.
Manufacturing, which was once due for a "renaissance," shed 8,000 jobs -- a large miss from the consensus forecast of a gain of 4,000. That corresponds with the weakness in manufacturing employment conditions reported in the Institute of Supply Management's survey, which came out earlier in this week. On the other hand, employment in "food services and drinking places" rose by 38,000 -- about 22 percent of the month's total.
The new data are notable mostly for their consistency with previous reports. Since the beginning of 2011, the U.S. economy has added about 181,000 each month, with remarkably little variation. Two crucial questions emerge: Will jobs continue to be added at this pace? And if so, how long can we expect to wait before once again reaching full employment?
It's impossible to predict much about the future rate of job creation. But careful analysis of demographic trends can give us some clues about the size of the employment gap. The Federal Reserve Bank of Chicago recently published a research note that does exactly this, arguing that aging and slowing population growth mean fewer jobs need to be added to prevent the unemployment rate from rising.
The boffins at the Chicago Fed "project trend employment growth to slow to about 80,000 per month over the next two years and then drop to roughly 35,000 jobs per month, on average, from 2016 to 2020." Those predictions include embedded assumptions about immigration and average retirement ages, which creates a bit of a range.
If we take the most optimistic assumptions into account, trend payroll employment growth could average a bit more than 120,000 jobs per month over the second half of the decade, roughly where it stood in 2012. Likewise, the most pessimistic assumptions would result in little or no growth in trend employment growth, on average, over the same period.
Given all this, the Chicago Fed economists estimate that the employment gap won't be closed until the end of this decade. According to them, we would need to add an average of 240,000 jobs each month for the next three years to return to full employment. Since the beginning of 2011, there were only five months that registered job growth at that pace or faster. Using a more conservative estimate of 165,000 jobs per month, the Chicago Fed economists project that we would close the job gap in the middle of 2018. The last cyclical peak was in 2007, so this puts the U.S. on track for a lost decade.
In contrast to the gloomy news coming from the U.S., Statistics Canada reported its best jobs numbers in decades. The Canadian dollar jumped on the news, although the value of shares traded on the Toronto Stock Exchange opened sharply lower before rising later in the morning. The number of working Canadians soared by 95,000 in the month of May. The labor force also expanded by 80,000, pushing the unemployment rate down slightly to 7.1 percent, from 7.2 percent in April.
Over the past year, Canadian employment has expanded by 1.4 percent, compared with 1.6 percent in the U.S. On the other hand, the number of working Canadians surpassed its previous peak back in late 2010. The U.S. still has 2 percent fewer people working than at the end of 2007.
Canada's strong performance was driven by construction, which added 43,000 jobs in May and has added 74,000 over the past 12 months, an increase of 5.8 percent. For comparison, the U.S. has hired 189,000 construction workers since May, 2012, for a gain of 3.4 percent.
As usual, the interesting question is whether this will last. The Financial Times's Izabella Kaminska is skeptical, noting that highly indebted consumers, an enormously expensive housing market and declining commodity prices will retard growth. These forces suggest that Canada's outperformance may be short-lived. U.S. consumers have made some modest progress at reducing their debt burdens over the past several years, while housing is still relatively inexpensive. Unlike Canada, the U.S. is a net importer of commodities. That means falling prices act like a tax cut, putting more money in the hands of U.S. households and firms. Maybe the latter will use it to, you know, create some jobs.
(Matthew C. Klein is a contributor to the Ticker. Follow him on Twitter.)