U.S. ECONOMY
The Federal Reserve has never linked monetary policy to a specific economic statistic, so their decision to tie policy to a substantial improvement in the labor market is unprecedented. However, it is merely an extension of their policy mandate to foster maximum employment. For a self-sustaining expansion to take hold, job growth must be strong enough to get the unemployment rate down. In order for that to happen, job growth must exceed the growth rate of the labor force. As we have noted, job growth does not begin at zero, but at 110,000, since that is the number of jobs needed to absorb new entrants into the labor market. The current recovery has created about half the average number of jobs as in prior post-World War II recoveries, despite unprecedented fiscal stimulus and monetary accommodation.
According to the National Employment Law Project, a majority of jobs lost during the recession were in the middle range of wages. Their analysis included 366 occupations traced by the U.S. Department of Labor. They created three equal groups, with each representing one-third of total employment in 2008. Officially, the recession began in December 2007 and ended in June 2009. The middle-third group had median wages of $13.84 to $21.13 and accounted for 60% of job losses between January 1, 2008 and early 2010. Unfortunately, only 22% of all jobs created since early 2010 have been in the middle-third of the labor market. This data strongly suggests that many workers are being forced to accept lower paying jobs, since the lower-third group has accounted for 58% of total job growth since early 2010, but only accounted for 21% of jobs lost during the recession.
According to the U.S. Census Bureau, median annual household income fell for the fourth straight year in 2011 to $50,054. The median is the number at which half the households are above, and half below. Since the end of 1999, median household income has declined 8.9% from its all time high of $54,932, and is now where it was in 1991. The labor participation rate fell to its lowest level since 1981 in August, as millions of unemployed and discouraged workers have simply given up looking for a job.
In August, the unemployment rate dipped to 8.1% because 368,000 workers dropped out of the labor force. This is an obvious flaw in the Department of Labor’s methodology, since it suggests the unemployment rate would drop to 6%, if we could just get another 4 million unemployed job seekers to throw in the towel. If half of those who have given up looking for work were included in the labor market, the unemployment rate would be 9.5% or higher.
Recently, much has been made of the improvement in housing. We think some of the exuberance is overdone and likely premature. But let’s put it in perspective. In 2006, new home construction represented over 6% of GDP. After declining by more than 60%, it now is 2.3%. If housing increases by 20%, it will add less than 0.5% to GDP. One of the headwinds still haunting housing is that lending standards remain tight for mortgages. The median credit score for an approved mortgage loan has increased by 40% since 2006, and “now exceeds by a considerable margin” the average of the last 12 years, according to the Federal Reserve. The low level of inventory for sale is a plus, but it is the result of 20 to 25% of existing homeowners being underwater on their mortgage, which means they are also removed from the demand side of the equation.
Consumer spending is 70% of GDP and has more than 30 times the impact of housing. Wages have increased a measly 1.7% from a year ago, while the real cost of living has risen by almost twice that amount. If Congress rescinds the 2% reduction in social security taxes, the net pay for the median worker will fall by $1,000. While improvement in housing is certainly a plus, the health of the labor market, and how Congress handles the fiscal grand canyon dwarfs the impact of housing.
After reviewing how weak the labor market continues to be, it is easy to understand why the Federal Reserve decided to target improvement in the labor market going forward. Its actions will help on the margin, but there is no meaningful direct link between buying mortgage-backed securities and job growth. The global economy is slowing, and there will be some drag on growth in the U.S. in 2013, no matter how well Congress handles the fiscal grand canyon.