The monthly US employment report has evolved steadily: once a lagging indicator of the underlying state of the economy, it is now seen more as a leading indicator of economic, political and social trends. Friday’s data tell us, for once, rather good news.
Let’s start with the numbers that make headlines and move markets. With 114,000 new jobs in September, the unemployment rate falling to 7.8 per cent (after fluctuating all year from 8.1 per cent to 8.3 per cent) and earnings increasing on account of both hours worked and average pay, the labour market is gaining traction. This healthy development is crucial for supporting consumption, encouraging investment and limiting further income and wealth inequality.
Yet this brighter picture must be sustained if America is safely to deleverage those segments of the economy that remain over-indebted. A significant part of the monthly improvement is associated with part-time, rather than full-time, employment. With Congress too divided to enact meaningful policy measures, the Federal Reserve will have no choice but to remain deeply engaged in uncertain policy experimentation.
The implications go well beyond economic policy and extend to the political process.
The unemployment rate is now back where it was when Barack Obama assumed the presidency in January 2009. Friday’s report will therefore make it harder for his opponent Mitt Romney, however energised he may be after Wednesday’s televised debate, to refocus the presidential campaign on disappointing economic outcomes. Remember that to win Mr Romney needs not only to provoke voter concerns about the economy, but also to convince more Americans that he is suitable for the White House.
The data will also resonate in congressional races that are important to future co-operation between the executive and legislative branches of federal government – thus affecting the ability of the political system to respond properly after the November elections.
These debates will no doubt play out in the media in the coming days, but they should not obscure issues that also matter a lot in the long-term: the structural health of the labour market and its ability to recover in a sustained and robust manner.
With an increase to 58.7 per cent, the employment-population ratio is edging up from a multi-decade low. This is important as the country cannot rely on a steadily declining share of its adult population to maintain and improve living standards, meet rising health costs and foster less divisive income inequality.
There is another labour market issue that deserves mention here, and that is the number of workers out of a job for six months or more. At 4.8m (and 40.1 per cent of the total), long-term unemployment is still too high: it is slowly improving, but still includes too many who are young (the teenage unemployment rate is an alarming 23.7 per cent) or have limited education (an 11.3 per cent unemployment rate for those with less than a high school diploma).
Such long-term joblessness is particularly detrimental for households, communities and government. It inhibits labour market flexibility, erodes skill levels over time and strains already-stretched (and often inadequate) safety nets. For those who have yet to secure their first “real” job, it risks tipping them from being unemployed to unemployable.
The bottom line is simple. We should certainly welcome Friday’s data, the best we have seen for a while. But it is too early to celebrate. And we should certainly not relax the pressure on politicians in Washington to do more to overcome the US unemployment crisis.
Between those in Congress ignoring the severity of the problem and others delaying substantive policies, America’s insidious jobs crisis could become still more entrenched. If that happens, human suffering will increase and politicians will find it even harder to overcome other policy challenges – from the impaired fiscal outlook to a still-fragile housing market – that are already deeply structural in nature.
The writer is the chief executive and co-chief investment officer of Pimco