Weak labor market data: Not necessarily a signal of a slowing economy

Last Friday, the Labor Department released employment figures for the month of May. The numbers proved somewhat disappointing. Many economists suggest last week’s weak labor market data means the American economy is slowing down. Some say this slowing economy marks the beginning of the end of the long recovery / expansion following the last recession.

Weak labor market data?

While economists expected the economy to add 180,000 jobs in May, the actual number was a paltry 75,000. And the number of jobs added in the prior months was reduced by 75,000, also disappointing. That means the 2019 monthly average of new jobs is 60,000 jobs lower than in 2018. Oddly, the unemployment rate remained constant at a record low of 3.6%.

Additionally, many employers report increasing difficulty finding qualified employees. They credit this factor for helping to hold down the rate of new hires. It could be yet another factor in our recent weak labor market situation.

While wage growth still exceeds 3% annually, its growth rate did slip a bit from the prior month. That is not consistent with a tight labor market where wage increases are generally expected to occur.

Reports also indicate that the number of unemployed people remained constant at 5.9 million. Taken together this data may suggest some fundamental changes are occurring in the workplace. The changes could result in an economy that can achieve 3% or higher annual growth, even if the labor force increases at a much lower rate than the present average. And this can occur without any increase in inflation.

Slowing economy? Or a problem filling existing job openings?

Since the US population is growing at less than 1% annually and the labor force is growing by about .6% annually, there could be a problem filling future jobs. A labor shortage would lead to rising wages and inflationary pressure. That’s something that could also lead to a slowing economy. But the recent weakness in the job market could signal the beginning of a new and unexpected workplace environment.

Mostly because Congress reduced tax rates for corporations and high-income earners in 2017, available new capital continues to increase. The timing of this proved the perfect way to achieve President Trump’s economic goals of high growth and low inflation, leading to a full-employment economy.

Increasing productivity via technology investments may be influencing employment numbers

For the last decade or so, businesses have increasingly emphasized efficiency and improving productivity. Dozens of Silicon Valley start-ups have developed “software as a service” (SAAS). Many of these now public companies now help businesses to use SAAS to increase output while enabling them to hire few if any new workers. This is another way where apparently weak labor market data may, in fact, not signal a slowing economy. Rather, the data may signal improving productivity and worker efficiency.

Clearly, by making judicious investments in technology, firms can grow without needing to add more labor and its attendant costs. Last month’s data suggests this may currently be the case in both the service and manufacturing sectors.

Again, for a multiplicity of reasons, we can see that the manufacturing sector of the American economy is growing. That’s yet another unexpected development. This new growth is not labor intensive, but, rather, capital intensive. In other words, instead of adding more workers to an assembly line, companies now add robots to the line. It takes one worker to controls a number of robots, making each worker much more productive.

May’s unemployment rate was 3.6%. That marks yet another month at what economists regard as a full employment level. For a number of reasons, this rate may not go much lower than this. Also, it appears that the higher wages and increased opportunity have not drawn a large number of discouraged workers back to the labor market.

Labor participation rate: Another factor

Prior to the last recession about 66% of adults were in the labor market. That number dropped to under 62.3% by May 2015. That’s because a number of workers left the labor market during the severe recession and the extremely weak recovery, because of the lack of opportunity. In May 2019 it is 62.8%. That means, in spite of the new opportunity and higher wages, the discouraged workers are not coming back into the labor market.

With slow population and labor market growth and with a continuing low percentage of the workforce willing to work, the economy can not depend on labor figures to sustain growth. That’s what the May job numbers seem to say.

As indicated by recent weak labor market data, it does appear that economic growth has slowed in the second quarter of this year. The first quarter witnessed a 3.2% growth rate. It looks like the second quarter might be less than that. Although certainly possible, it doesn’t necessarily mean a slowing economy is now the new normal.

Fundamentals of the American economy remain strong

The fundamentals of economic growth in America remain strong. On the whole, employment, wages and personal income are up, corporate profits continue to increase, interest rates and energy costs continue to drop, consumer confidence remains sky high and the administration continues to reach trade agreements, albeit slowly. These agreements will open foreign markets to US manufacturers.

As long as productivity exceeds wages increases, labor costs will not rise. If the Federal Reserve doesn’t push interest rates up further, more borrowing should occur. If corporations can raise new capital to increase supply as demand grows, inflation should remain low.

Ultimately, this means we can have solid economic growth plus low inflation and full employment. In short, it appears President Trump’s policies and timing continue to work wonders for the American economy.

MICHAEL BUSLER

Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years.

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