US Job Openings: Rising Once Again
While the overwhelming bulk of global economic news has been negative over the past few months, it is easy to overlook positive economic signals, however scant. For example, the Fed will no doubt have been disappointed by the rise in the civilian unemployment rate to 8.3% in July, despite the much larger-than-expected gain in non-farm payrolls. Since the release of the Employment Situation report, there has been additional information about the state of US labour demand: not all of the news about the US labour market is bad. The monthly report entitled Job Openings and Labour Turnover Survey (JOLTS) was released late last week for the month of June. It incorporates some positive news that the mainstream financial media is overlooking, most important of which is the recovery in job openings. This will provide some welcome news for Fed Chairman Bernanke.
The Fed Chairman has been exasperated by the slow decline in the unemployment rate since peaking in 2009. There has been a vast array of possible explanations postulated by commentators as to why the unemployment rate has been so sluggish to decline, including the mass onset of structural unemployment. Chairmen Bernanke will probably concede that there are some sectors of the US economy going through structural adjustment which will result in lower labour demand at any given point of the economic cycle. The housing sector provides an excellent example of this process. It has, however, been the lack of improvement in job openings that have been a consistent source of frustration for the Fed Chairman. In fact, Chairman Bernanke has cited the dearth of improvement in job openings as being the major reason why the civilian unemployment rate has been so sticky since the start of the economic expansion in July 2009. There are signs that this could be changing.
Recent Improvement in Private Job Openings
The JOLTS report for June showed that there were 3.8 million job openings in the US economy. This compares to 2.2 million openings at the start of the current economic expansion. Private sector job openings in June stood at 3.4 million compared to 1.9 million in July 2009. The all-time high for private job openings was 4.9 million in January 2001. The current level of unemployment in the US 12.8 million compared to 14.7 million at the end of the Great Recession in June 2009. The dynamics underpinning the current cycle need to be placed into context.
The JOLTS survey provides historic data going back to 1999. We can only compare the current cycle to the recovery after the 2001 recession. The characteristics of the 2001 recession were profoundly different to the Great Recession: economic contraction was relatively mild and concentrated in capital spending. In contrast, the Great Recession and the subsequent recovery affected all segments of aggregate demand. Private sector job openings increased by just 274K in the first three years of the post-2001 economic recovery. This compares unfavourably to the +1.5 million increase for the current post-Great Recession expansion. The recovery in private job openings is 5.5 faster than the post-2001. The civilian unemployment rate during the first 3 years of the post-2001 recovery was even stickier than the present expansion, declining from 5.7% in December 2001 to 5.4% three years later. This implies an average decline of -0.1% decline per annum.
While critics like to lambast the Fed for not doing enough to lower the unemployment rate in the current expansion, the rate of improvement is far superior at this stage than the post-2001 recovery. The average yearly decline in the civilian unemployment rate since its peak in October 2009 has been 0.6%. This superior achievement has, however, not come without associated costs: the Fed has been forced to bloat its balance sheet through quantitative easing and the federal government budget sector has also expanded significantly. The policy intervention by the Fed and the Administration has also incurred political implications.
Federal Government Sector Labour Demand Has Been Weak For Some Time
The impending US Presidential election is arguably the most important for decades in terms of defining the future role of the state. The Republicans have long argued that government’s role in the US economy is too large and needs to be shrunk. This ideology underpinned their negotiation stance when the debt ceiling negotiations were taking place last summer: long-term spending cuts had to be instituted in return for co-operation to lift the debt ceiling higher. This implies a squeeze on employment by federal government.
Closer analysis of the data showing government’s share of employment would suggest, however, that the days of ultra-big federal government are behind us. Civilian federal government employment has been contracting for some time: federal government employment is down -345K since President Reagan left office in 1989. The growth in government employment over the past 20 years has, therefore, been at the state and local levels. Since the end of the Great Recession, however, there have been -640K job losses at these two levels of government. The need to adhere to constitutional requirements to balance budgets has been the major reason for the employment losses. There are, however, signs that an end to the retrenchment could be in sight: tax revenues at state and local government are starting to rise again. This development has been historically been associated with subsequent rising levels of employment. Part of the increase in tax revenues is attributable to higher property taxes, as home prices have shown signs of improvement.
Housing Remains a Headwind for Employment
The housing bubble was a significant source of new job creation, particularly at the small business level. It is hardly surprising that the bursting of the bubble will act a headwind to new job creation for many years by reducing potential GDP growth. While residential construction is no longer a negative contribution to GDP, any recovery is likely to be more moderate during this cycle. Furthermore, the nature of residential construction in this recovery will fundamentally differ the previous cycle: renting will prove to be more popular than owner-occupancy. This implies that multi-family construction will be stronger than in the previous cycle. There will be implications for job creation in this scenario, not only in terms of construction employment but also in areas related to home improvements.
Will Slower Earnings Growth Hamper Employment Prospects?
We have just completed the final busy week of Q2 financial results for S&P500 companies. The reporting season has been characterised by the lowest incidence of top-line beats since 2009 Q1. Although Q2 positive EPS surprises are respectable, earnings expectations for Q3 are being scaled back due to uncertainty about the global economic cycle. The need to pare guidance in Q3 raises questions about the hiring intentions of US corporations during H2. Will companies change hiring practices in H2?
A significant amount of the need by US companies to guide lower in H2 stems from developments outside of the US. Firms with sizeable non-US exposure will face the added pressure to keep fixed cost containment tight. The chances are that cost containment measures will occur in those countries where US companies have a local presence as opposed to within the US. Furthermore, the appreciation of the US dollar has been a headwind to foreign-sourced profits in Q2, thereby reinforcing the need to keep costs at foreign located operations under control.
Meanwhile, as I recently highlighted, profitability has held up pretty well for domestic US non-financial corporations. As long as these companies can preserve high levels of profitability, there need not be major degradation to hiring intentions. Perhaps the biggest uncertainty for domestic US non-financial companies remains the conduct of US fiscal policy: failure to avoid the much-feared “fiscal cliff” outcome would guarantee a recession in 2013. The most likely outcome, at this point, appears to be a deferral of fiscal tightening by a few months. This scenario will simply raises the pressure on the Fed to invoke another round of quantitative easing.
Summary and Conclusions
The bulk of global economic data over the past few months has been negative. Against this backdrop, the mainstream media has tended to concentrate on the bearish implications of the news flow. It has been easy not to notice improvement in key metrics.
One of the major frustrations facing Fed Chairman Bernanke has been the lack of growth in job openings: this may now be changing. Private sector job openings are rising at a much faster rate compared to the previous economic recovery.
There have been very modest improvements in public sector openings, but these will remain constrained until more meaningful improvements in tax receipt s appear at state and local governments. Housing remains a headwind for private sector job creation and will continue to be so for some time to come.
Lower earnings growth and guidance for Q3 need not result in major degradation to hiring plans in H2. Softening economic activity outside of the US is a major source of the caution to the aggregate US profits outlook. The pressure is on US companies to contain the costs at their foreign operations. This need has been reinforced by the appreciation of the US dollar.
As long as US domestic non-financial companies can preserve high levels of profitability, then hiring intentions need not be suffer adversely. The biggest threat to hiring intentions remains the 2013 “fiscal cliff.” If this scenario transpired, then further quantitative easing would be undertaken by the Fed.
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