Economic Notes: Jobs, Deficits, and The Fed
5/11/2011
By Patrick O'Keefe, Director of Economic Research, J.H. Cohn
The employment report for April was generally positive, with the private sector adding jobs for the 14th consecutive month. Those gains were, however, partially offset by public sector cutbacks.
While the acceleration in job growth was welcome, it remains sluggish—averaging about 130,000 jobs since March 2010 when the private sector employment recovery began.
As a comparison: at a similar point in the recovery from the early 1980s downturn, the private sector was adding an average of 375,000 jobs per month (equivalent to about 500,000 in today’s economy) and the public sector was expanding as well.
Despite the gains, there were 7.0 million fewer jobs in April than when the recession began. Further illustrating the downturn’s damage: today’s job count is equivalent to 11 years ago when the work age population was 13.1% smaller.
As a consequence, the employment rate—the proportion of the work-age population with jobs—remains near its cyclic low.
The current employment rate (58.4%) translates into a deficit of 10 million jobs. At a similar point in the recoveries from the protracted downturns in the 1970s and 1980s, the employment rate was near (or above) its pre-recession level.
Further, near-record underemployment—that is involuntary part-time workers—tends to constrain jobs growth, since it is more cost-effective for employers to increase hours than hire additional workers.
The combination of the jobs shortfall and elevated underemployment explain why—even though household incomes are $1 trillion higher than prior to the recession – wage and salary disbursements (earnings net of benefits) are virtually unchanged.
Real (i.e., inflation adjusted) wage and salary earnings are 5.0% below the pre-recession peak—impinging on spending by households whose paychecks are the primary source of income.
The unemployment rate rose in April. But the increase was due—at least partially—to an increase in labor force participation because of the perception that the jobs market is strengthening. More than one-half of the increase in the number of jobless was attributable to renewed job searches by previously discouraged jobseekers.
Does April’s jobs report indicate that the jobs recovery will accelerate as the year unfolds? Or will it stall as happened last spring?
Analysts at the Federal Reserve (“Fed”) and elsewhere suggest that the acceleration in private sector hiring was stimulated—at least in part—by the Fed’s second round of quantitative easing (“QE-2”).
Quantitative easing is a process in which the Fed expands its balance sheet (i.e., creates money) and purchases securities from the banking system, thereby increasing the money supply—and the potential for loans into the general economy.
An earlier iteration of quantitative easing (“QE-1”) was central to the Fed’s response to the financial meltdown in the autumn of 2008 when the Fed’s balance sheet more than doubled.
Where QE-1 was launched rapidly and modified frequently as the financial crisis mutated, QE-2 was a considered response to the sluggish pace of the recovery—particularly the rate of job growth.
QE-2 entails a $600 billion increase in the Fed’s balance sheet. Those assets, together with the proceeds from other investments (largely mortgage-related securities), are used to purchase Treasurys (i.e., Federal government debt).
In June, the QE-2 purchases will conclude and monetary policy will become somewhat less stimulative.
QE-2’s impending end poses two questions: to what extent did it contribute to the pick-up in hiring; and what will happen when it ends?
The thinking here is that QE-2’s employment impact, if any, was more coincidental than causal. The same can be said about the “evils” attributed to QE-2, including: the recent decline in the value of the dollar, the run-up in the price of oil and other commodities, and the rise in consumer prices.
Instead, QE-2 essentially financed the increase in the Federal government’s burgeoning debt and, thereby, suppressed the deficit’s interest rate impacts.
In the six months since the Federal Reserve launched QE-2, the U.S. government’s public debt (i.e., that held by domestic and foreign investors, including foreign governments) rose $522 billion. Over that same period, the Federal Reserve’s holdings of Treasury securities (i.e., notes, bonds, and bills) increased $600 billion.
To the extent that a half-trillion dollar increase in the Federal government’s debt in a short period of time would have increased interest rates and, consequently, curtailed the private sector’s expansion (and hiring), QE-2’s monetizing of the Federal debt has increased employment—at least temporarily.
Will rates remain subdued when the Federal Reserve’s purchases of Treasurys drops; or will other investors demand a premium to step into the Fed’s shoes?
The more likely outcome is the latter, unless the Federal government curtails its borrowing. If not, businesses and households face an increase in interest rates— which has implications for the pace of economy’s recovery and its still-sluggish job growth.
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The statements, opinions, and conclusions contained herein are based solely upon the author’s own studies, research, and personal experience. Neither J.H. Cohn LLP nor the author makes any representation or warranty as to the accuracy or completeness of this information. J.H. Cohn LLP and the author expressly disclaim any liability for any loss or damage which may be incurred, of any kind whatsoever, as a result of or arising from the use of any of the information contained herein or reliance on the accuracy or completeness of it.
Patrick J. O’Keefe is director of economic research at J.H. Cohn LLP. He can be reached at pokeefe@jhcohn.com or 877-704-3500.