Slow pace of recovery in US jobs leaves little joy

For the US, it is hard to call this a jobless recovery. Jobs have recovered. Since the trough of the Great Recession, non-farm payrolls have expanded by some 8.6m jobs. With only another 130,000 net new jobs, a figure that will probably be exceeded this month, the US will have more people in work than ever before, beating the record set in 2008, before the financial crisis, and the Great Recession, took hold.

Friday’s April non-farm payroll data, still the most closely watched economic release in the world, were undoubtedly strong, and surprisingly so. So why are people still not very happy? Specifically, how could Treasury bond prices rise slightly after such an announcement, while stocks did nothing?

The textbook says that a good economy is good news for everyone except bond investors, who dislike the inflation risk that comes with higher growth. They also dislike the higher interest rates that follow such strength, as these will raise the yields payable on bonds, and hence reduce their price.

But now the caveats start. The growth in jobs is impressive, but the US population has also grown. The unemployment rate offers a less impressive picture, although again there is real improvement. According to the official data, joblessness now stands at 6.3 per cent. This could be politically important as it has for the first time dipped below its level of November 2008, when Barack Obama was first elected president.

However, there is room for far more improvement as the rate stood at 4.3 per cent before the crisis in 2007.

And the unemployment rate is only as low as it is because the participation rate – the proportion of the adult population deemed available for work – is falling. After a period, the long-running unemployed cease to be eligible for benefits, so the improvement in the unemployment rate may, as has been widely noted, be due instead to an increasing legion of people giving up all hope.

From the early 1960s until a peak in 2000, the entry of women to the workforce helped push the participation rate from 58 per cent to 67.3 per cent. It has now dropped to 62.8 per cent, its lowest level since 1978. Another reason why this recovery causes so little joy: average earnings are going nowhere. Annual growth in earnings dropped to 1.9 per cent.

This explains the unhappiness. Those in work are not feeling any better off. Inequality is much discussed at present in the wake of Thomas Piketty’s book Capital in the 21st Century. This finding shows why so many people feel they are falling off what is already being dubbed the “Piketty fence”.

Meanwhile, the lack of inflationary pressure is good for bond investors. Payrolls have been rising at a rate of 200,000 per month for the past year now, but if that fails to put any upward pressure on wages, then the world is safe for bonds.

A final caveat on the jobs data are that they are noisy and revision-prone. That is particularly so after the harsh winter in the US, which reduced jobs earlier in the year, and may have led to a “catch-up” last month. So instant reactions to the headlines should always be tempered.

However, even if the jobs data came as a surprise, they confirm a longer trend. Late last year, 10-year Treasury yields rose to 3 per cent as the Federal Reserve started tapering the monthly bond purchases with which it has been trying to keep rates low. The Fed has kept tapering at every Monetary Policy Committee meeting since then, a policy it affirmed this week. And yet yields have fallen back to 2.6 per cent this year, and on Friday tested 2.57 per cent. Some of this is “haven” buying driven by the ugly events in eastern Ukraine.

But much of it is because even after the Fed finishes tapering, rates may not rise very fast. US growth like this, coupled with a near-deflationary Europe and a China which is looking weak, is consistent with low rates for a while ahead.

That is great news for bonds. Equity investors would also usually cheer this, but stocks entered the year priced for a stronger recovery. Growing deal activity shows that investors and managers are regaining confidence – but still, long-dated bonds have beaten equities by some 7.5 per cent so far this year.

Treasury yields have been steadily declining for three decades and cannot go much lower. Support from the Fed is unprecedented and is steadily being removed. In the long term, barring all but the most alarming scenarios for the global economy, bonds must be in for a bear market.

In the shorter term, however, the forces behind buying Treasuries remain very strong.

The chances are that bonds will rise over the coming years, but that this will follow the pattern of the last year, with sharp increases followed by reappraisals as investors realise that bonds suddenly offer them better value.

As for the US jobs market, it is palpably improving – but not fast enough to create much sense of wellbeing in the US, or to correct deepening inequality that is causing ever greater resentment.

John Authers

Fonte: FT