Don’t be fooled by US short-termism

Once again, the US jobs numbers were, at first glance, better than expected with positive upward revision in the annual benchmark review also adding a supportive tone to the data. The reaction of the dollar was understandable, around 0.25% firmer on the dollar index on the perception that further QE is less likely as the better labour market numbers become more entrenched. Furthermore, revisions to November and December alone added 60k more jobs that were previously estimated. Also, the unemployment rate fell to 8.3%, the lowest reading for nearly three years.

Of course, for some this sits uncomfortably with the Fed’s pledge to keep rates close to zero for nearly the next three years. Looking at the bigger picture however, and taking a closer examination of the data, it’s not that difficult to square the circle. Firstly, there is the state of the labour market so far during this recovery. Whilst the economy may have passed its pre-recession peak in output, the labour market still has to see employment expand another 4% on the payrolls measure to achieve the same. The other stand-out feature of this report is the sharp fall in the participation rate, the largest monthly decline for just over two years, although this was down to the population control effects from the annual revisions. What they are showing is that just 63.7% of the working age population is either in work or looking for work. That’s the lowest since 1983. Compare that to Germany at 81%, the UK at 76.5% and Japan at just over 80%.

So, whilst this report has been positive for the dollar and painted a decent picture of the labour market relative to where we thought it was beforehand, it should be considered in the content of the overall recovery and the extent of labour force participation. The latter remains particularly disappointing and goes a fair way to explain the stagnation of median incomes over the past decade. The closer the US gets to the presidential election the more short-termist politicians will become in relation to these the numbers Just as important however is the wider picture of the worrying sea-change in the US labour market which today’s numbers have enhanced rather than assuaged.