Editor’s note: The U.S. economy added a disappointing 38,000 jobs last month, the smallest number in more than five years, according to seasonally adjusted figures from the Bureau of Labor Statistics. The weak numbers suggest a June interest rate hike – which the Federal Reserve had recently hinted is possible – is now off the table. We asked two of our experts to give us their quick takes on the report.
We need a credible plan for the economy
Thomas Kochan, MIT
The bottom-line takeaway from the May job numbers announced on Friday is we need a clear and credible plan for expanding the economy. It is the uncertainty over the future policies of the next president and Congress that may be the root cause for concern.
The seemingly good news of the headline that the official unemployment rate declined from 5 percent to 4.7 percent evaporated as soon as we read further to see that the reduction came mostly from a 0.2 percent decline in the labor force participation rate and an increase of 468,000 in those working part-time jobs but looking for full-time work.
The news got worse when we read that the economy produced a meager 38,000 new jobs in May and 59,000 jobs were subtracted from the prior two months’ figures. From March to May, the economy averaged only 116,000 new jobs per month. If the economy can’t do better than this, it will be early 2019 before we finally reach closure on the effects of the Great Recession by getting back the number of jobs lost plus the number needed to absorb the new entrants to the labor force.
Why do I think uncertainty over the future is a root cause of the problem? Consumer confidence also declined in May. That Conference Board survey found the number of people worried that jobs are hard to find also increased. A University of Michigan Consumer Confidence survey also showed a slight decline, and its authors noted the biggest source of concern is uncertainty over the economic policies the next president will follow.
Taken together, these data suggest two actions: one a stop-gap available to the Federal Reserve and the other one only the voters can take. The Fed should hold the course by not raising interest rates in June and hold steady as long as these dismal numbers and uncertainty over the future persist. Voters should hold presidential and congressional candidates’ feet to the fire by judging them against the credibility of their plans for creating and sustaining good jobs with good wages.
Nothing short of that will overcome the uncertainty and lack of confidence that is holding back the economy from reaching its full potential.
Don’t panic! Look at the raw data
Jay Zagorsky, The Ohio State University
Headlines following the report’s release emphasized that the U.S. economy created only 38,000 additional jobs in May. This figure promptly caused the stock market to fall. The next day’s Wall Street Journal front page led with a story declaring “Weak Hiring Pushes Back Fed’s Plans” for an interest rate hike. But the true figure was much higher than 38,000 jobs.
The actual number of additional jobs created between April and May was 651,000! This much larger figure is calculated using numbers found in table B1’s top line located on the press release’s 28th page.
Why did the government report indicate that 38,000 and not 651,000 more people were employed in May than in April? The 38,000 figure is seasonally adjusted, while the 651,000 figure is not.
The seasonal adjustment process, called X-13ARIMA-SEATS, is quite complex. However, the general idea is simple. The number of people employed jumps up and down dramatically from month to month. The adjustments smooth the data series to show long-term trends in the labor market by accounting for the regular pattern occurring each year because of things like weather, major holidays and school schedules.
To emphasize the long-term trend, the government increases the employment figures in low employment months, such as January, February and March, and reduces them in high employment months, like May and June.
However, highlighting seasonally adjusted data is problematic, because people in businesses like construction, transportation and manufacturing do not look at seasonally adjusted conditions when hiring and firing. Instead, their decisions are based on the current season, weather and business conditions. Seasonally adjusting the data eliminates some of the very patterns that managers watch when making hiring decisions.
If I just hired 1,000 new people for my factory and then read that only 38,000 people were hired nationwide, I would start wondering if I had made a big mistake. The 651,000 figure would give me a very different impression.
Is the 651,000 figure low for May compared with the past few years? Yes, it is. But it’s too soon to panic and declare the end of the U.S. economic expansion.