Debating Dour Datapoints

Headlines Friday admonished a weak US jobs report—80,000 new non-farm payroll jobs (missing expectations of 100,000) added in June and the official unemployment rate steady at 8.2%—as additional signs of a stagnating US economy. This marked the third straight month of sub-100,000 gains after a far more robust Q1. Some folks latched onto another dour datapoint too: June’s unemployment print made Q2 the worst quarter for jobs growth since Q3 2010 (when the economy lost an average of 45,000 jobs a month).

There’s no doubt, unemployment improvements have been slow in coming and volatile at best—everyone would like to see faster, more consistent gains. However, we’d caution against making sweeping dire economic conclusions about the future based on unemployment figures. For starters, granular economic data are always susceptible to volatility, adjustments, recalculations, revisions and so on. But more importantly, in our view those who believe low unemployment to be a panacea against future economic or stock market weakness have their order of operations reversed.

As we’ve said before, unemployment is a late-lagging indicator, reflecting past economic conditions—often by quarters and years. Unemployment always remains high—or even goes higher—after expansions begin, then takes some time to fall. But that doesn’t presage doom. Economic growth comes first, creating new jobs as businesses need to hire more folks to meet rising demand. But companies only hire based on their unique, real circumstances—when capacity limits the ability to meet demand, and future sales are imperiled. That is, after productivity gains earned through the downturn are worked through and the only way to boost output (to meet anticipated demand) is to add headcount. Keep in mind, US (and global) GDP is at all-time highs today and the global economy remains robust. As economic growth continues, it’s likely the private sector gradually works off elevated unemployment.

Moreover, those fretting Friday’s result are likely missing the trend already taking place. For example, June’s result marks 28 straight months of jobs growth. And, the unemployment rate has dropped from 10.2% in October 2010 to our current 8.2%—a full 2 percentage points lower. While still elevated above its long-term average, the last six months’ results have actually shown significant stability. And that’s the story. Slow, but steady employment growth as the private sector and economy continue to grow.