The outlook for jobs seems to be brightening, albeit slowly. By mid-June, the Labor Department was reporting that the four-week moving average of jobless claims had fallen below 350,000, a level we haven’t seen since early 2008 and a “magic number” for many analysts who think this level signals consistent job gains. Stu Hoffman of PNC Financial said these good numbers “look good, perhaps even the beginning of a trend.”
But according to a May Goldman Sachs study, the current unemployment rate of 7.6 percent is understated because of a significant drop in the labor force participation rate, or LFPR. According to the Goldman Sachs study, if the LFPR was the same today as it was in late 2007, just before the Great Recession began, the unemployment rate would be a staggering 11.3 percent.
James Pethokoukis of the normally conservative American Enterprise Institute has turned heads recently by becoming something of an apologist for the Fed’s Quantitative Easing policies and for criticizing the Goldman Sachs study. He says some of the declines in the LFPR are due to baby-boomers aging into retirement. Yet more of the declines are due to increases in the number of people on long-term disability: Since 2007, the number of workers qualifying for Social Security Disability Insurance has risen by an astonishing 2 million, or 0.7 percent of the over-16 population.
On this latter point Pethokoukis is right, though it’s hard to understand why long-term disability insurance serving as a substitute for long-term unemployment should be considered a positive outcome. Nonetheless, even if you grant Pethokoukis his stipulations and take retirees and the questionably disabled out of the denominator, the unemployment rate is still likely above 9 percent. Both Pethokoukis and Goldman Sachs agree the unemployment rate won’t fall to 6 percent until sometime in 2016.
The cause of the stubbornly high unemployment is slow economic growth, which Goldman Sachs and most other analysts say will continue at an anemic 3 percent at least through the end of the year.
Pethokoukis has argued that without Bernanke’s Quantitative Easing program, the U.S. economy would look more like the disaster in Europe. John Taylor, a former Treasury undersecretary in the George W. Bush administration and a professor at Stanford University, sees it differently. According to Taylor, comparing the United States to Europe is selling short the greatness of America. “Saying we’re better than Europe is not saying much,” he said. “We should compare the U.S. with what we know the U.S. can do and has done repeatedly in the past.” Compared to that, Taylor said, the current recovery is lagging far behind: “This is the slowest recovery in American history. We can and should be doing better.”
Ben Bernanke’s June 19 pronouncement that the Federal Reserve would look to end Quantitative Easing was more proof that the tail wags the dog when it comes to stock markets. In the two days after his announcement the markets fell by nearly four percent. Another example from mid-June: Standard & Poor’s raised its credit outlook for the United States. That good news should have boosted the markets. But good news has become bad news, because good news means the Fed may end its bond-buying scheme. Add to this increasing bond yields, and the result is investors rotating out of stocks. Since about the middle of May, volatility has been measurably higher. With electronic program trading, and nervous analysts, the old “sell in May and go away” tradition on Wall Street is likely to become, instead, a long, hot summer. —W.C.S.