By Dr. Uric Dufrene, Sanders Chair in Business and Professor of Finance, Indiana University Southeast
This month’s national employment report was another big miss at payrolls. Consensus estimates were expecting close to 500,000 jobs, but the headline number came in at 194,000. This is now the second consecutive month of significant misses in the national jobs report.
Breaking the report down, there were some bright spots on the payrolls side. Leisure and hospitality gained 74,000 jobs, despite the adverse impact of the Delta variant. Gains were also observed in professional and business services (+60,000), retail trade (+56,000), transportation and warehousing (+47,000), information (+32,000), social assistance (+30,000) and manufacturing (+26,000).
Local and state government education lost a combined 161,000 in jobs. This number is somewhat difficult to interpret, given that September is a start date for many school systems around the country. Seasonal adjustment issues following significant volatility during the pandemic could be one of the reasons why this was such a low number.
Had the local and state government education been positive, a more favorable payrolls number, closer to the consensus estimate, would have been the result. However, the weakness in the report was on the household side of the survey, even though the unemployment rate declined by .4% points to 4.8%. The nation’s labor force saw a decline of 183,000 in September, and the labor participation rate declined by .1%, to 61.6%. Those not in the labor force increased by 338,000, raising the total to 100.4 million. The current labor force participation rate is equivalent to the level that existed all the way back to the mid-1970s and is about 2 percentage points lower than the end of 2019. It has been stuck at the current level since last July, about the same time the nation’s GDP hit a bottom (June 2020 to be precise). While labor force participation has been stuck since last July, the nation’s GDP has seen the steepest rise since at least the mid-1970s.
The last JOLTS (job openings, hires, and separations) report saw that job openings declined by 659,000 to 10.4 million. Quits, however, increased to an all-time high of 4.3 million. Last February 2020, the economy had a level of quits of about 3.4 million.
As a comparison, the level of quits during the Great Recession hit a bottom with 1.5 million just as the country was about to exit the recession. It then took 9 years for the level of quits to reach the pre-recession level that existed in 2007. With the Covid recession, the level of quits hit a bottom of 2.1 million in April 2020 but saw a rapid rise the following month. It only took a year for the level of quits to reach the pre-pandemic level of early 2020. After February 2021 of this year, quits have been steadily climbing, and are approaching total quits added this year to 1 million, a change not observed in the history of the series.
The quick rise in the number of quits during the recession of last year, and the continued increases since are quite significant. To be sure, quits do not convey a lack of confidence in the economy. Normally, quits signal that employees are confident that they can easily find another job. With the record number of openings and a declining labor force, this confidence is justified.
In my view, the number of quits and a stagnant national labor force tell us more about structural changes underway. A look at the data presents a few clues.
Both nominal and real (adjusted for inflation) GDP exceed levels that existed at the start of the pandemic recession. This has occurred in the presence of significant supply chain issues; perhaps like we have never experienced. Additionally, the consumer is proving to be quite resilient, and we have seen the largest jump in retail sales in the history of the series. On the corporate side, profits continue to climb. Since March 2020, corporate profits have increased by 26%, making it one of the steepest increases in profits coming out of a recession.
With respect to business investment, non-defense capital goods, excluding aircraft, are seeing the fastest increase in the past 30 years. Following the 2001 recession, it took six years to match the level of investment that existed prior to that recession. In the Great Recession, it took four years for this investment measure to exceed the level that existed prior to the start of that downturn. In the pandemic recession, it took less than six months for the level of investment to surpass the pre-recession level. Since that time, we have observed the steepest increases in non-defense capital goods, excluding aircraft, in the past 30 years.
The “great resignation”, record-breaking job openings, and a stagnant labor force participation rate all relate to this significant increase in capital investment. As we’ve discussed in this space previously, the labor scarcity situation, as evidenced by the number of openings, quits and a stagnant labor force participation rate is forcing business and industry to seek out innovations to meet the increase in demand. This can be seen through the level of investment we are seeing in non-defense capital goods investment.
The past two employment reports were big disappointments, but the economy continues to grow. More data points are necessary, but we may be seeing more productive capacity, with fewer workers. Corporate profits are increasing, consumers are spending, and this is reflected in increasing GDP. All this is happening with a record number of job openings, and a declining labor force. The “great resignation” is producing the “great innovation”.
Data sources: BLS Employment Situation, FactSet, BLS JOLTS, Census Durable Goods Manufacturers’ Shipments, Inventories, and Orders.