The U.S. added 209,000 jobs in July, but the unemployment rate remains steady
The U.S. economy added 209,000 new jobs in July, according to the latest employment report from the Bureau of Labor Statistics. The number is slightly lower than the 233,000 jobs some analysts expected. Despite the increase, unemployment ticked up slightly to 6.2%.
The report also showed that the labor force participation rate—the percentage of the working-age population either employed or looking for a job—moving up only slightly to 62.9%, virtually unchanged since April. The number of long-term unemployed, who make up 32.9% of the total unemployed population, also changed little, moving from 3.1 million to 3.2 million.
The BLS revised upwards its May and June employment growth figures, reporting 15,000 more jobs were added in those months than previously reported.
Job growth is always a closely-watched indicator of economic performance, but investors will be paying especially close attention to today’s numbers and what they might mean for interest rates. The Federal Reserve has shown increased confidence in the economy, and recently began phasing out its bond buying program known as quantitative easing.
While Federal Reserve Chair Janet Yellen announced on Thursday that the Fed still had no plans to increase interest rates, citing concerns with the housing market’s slow recovery, many economists believe that strong GDP growth in the last quarter combined with persistent job growth may soon force the central bank’s hand as it seeks to keep inflation from creeping over 2%. The beginnings of a return to pre-recession interest rates would be good sign for the economy as a whole, but some investors may stand to lose money if interests rates rise earlier than expected.
The economy and inflation have now risen to levels where the Fed has to start thinking about raising rates. The only excuse left: the weaker-than-expected housing market.
The pressure is mounting on the Federal Reserve to start raising interest rates — and Fed chair Janet Yellen is running out of excuses.
On Wednesday, the Fed announced that it would keep short-term interest rates near zero and would continue to gradually taper its stimulative bond-buying program as the economy improves. No surprise there.
But the chatter for the Fed to stop coddling the economy really heated up Wednesday morning.
That was when a new government report showed that, after hitting a speed bump in the snowy first quarter, the economy really sped up between April and June. Gross domestic product grew at an annual rate of 4.0% in the second quarter.
What’s more, the government went back and revised some of its estimates for prior quarters. Uncle Sam now believes the economy grew well above the normal 3% rate in three out of the past four quarters.
“With this morning’s GDP release,” says James Paulsen, chief investment strategist and economist at Wells Capital Management, the “is-the-Fed-behind-the-curve fears among investors are increasingly evident.”
The GDP report included preliminary measures of inflation that might not sit well with Wall Street’s inflation hawks.
In the second quarter, the so-called personal consumption expenditure index, which is the Fed’s preferred measure of inflation, grew 2.3%. If you strip out volatile food and energy costs, core PCE still rose 2%. UBS economist Maury Harris notes that this represents a big jump from the 1.2% pace of core inflation in the first quarter. Plus, 2% is the target that the Fed has openly set for inflation.
While the actual level of inflation today may not be so worrisome, the ability to fight inflation after the fact is, says Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott. “The challenge with inflation is that there’s a very long lag between policy and price pressures, so a Fed concerned with inflation 12 to 24 months down the road needs to start acting now to protect against the prospect.”
Three years ago, the Fed drew another line in the sand. The Fed back then said that it would not think about raising rates until the national unemployment rate fell to 6.5%. Back then, policy makers thought that this would not transpire until around 2015. However, the unemployment rate fell below this level in April and is threatening to fall below 6%.
In recent months, as the Fed has tried to explain why it won’t hike rates soon despite rising inflation and falling unemployment, Yellen introduced a new reason altogether: housing.
In mid July, in a monetary policy report delivered to Congress, Yellen said:
The housing sector has shown little recent progress. While it has recovered notably from its earlier trough, activity in the sector leveled off in the wake of last year’s increase in mortgage rates, and readings this year have, overall, continued to be disappointing.
Later on in the report, Yellen noted that the lack of traction in the housing sector is probably preventing the labor market from reaching its full potential:
Even after rising noticeably in 2012 and the first half of 2013, real residential investment remains 45 percent below its pre-recession peak. The lack of a rapid housing recovery has also affected the labor market: Employment in the construction sector is still more than 1.6 million lower than the average level in 2006.
In announcing its rate decision on Wednesday, the Fed’s Federal Open Market Committee reiterated that while economic growth in general appears to be returning, “the recovery in the housing sector remains slow.”
The irony is that the two things that are likely to get the housing market on track are low mortgage rates and an improving job market.
To achieve the latter, the Fed is keeping rates low. Yet to achieve the former, the Fed needs to show the bond market that it is serious about combatting inflation. And the worst way to do that is keep rates low.
There, in a nutshell, is Janet Yellen’s conundrum.
Millennials and new college grads still face a tough job market, and that can create strains in your social circle. Follow this script to keep everyone happy.
You and your best friend graduated from the same college and moved to the same city at the same time. But while you landed a promising entry-level position, your friend’s been out of work for months. Even though you know that shouldn’t affect your relationship, you’re starting to feel that the two of you are drifting apart. Or maybe you’re simply sick of hearing yourself repeat the same chirpy platitudes (“I’m sure something will come up!”).
As millennials and new grads enter the job market together, one friend’s unemployment can easily become a point of tension. Landing a position is an uphill battle for some young job seekers. The unemployment rate for 20- to 24-year-olds stood at 10.5% in June. Although that number has been on the decline, it’s still higher than the overall unemployment rate of 6.1%
“This mirrors a lot of other life-stage issues, whether it’s getting married or getting pregnant. One person is moving forward, and the other one is stuck,” says Ken Clark, a certified financial planner and psychotherapist.
The good news? You can take steps to ensure that your relationship doesn’t crumble as your friend scrambles for a job. No matter how long this stretch of unemployment lasts, here’s what you can say (or not say) to preserve your friendship.
YOU SAY: “A couple of people are coming to my place for happy hour this week—want to join?”
While your friend looks for work he or she may pull away from you or your group of friends. It’s normal—many people are embarrassed and reluctant to spend money on socializing when they’re unemployed. But if you notice your friend hasn’t been around much, try to draw him or her back into your social circle.
“A sensitive friend should take a leadership role among their circle of friends,” says Clark.
If your group of friends tends to spend a lot of money at bars or eating out, subtly push for a change. Invite a close group over for drinks at your place, or suggest a half-price movie or a free concert you can all attend. If spending time together doesn’t mean spending money, your unemployed friend may find it easier to join in.
“People have a tendency to self-isolate when they’re trying to be careful with their money,” says Amanda Clayman, a financial therapist and author of financial behavior blog The Good, the Bad and the Money. “Go above and beyond in terms of making offers to your friend.”
YOU DON’T SAY: “How’s the job hunt going this week?”
Avoid the impulse to dig for details on the job search. Trust that you’ll hear when a major development comes up.
“Stuff doesn’t change that much in a week,” says Clark. “If you’re asking more than once a month, it’s too much.”
That said, don’t stop checking in. Retreating from your friend could cause him or her to become even more isolated.
“Your presence and availability is huge for someone who’s hurting,” says Maggie Baker, a psychologist specializing in money and relationships. “The worst thing you can do is pull away.”
YOU SAY: “I could really use a running partner tomorrow.”
Be aware that unemployment can quickly give way to depression. Exercise is an easy, natural way to shake the blues. Invite your friend out for a brisk walk or run with you. It’ll give you two time to talk one-on-one and help your friend re-energize.
“Physical exercise outside is both beneficial and free,” says Clark. “You’re helping elevate her mood, decreasing anxiety, and building your relationship.”
YOU DON’T SAY: “I can give you feedback on your résumé if you’d like.”
You might want to offer to help edit your friend’s résumé or forward job listings that seem relevant. Tread lightly. Your offers could backfire if they come off as condescending.
“Just having a job doesn’t make you an expert on résumés,” says Clayman. “Don’t presume that you have the solution.”
Instead, make a gentle, broad offer to help in any way you can. Beyond that, let your friend’s reaction guide you.
“Usually if people are scrambling to find whatever work they can, they put off a very strong signal. If you aren’t seeing them ask for help, better safe than sorry.”
Read more Face to Face columns:
- How To Tell a Wealthy Friend You Can’t Afford to Vacation Together
- How to Tell a Do-Gooder Friend You Can’t Donate. Again
- How to Tell Your Spouse You Want a Pay Cut
With a little help from Jonathan Swift, Shakespeare, and World War II, Dallas Fed President Richard Fisher makes the case for why interest rates need to rise soon.
In between references to Shakespeare, beer goggles and Wild Turkey, Dallas Federal Reserve Bank President Richard Fisher— a member of the Federal Open Market Committee that sets the nation’s interest-rate policy— expressed concern Wednesday about the risks caused by the Fed’s ongoing stimulative policies.
Thanks to a dramatically improving jobs picture, according to Fisher, the Fed should not only cut off its bond-purchasing program (known as “QE3″) by October, but the central bank should also shrink its portfolio of assets and begin raising interest rates early next year or sooner.
Whether or not the economy can withstand monetary tightening — fewer jobs means fewer people able to buy stuff — is open for debate. The real question, though, is if the jobs picture is really that strong?
First some context.
In his colorful speech, Fisher, one of the Fed’s leading “inflation hawks,” reiterated his belief that the Fed’s rapidly escalating balance sheet (now at approximately $4.4 trillion) in combination with a near-zero federal funds rate has led to investors having “beer goggles.” (As Fisher explains it, “this phenomenon occurs when alcohol renders alluring what might otherwise appear less clever or attractive.”) This is what he says is happening with stocks and bonds, which are both relatively expensive.
To make his point Fischer quoted Shakespeare’s Portia in Merchant of Venice: “O love be moderate, allay thy ecstasy. In measure rain thy joy. Scant this excess. I feel too much thy blessing. Make it less. For fear I surfeit.”
Portia’s adjectives (joy, ecstasy and excess) describe “the current status of the credit, equity and other trading markets that have felt the blessing of near-zero cost of funds and the abundant rain of money made possible by the Fed and other central banks that have followed in our footsteps,” Fisher said.
Of course, the Federal Reserve hasn’t bought trillions of dollars of debt, and cut the main interest rate to nothing, for no reason. There was something called, you know, the Great Recession — the once-in-a-lifetime cataclysmic economic event from which the country is still recovering.
But, said Fisher, things are improving, especially in the labor market. Not only did businesses add almost 300,000 employees last month, but there are more job openings, workers are quitting more often and wages are rising. Is he right?
Let’s check out some graphs:
Fisher is right that job openings “are trending sharply higher.” This time last year, there were a little less than 3.9 million job openings. Right now there are more than 4.6 million – an 18% increase.
The healthier an economy, the higher the number of employees who quit their job to either find another or start a new business. Therefore a higher so-called quits rate, means a healthier labor market.
Like job openings, the number of quits has been rising since bottoming out during the recession. The major difference though is that the number of job openings has almost reached pre-recession levels, while quits has not.
Fisher admits that wages aren’t growing “dramatically.” Nevertheless, he cites the Current Population Survey and the most recent National Federation of Independent Business survey to show that wages are on the rise.
However, wage data from the Bureau of Labor Statistics shows that Americans in the private sector are earning $24.45 an hour, only up 1.9% from last year.
But these three metrics aren’t the only metrics to gauge the health of the labor market.
Before the recession, about 1.3 million workers were without a job for longer than 27 weeks. Today, that number is slightly more than 3 million. While that’s significantly better than the post-recession high of 6.8 million in August 2010, there are still a lot of workers who’ve been without a job for a long time.
“Long-term unemployment is still a significant source of slack in the economy and is accounting for a historically large share of the total unemployment rate,” says Wells Fargo Securities economist Sarah House.
And while the unemployment rate may signify the economy is moving closer to full employment, the picture is less sanguine if you look at a broader unemployment rate that takes into account the underemployed (part-time workers who want to work full-time) and discouraged workers. Before the recession that number hovered a little over 8%. It’s now 12.1%. And while it’s trending down, it’s not coming down fast enough. At least according to recent testimony by Federal Reserve Chair Janet Yellen.
Conventional wisdom says inflation will come when wages really start to rise. Some, like Fisher, think we’re getting really close to that point. But if you take into account wage data from the BLS and look at the millions of Americans who aren’t working to their full capacity, it’s not hard to see how tightening monetary policy might make life harder on lots of workers.
The new Prime Minister indicated change will come in steps, not all at once
Narendra Modi and his Bharatiya Janata Party (BJP) rode into office in May on a tidal wave of support created by hopes he would revive India’s stumbling economy. India, once one of the world’s best-performing emerging economies, has witnessed growth shrink under 5% — too low to rescue the hundreds of millions of countrymen still trapped in desperate poverty. Business leaders have had high expectations that Modi would push ahead with the long-stalled but painful reforms necessary to restart the country’s economic miracle.
In his first major policy pronouncement, however, Modi indicated change would come — but slowly. On Thursday, Modi’s Finance Minister, Arun Jaitley, presented the new government’s budget in Parliament in New Delhi. Indian budgets are considered a bellwether for the direction of economic policy. What emerged was a very gradualist approach, with some encouraging tidbits, but no signs Modi is in a big rush to remake the Indian economy. In his speech, Jaitley said the budget was “only the beginning of a journey” to bring growth back up to 7% to 8% over the next three to four years. “It would not be wise to expect everything that can be done or must be done to be in the first budget,” he said.
Investors got some items on their wish list. The government pledged to open the defense and insurance industries wider to foreign investors, bring down the budget deficit more rapidly, press ahead with much needed tax reform, improve the country’s inadequate infrastructure and support manufacturing to create more jobs. Jaitley also promised an overhaul of costly food and fuel subsidies, which are a huge burden on the strained budget, to make them “more targeted” on the most needy.
Yet for a government that has pledged to control spending and unleash the country’s growth potential, the budget was still puffed up with plenty of populist pork. The budget reiterated Modi’s campaign pledge to provide toilets for all. Jaitley also decided to maintain the previous administration’s expensive and controversial program to guarantee jobs for rural workers, though he suggested its oversight would be strengthened to ensure funds got utilized more wisely. On other issues, Jaitley seemed to fudge a bit. Widely criticized efforts by the previous government to impose retrospective taxes scared foreign investors, and though Jaitley said the Modi administration would limit any such taxes and “provide a stable and predictable taxation regime that would be investor-friendly,” he didn’t emphatically close the door on them, either.
The most disappointing aspect of the Modi budget is that it was no bold statement that a new era of economic policy was coming. Details on many of Jaitley’s proposals were sparse. For example, he did offer many specifics on such key issues as reducing subsidies. Other important reforms weren’t addressed, such as loosening up the country’s restrictive labor laws, which hurt job creation. “Nothing that was announced today marks this government out as being significantly different from the last,” complained Mark Williams, chief Asia economist at research firm Capital Economics. “If market enthusiasm for Mr. Modi’s government is to be sustained, that will have to change.”
Ultimately, though, Modi’s incremental methods may be simply good politics. Even though Modi scored a landslide victory in the last election, many of the reforms most critical to the economy are certain to face stiff opposition. If he charges ahead too quickly, his entire reform effort could get derailed. Modi has already been forced to reverse course on one of his initial reforms. In late June, Modi partially rolled back a hike in train fares aimed at putting the strapped railway system on a stronger financial footing after protests erupted and the BJP’s political allies objected.
At the same time, Modi has to play a delicate political game. If he moves too slowly on reform, growth won’t improve, and his support could suffer. Fixing India’s economy will take a huge amount of political will. We’re still waiting to see if Modi has it.
The country continues to add jobs, but more than 30% of the nation's unemployed have been out of work for more than six months.
Great jobs numbers have stock investors cheering. But what about bonds?
We’re heading into the 4th of July weekend with reasons to be cheerful. The jobs report from the Bureau of Labor Statistics came in surprisingly strong. Unemployment is down to 6.1%, the lowest level since before the financial crisis. And employers reported adding 288,000 new jobs, considerably more than the roughly 212,000 economists had forecasted, according to a Reuters survey.
At the same time, the stock market continued it’s rally. After the report the Dow climbed past 17,000 for the first time. So the story here — more jobs, stronger economy, good news for investors — is clear, right?
Well, actually, that’s if you care only about the stock market. The bond market had a different reaction this morning: Yields on Treasuries ticked up, which means that their prices fell. And while most of us consider bonds the ho-hum, steady part of our portfolios, they stand to take a big hit if employment continues to come back more quickly than expected.
The reason? In the upside-down world on bond investing, a really strong and sustained recovery means the Fed is more likely to raise interest rates — and rising interest rates cause bonds to fall in value. In this case, the potential slide could be worse because bonds gained in value this year as investors bet that the status quo of low interest rates would hold.
Of course, the jobs report wasn’t perfect. There are still plenty of signs of economic slack. Wage growth is still slow. And then there’s this:
Remember, the unemployment rate only captures people who say they are still looking for work. The graph above shows that the number people either working or trying to work is historically low. That partly reflects demographic changes, but also a large number of people so discouraged in their job searches they’ve stopped looking. Numbers like these are one reason Janet Yellen and the Fed may continue to hold rates low despite the better numbers.
Still, after a long period of low rates and strong returns for bonds, people who run mutual funds are worried that many investors are unprepared for rising interest rates. Speaking yesterday, before the jobs numbers came out, T. Rowe Price chief economist Alan Levenson noted that the risk of losses on long-maturity bonds is unusually high. “I don’t know that retail investors are aware, as they’ve ridden this bond market down to lower yields, that the duration of their assets and vulnerability to capital losses is extraordinary by historical standards,” he said.
How big a loss are we talking about? An exchange-traded fund owning long-maturity bonds has a “duration” of about 14 years, which roughly translates to a 14% capital loss should rates rise a full percentage point. A more typical fund used as a core bond holding, the Vanguard Total Bond Market Fund, has a duration of 5.6, so would face roughly a 5.6% decline in a one-point rate spike.
This doesn’t mean investors should be running away from bonds. Rates could stay low for a long time. And compared to stocks, bonds are still likely to be less volatile, especially in the lower-duration bonds you might have in a short- or intermediate-term bond fund. But today’s happy job news is reminder that the era of strong bond returns is likely coming to a close.
Five years after the end of the Great Recession, America's young adults are still facing economic challenges.
For many millennials, the future looks bleak. “We don’t just face dreams that are deferred, we face dreams that are destroyed,” Emma Kallaway, executive director of the Oregon Student Association, told the Senate Subcommittee on Economic Policy Wednesday. But if they were hoping for answers from Congress, Kallaway and other young adults across America facing frustrations with student loan debt and the sluggish job market will have to wait.
Senate Democrats convened the subcommittee hearing entitled “Dreams Deferred: Young Workers and Recent Graduates in the U.S. Economy” to highlight youth unemployment and heavy student loan debt after Sen. Elizabeth Warren’s (D-MA) student loan bill stalled in the Senate earlier this month. Warren’s bill would have allowed an estimated 25 million people with long-existing student loan debt to refinance at lower interest rates.
Just 63.4% of youth aged 18-29 are employed, Keith Hall, senior research fellow at George Mason University, reported in his testimony. The unemployment rate of workers under the age of 25 is 13.2%, more than twice the overall rate of unemployment.
As joblessness remains high, the cost of college continues to rise, compounding already hard-to-manage debt levels for many young Americans. Student debt in the U.S. now tops $1.2 trillion, according to Rory O’Sullivan, deputy director of the non-profit group Young Invincibles.
“It sounds like perfect storm in a way,” said subcommittee chair Sen. Jeff Merkley (D-OR) of the snowball effects of the Great Recession on young adults.
Youth unemployment also affects overall spending in the broader economy because young adults cannot afford to move out of their parents’ house, buy big items like cars and homes, and get married. Taxpayers bear some of that burden. Youth unemployment deprives the federal government of over $4,100 in potential income taxes and Federal Insurance Contributions Act taxes per 18-24 year old every year, and almost $9,900 per 25-34 year old, according to a recent study by Young Invincibles. That translates into an additional $170 of entitlement costs per taxpayer in the federal budget.
If the problem is clear, the solution is not. Witnesses at the hearing variously suggested state disinvestment in higher education, simplifying the federal aid application and repayment process, offering relief for existing borrowers, and holding institutions more accountable for providing affordable, quality credentials to graduating students.
Merkley asked the panel for their opinions on the merits of the “Pay It Forward” Guaranteed College Affordability Act, which would allow students to go to college without paying up front. Instead, students sign a contract to join an income-based repayment plan for a designated period of time after graduation. Several states are considering versions of the grant plan; Oregon signed one into law in 2013.
Although Kallaway and O’Sullivan said the plan would possibly circumvent the debt-to-income trap, both agreed it was not a long term fix. Kallaway believes the solution is to tackle the problem at the root, in high education costs, and not at the repayment level. “More affordable education upfront is what’s right,” Kallaway said. “Federal student loans should not be a form of income for the government.”
Hall believes that student debt and rising tuition are just symptoms of a larger disease. High unemployment numbers aren’t just an issue for young adults, he pointed out. The problem, he said, is a poorly functioning economy. “Until you solve this labor market problem […] this problem is not going away,” he said. “You’re going to have these continuing symptoms.”
Paying out bigger benefits in lean times is literally a lifesaver for the jobless
A new study published in the American Journal of Epidemiology finds that greater unemployment benefits can decrease the rate of suicides.
The research team, led by Jon Cylus at the London School of Economics, acknowledged that suicide was caused by a variety of factors, but determined that income loss and loneliness predicated by unemployment were key.
The 2008 financial crisis suggested a correlation between suicides and the availability of employment — with the suicide rate in North America and Europe increasing by an estimated 10,000 people per year from 2007 to 2010, compared with prior years. When Cylus and his team examined the allocation of unemployment benefits from 1968 to 2008, however, they found that greater cash assistance reduced the burdens caused by joblessness.
Although suicide is the most severe outcome of unemployment, financial distress can also lead to mental and health issues — which the team also noted could be mitigated by improved benefits.
The study concluded that more financial assistance at times of need could save lives. “If the unemployment rate increases, having better benefits is going to buffer the effect,” Cylus told HuffPost.