Unemployment: Is Resilience Illusory?
After sinking to a five-year low last week, jobless claims have now jumped to a seasonally adjusted level of 360,000. This is the highest in six weeks, an increase of 32,000 over last week’s revised figure of 328,000. Last week’s claims numbers were originally reported at 323,000, the lowest level recorded since Jan 2008.
The more representative figure for jobless claims, the four-week moving average, increased by only 1,250 to 339,250. This lightens the impact of weekly volatility and indicates that claims numbers are largely headed southward. Despite problems with key areas of the economy such as manufacturing, retrenchments have been largely contained. It seems that the economy has largely managed to stave off prospects of a summer swoon.
Some economists believe that the labor market may be showing internal resilience. This is backed up by the employment report for April released during the first week of the month. Nonfarm payrolls increased by 165,000 in April.
Meanwhile the unemployment rate declined to 7.5% from 7.6% in March, the lowest recorded figure since December 2008. From an average of 181,000 for the entire year of 2012, the number of job additions has gone up to an average of 196,000 per month this year.
Even more significant was the fact that employment numbers for previous months were revised upwards. Jobs added in February increased from an initially recorded 268,000 to 332,000. Additionally, employment numbers in March were revised upwards from 88,000 to 138,000, another substantial increase.
Immediately after monthly employment numbers were released on the third, exchange traded funds linked to volatility saw their values tumble. The iPath S&P 500 VIX Short-Term Futures Index ETN (VXX) declined 2.5% and the ProShares Ultra VIX Short-Term Futures (UVXY) dropped 5%. These products are constructed in a manner which will mimic the returns of futures based on the CBOE Volatility Index, the Street’s fear gauge.
At the same time, the SPDR S&P 500 (SPY) jumped 1% after its tracking index moved above a crucial psychological level. Meanwhile, the iShares 20+ Year Treasury Bond (TLT) declined 1.5%. Domestic government debt yields increased, implying that investors were now considering investing in more exciting areas. Again, the CurrencyShares Japanese Yen Trust (FXY) fell by 1.2%, reflecting that the dollar had moved up against the yen.
The VXX has now declined by 7.2% over the last 10 days, whereas the UVXY has fallen 14.1%. The TLT has declined by 5.4% over the same period, whereas the FXY has slipped 4.9%. Meanwhile, the SPY has risen by 5%, reflecting continued strength in the markets.
Actually, the underlying strength in the labor market has gone against conventional logic. Despite the fact that Congress remains deadlocked in a never-ending battle over the budget, the private sector has continued to hire. Over the last two years, government spending has been reduced at a rate faster than that experienced at the end of the Vietnam war. And this year will be impacted by the end of a payroll tax break on one hand and spending cuts related to the sequester on the other.
These issues are also reflected in government job cuts in April, which amount to 11,000. On the other hand, the private sector added 176,000 jobs with retail adding 30,000 jobs while a similar number were added by temp agencies. All this points toward brighter prospects for hiring in the future.
Wages remain a matter of specific concern. Average hourly earnings have risen by just 1.9% over the last year, falling well behind inflation. Meanwhile, conservatives have continued to blame President Obama for labor-market weaknesses. They believe small businesses are wary of ramping up hiring because of health care reform and other new regulations.
In fact, President Obama’s support base has been grievously affected. Compared to 5.4% in 2007, the unemployment rate for those who are aged 25 and have a bachelor’s degree is now 8.2%. The figure for African-American workers is 13.6%, while it is 9.5% for Latin-Americans. This compares most unfavorably to the overall average quarterly figure of 7.7%.
The president has recently announced specific measures to address these problems. Firstly, three new manufacturing innovation institutes will be created and partnerships between the private sector and public universities will be fostered. Secondly, large amounts of government data will be made available online in an attempt to encourage innovation and aid startups.
Manufacturing is clearly an area which the administration believes holds out hope. Gene Sperling, director of the National Economic Council has credited the Obama administration with a boost in employment in the automobile sector. It is now to be seen whether sectors such as advanced manufacturing can create new avenues of employment and provide a long-term basis for jobs growth.
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