(Bloomberg View) -- Almost every report, news account and comment on the 148,000 rise in payroll hiring in December characterized the increase as weak, mediocre or somehow disappointing. None described it as strong or solid. As a result, fears of more interest rate hikes by the Federal Reserve receded.
Yet all of these responses to that data were backward, and it has taken just one additional month of employment data, the January report released Friday, showing an increase of 200,000, to demonstrate that the labor market is quite tight. Reinterpreting the pace of job growth as rapid also requires a wholly different need for policy responses. Moreover, fiscal stimulus was untimely and the Fed most certainly needs to continue on its mission to normalize interest rates more quickly.
Judging whether a labor market report is strong is unlike judging beauty, which is in the eyes of the beholder. Data must be benchmarked against some valid standard. In the case of job growth, a common but inappropriate standard is historical job growth. Previous economic expansions have gotten off to rip-roaring starts, with monthly job growth consistently above 300,000 and months of 400,000 or more not uncommon. This cycle has seen few months of job growth above 300,000, and we’ve run below 200,000 for more than a year. So any historical comparison would conclude that the pace of economic recovery and expansion has been decidedly below average and disappointing. Unfortunately, this is the wrong conclusion.
A more appropriate benchmark against which to judge the pace of expansion is the growth in labor supply. In the past, our labor force grew far more rapidly than it has recently, by 1.7 percent a year in the 1960s and 2.6 percent in the 1970s, according to the Bureau of Labor Statistics. As those aspiring job-seekers found work, they earned income and were able to increase spending, which also promoted faster growth in gross domestic product. So the faster pace of GDP growth both reflected and caused the need for more rapid hiring.
The slower pace of growth in the labor force today precludes rapid economic growth, and if demand were to rise rapidly, it would be brief and simply unsustainable. Now, our workforce is expected to increase by a mere 0.2 percent annually from 2015 through 2025, or less than 30,000 per month. So the “disappointing," “weak,” “mediocre,” “sluggish” December report of 148,000 was actually about five times the sustainable pace of job growth. (I’m more optimistic than the Bureau of Labor Statistics and expect between 0.25 percent and 0.5 percent labor force growth, but even my high estimate suggests actual job growth was more than twice its sustainable pace.) Compared to the underlying growth of labor supply, December’s job increase was well above any sustainable pace and must be considered unduly rapid.
In the 1970s, if productivity improved at a 1 percent annual rate while labor supply grew by 2.6 percent, the economy would have required growth in demand above 3.6 percent annually to drive down the unemployment rate. If growth in that period had run lower at our latest expansion rate of around 2 percent, the unemployment rate would have increased quite sharply.
This also places into the proper context how our “disappointing” economy that managed a mere 2 percent annual growth in GDP over the course of this recovery could still drive down unemployment from a peak of 10 percent in 2009 to 4.1 percent in December 2017. On its very face, it is clearly inappropriate to describe economic growth as disappointing in this context.
Consider an alternative outcome. Applying the same simple, straightforward math, if GDP had been closer to 3 percent, as many think to be a more desirable and healthier pace of growth, instead of the 2 percent pace actually seen over the expansion, the measured unemployment rate would have been close to zero by the end of 2017. (Okun’s Law implies that every incremental percentage point of GDP growth would reduce the unemployment rate between one-third and one-half percentage point annually. Using a value of one-half over eight years implies a reduction in unemployment of an additional 4 percentage points.)
The straightforward math indicates that the economy could not have grown by 3 percent annually in this expansion without a major breakthrough in productivity. Had GDP growth actually been that rapid, labor scarcity would have cropped up much sooner and become a serious impediment to growth, as well as highly inflationary. So it is entirely inappropriate and misleading to characterize the pace of job growth experienced by the economy as weak or disappointing. Faster job growth would have been unsustainable, and would have been accompanied by highly undesirable consequences.
The view that faster growth is needed because growth has been disappointing is wrong and has produced inappropriate initiatives for fiscal and monetary policy. Efforts are underway to stoke faster growth on both fronts. The fiscal stimulus embedded in the recently passed tax bill should modestly increase economic growth. Factions within the Fed favor keeping interest rates at exceptionally low levels to promote more growth and elevate inflation. So, the Fed has been very cautious and measured in its pace of normalizing interest rates from historically low emergency levels. Rates are still low enough to promote faster economic growth.
Be careful what you wish for. In trying to increase growth, we are likely to get meaningfully higher inflation.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Charles Lieberman is chief investment officer and founding member at Advisors Capital Management LLC.
To contact the author of this story: Charles Lieberman at chuck@advisorscenter.com.
To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net.
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