A Not-So-Jobless Recovery

A certain milestone occurred in March—and we’re not talking about the “Oscar Selfie” breaking all manner of Twitter records. This one is far more meaningful: US private sector employment hit a new all-time-high. Yes, the “jobless recovery” isn’t jobless! It’s a welcome development, and while it doesn’t tell you where the economy goes from here—employment is a late-lagging indicator—it should boost folks’ confidence, helping overall investor sentiment shift into optimism.

Private payrolls have had a long journey back from their February 2010 low. It has taken 74 months and nearly 9 million jobs.^[i] The slow speed compared to previous expansions is a large reason why the notion of a “jobless recovery” developed and has persisted for years. It took only 54 months for private employment to rebound from the tech bubble’s aftermath and 37 months after the 1990-1991 recession. This cycle’s 74 months are the longest recovery since 1948.^[ii] Even though private payrolls have steadily grown over this period, the high benchmark made improvement seem lackluster.

However, the lag wasn’t a function of private sector weakness. The US also happened to lose far more private sector jobs during the last recession. Not only did the private sector shed 8.8 million jobs, but those lost jobs amounted to a -7.6% drop in private sector employment—the second-biggest drop since data began in the 1930s, with only the 1945 recession edging it out at -8.7%. Private payrolls fell only -3.0% during the tech bubble and -1.9% in the 1990 recession. In the 1970s recession—widely remembered as one of the US’s most painful—private employment fell -4.2%.^[iii] With such a big drop, and the slowest economic growth since World War II, it was largely a given that we’d see the slowest trough-to-peak private-sector jobs recovery.

Total non-farm payrolls still remain below their prior peak, but this too isn’t a sign of economic weakness. It’s mostly a function of falling government employment. Federal, state and local governments have cut 627,000 jobs since February 2010, when total employment bottomed.^[iv] Public sector job cuts, though tough on those immediately impacted, aren’t a sign of labor market or overall economic weakness—they’re a sign of the post-sequester drive for more efficiency (which in turn creates more room for the private sector to absorb the displaced workers over time). Falling government payrolls are also a big reason the unemployment rate still remains on the higher side at 6.7%. The rising workforce is another reason for elevated unemployment—the total civilian labor force hit an all-time-high 156.2 million in March as more previously “discouraged” workers re-entered the labor force.

Some argue the recovery won’t be complete until unemployment comes all the way back and we reach “full employment,” believing this is necessary for competitive pressures to drive wages higher and cement economic growth. To the casual observer, it probably seems logical, but there are several flaws. For one, it assumes job growth creates economic growth, ignoring decades of evidence to the contrary. It also ignores that wages are already on the rise, and it doesn’t account for the fact full employment typically coincides with economic peaks. Consider the 1990s. Unemployment was over 5% in 1995 and 1996, in the 4% range in 1997, 1998 and 1999 and bottomed just below 4% in 2000—full employment by most definitions.^[v] It didn’t last.

That’s not to say there is some magic level of unemployment that triggers the next recession—coincidence isn’t causality. But it does show low unemployment doesn’t mean the expansion is any more sustainable than it was at higher unemployment. Jobs are always and everywhere a function of the growth preceding them.

Because of this, employment data don’t dictate where stocks go from here—markets are forward-looking. But employment trends do impact sentiment. As people realize labor markets are a lot further along than the media has tried to convince them for five years, their false fears should flip to rising confidence, helping broader sentiment become increasingly optimistic. And as folks become more optimistic, they usually become more willing to bid stocks up—a nice tailwind for equities as bull markets mature.