June's Slight Uptick in Unemployment Actually Indicates Health

Posted by jbrumley on July 5, 2019 1:50 PM

If the economy is running into headwinds, it's difficult to tell from the most recent round of employment data. In June, the U.S. added 224,000 people its net payrolls, handily topping the estimated figure of 160,000 new jobs. Though the number of employed people reached record levels, the unemployment rate was actually able to edge a little higher from 3.6% to 3.7%.  But, even then, the underlying explanation bodes well. The key is in how the unemployment rate is calculated.

As of last month, a record-breaking 157.0 million people held jobs in the United States, while the 5.975 million people who are officially unemployed remains near multi-year lows. It did grow just a bit from May's figure of 5.888 million.... just enough to make rounding error an issue with the officially unemployment rate figure.

The surge is the number of people not in the labor force but still interested in a job doesn't impact the calculation of the unemployment rate, but the big jump to 5.322 million is still the same. While the full explanation remains fuzzy, the data may reflect the impact of recent graduations, from high school as well as college.

Another contributing factor in the surprise increase in the unemployment rate is the participation in the labor pool... a figure that's made up of all willing and eligible individuals whether they're working or not. It moved higher again, to 62.9%; the bump in the number of unemployed people interested in a job but not working but also not receiving unemployment benefits accounts for most of the participation rate's increase. Notice, however, that the portion of the labor force that actually held a job didn't budge from 60.6%, for the fourth straight month. That disparity is where the 5.322 million unemployed-but-hoping people came from.

The biggest cohort of people who lost employment comes from those who did so voluntarily.

There are jobs for most of the unemployed crowd though, were they willing to take them. In most cases those individuals are holding out for a particular job, or a particular pay.

It's more the latter than the former though, given the way wages have continued to improve. Though not yet indicated on the graphic below, hourly pay improved 0.2% from May's levels, and were up 3.1% on a year-over-year basis. That carries the hourly rate to another record.

It's not red-hot growth, but it is outpacing inflation.

Perhaps more important though -- and what's largely been ignored by most of the punditry -- is who's receiving the bulk of the benefit from the jobs-rich and solid-pay environment. Those workers without college degrees continue to enjoy near-record unemployment. It's this demographic who are most likely to ramp-up their consumption in a big way with even modest increases in income. Higher-earning managerial and executive workers tend not to change their spending habits even as their paychecks grow.

It's this shift that may explain how and why the U.S. economy is grinding through a rough patch when it seemingly shouldn't be.

On-balance, last month's employment snapshot earns a B+. It could have earned an A were it not for the sudden surge of people who are suddenly in the labor force but still not employed. That will likely level off in July.