April 3, 2004

U.S Job Creation Rebounds…so what?  It seems like everybody in the world wants to talk about U.S. creation.  As the current U.S. expansion moved forward, it seemed that job creation was rather weak.  This raised cries of another “job-less recovery” similar to one in the early 1990’s when another George Bush was president.  This week may have quieted some of these cries as the economy produced 308,000 new non-farm jobs.  Most economists thought it would be in the 100,000 to 120,000 range.  What to make of this?

Well…on the one hand it might be a “flash in the pan.”  Certainly continuing to add 300,000 new jobs each month will be…well…difficult to put it mildly.  Job creation of 120,000 to 145,000 would very healthy.  So let’s not start wringing our hands if April’s figures are lower than March’s 308,000.  The hours worked stat, the number of temporary job stat, plus weakness in manufacturing all seem to suggest that another month of 300k plus is unlikely.

On the other hand…month to month figures might not be telling us much anyway.  The first thing to remember is that the initial reports released from any government agency are horribly unreliable.  Even though participants in the financial markets often treat these things like the “Holy Grail” of the economy, most level-headed economists wait at least 3 months for the revised data to come out.

Another thing to remember is longer trends are ultimately more important.  Remember that much talked about “jobless recovery” of 1991?  What followed it was the longest peace time expansion with the lowest unemployment rate in 30 years.  So what do month to month labor statistics really tell us?  Not as much as the pundits make them out to. It is the long run that is more interesting and more telling.

There are, to be honest, major labor market issues we should be discussing other than new job creation.  We should be discussing things like worker training and retraining in the face of globalization.  In addition, we should be talking about ways in which we could make our labor market more flexible so that workers can find it easier to move from job to job so that we have better skill-job matching.  And finally, we should be talking about what we need to do to get workers, at all levels, to be savings more of their income and reducing their debt levels.  But, instead, the new job creation statistics will probably continue to dominate.

Steel prices are particularly interesting to watch and not just because of the steel tariffs.  The London Metals Exchange and the New York Merc are looking at creating a futures market for steel.  Objectively this would make sense, since anytime there are big fluctuations in prices there is a chance for a derivatives market to be extremely beneficial.  However some of the big steel producers have suggested that they might not be interested since they like the traditional way steel prices are set in relative secrecy.  I guess some people will never learn that transparency is Pareto improving.

In addition to these raw material price increases, let’s not forget energy prices.  As oil prices continue to climb producers are seeing their costs shoot upward.  The US Institute of Supply Management survey shows that their price index is at the highest level in eight years.  But overall the survey seems to be confident that the economy is on the right path.  See:  http://www.napm.org/ISMReport/ROB042004.htm  The question is are these commodity price increases a sign of a growing, expanding economy, or are they a sign of future inflation?  One wonders how the Fed answers this question.