Hoping to hike the federal funds rate in September, Federal Reserve Board Chairman Janet Yellen got some bad news from the Labor Department today with the economy adding only 151,000 jobs in August. Economists expected at least 180,000, something that would have helped Yellen pull the trigger on a September rate hike. Complicating the picture, the nation’s unemployment rate held steady at 4.9%, low enough by historical standards to drive inflation up. Relying more now on what’s called U-6 rate, a metric that includes not only the unemployed but “persons marginally attached to the labor force, plus total employed part-time for economic reasons, as a percent of the labor force.” U-6 remained unchanged in August at 9.7%, a far more accurate metric than the more ubiquitous unemployment rate, accounting for today’s sluggish Gross Domestic Product [GDP] growth.
Economists correlate a low U-3 or standard unemployment rate with rising unit-labor costs, something that goes up when employers compete for a finite pool of job applicants. As the U-3 rate drops, it’s supposed to increase the inflation rate, the key metric the Fed uses to change monetary policy. Unable to raise rates since Dec. 15, 2015, Yellen hoped U.S. GDP growth would permit more rate hikes. When 2016 Second Quarter came it at 1.2% July 29, then revised downward to 1.1%, Yellen paused on hiking rates in August. Despite the historic low 4.9% U-3 rate, the GDP remained flat, skating close to zero growth, possible recession. Yellen and her Fed governors in the Open Market Committee that sets interest rates, can’t figure out why today’s low unemployment number hasn’t translated into the much-needed consumer spending to spur GDP growth.
Examining U-6 more closely, it looks like low-wage part-time employment accounts for the discrepancy in how ordinary low unemployment hasn’t produced the improvement in consumer spending needed to fuel GDP growth. When you add to that the problem of high housing costs, especially rentals in most metro areas, it doesn’t leave too much left at the end of the month for consumer spending. Remaining about pre-recession levels, the U-6 rate of 9.7 percent account for why U-3 hasn’t boosted GDP growth. When you factor in rising health care costs, but, more importantly, how the Obamacare loophole affects the employer-based health care system, it’s also harmed GDP growth. Under Obamacare, employers of 50-or-more no longer have to provide health care if employees working under 30 hours-a-week. Rising health care costs squeeze consumer spending.
When you look at the labor participation rate, the percent of the population either employed or looking for work, it stayed at 62.8%, reflecting current retirement trends with post-WWII baby boomers. Even with less workers in the job market, the preponderance of part-time low-wage, low-skilled jobs has made consumer spending, especially on big ticket items, more difficult. While average hourly wages rose to $25.71 or weekly $882.54, averages take into account high-skilled unit labor costs. With the federal minimum wage still stuck at $7.25, average hourly rates are far lower than reported, probably under $10 an hour. Few part-time workers living on such low wages can afford to pay rent, let alone health care costs. Both Democratic nominee Hillary Rodham Clinton and GOP nominee Donald Trump propose increasing federal infrastructure jobs.
Since Republicans took charge of the House and Senate in 2012, there’s been a drop in federal employment. Former Fed Chairman Ben Bernanke warned Congress about the 2013 budget sequestration, where the House Budget Committee led by Rep. Paul Ryan (R-Wis.) forced lawmakers to slash federal spending, including reducing the number of federal jobs. With Hillary and Trump talking about the dwindling middle class, there are real differences between the parties of how to get there. Unlike Hillary, Trump isn’t willing to keep increasing the national debt to add to the federal workforce. Hillary shows a willingness to raise the debt ceiling for the purpose of adding federal infrastructure jobs. More high-paying full-time federal, state and local government jobs with benefits are needed to expand the nation’s shirking middle class, something needed to increase GDP.
Unless there’s a significant up-tick in consumer spending, it’s doubtful that third quarter GDP will be much better the Q2. With part-time low skilled jobs accounting for most of the 151,000 jobs in August, GDP isn’t expected to rise anytime soon, making it difficult for Yellen to hike interest rates for the foreseeable future. While Virginia Fed governor Jeffrey M. Lacker wants to raise rates in September, Yellen won’t pull the trigger unless she sees inflation and GDP start of rise. Hillary’s plan to increase the debt ceiling to add more federal jobs won’t fly with the Republican-controlled House and Senate. Trump’s plan to renegotiate bad trade deals and add more domestic manufacturing jobs sounds good but it won’t happen anytime soon. Whoever becomes president, creating more middle class jobs, whether in the private or public sector, should be a top priority.
