I thought this was a good, strong report. Fixed income markets disagreed with me, I guess, with rates dropping 6 to 8 bp on the news. I presume that is because of what is considered weak wage growth. I argue that wage growth is right where we should expect it to be, considering current inflation and unemployment levels. A supply shock in housing is causing wage gains to go to rent. The consensus take on this seems to mostly take low growth in nominal wages as a sign against there being inflation pressures. I think there are some subtle but important problems with that interpretation, but I suppose in the end, it is pulling the fixed income market toward my position where it counts - in forward rates. I expected to get a small bump in rates today, but I suppose that I was expecting that bump to come from what I consider to be errors in the consensus paradigm. I should probably be careful about that sort of position, since, as happened here, a differing paradigm may have its own ways of arriving at a pricing conclusion.
....Anyway, on to the data. The decline in the unemployment rate was reported as a drop from 5.9% to 5.8%, but it was actually from 5.94% to 5.76%. In fact, the last two months combined have seen a drop of 0.39% in the unemployment rate. So, we are really only a 0.02% drop away from the 5.5% to 5.7% range I have been forecasting for the EOY unemployment rate, with some indication that we might arrive at the lower end of that range. (There are some discrepancies between the unemployment duration data and the other data. I'm not sure what the source is. The unemployment durations add up to a rate of 5.83%. But the flows data points to the same 5.76% as the headline number.)
First, the durations data. My estimate of very long term unemployed (VLTUE) did find its downward trend again (though much of the noise here comes from my simple model), but long term unemployment held fairly steady. The drop in unemployment didn't come from an obvious drop either in short or long duration unemployment in particular, although nearly 0.1% of the reported drop in unemployment isn't accounted for here.
The general rate of exits from 15+ week unemployment continues to grow, although this month was the latest in a string of months that has pulled back toward the moving average.
After a couple of months where continued unemployment claims pointed to lower unemployment, but total unemployment didn't follow, for three months now total unemployment followed the expected trend downward. The 0.4% drop in unemployment in the last two months has basically been a reflection of the lower rate of job loss. It appears to be a real, sustainable drop. If anything, this still points to possible further drops in total unemployment.
The trends in flows continue to look stronger for workers moving into the labor force and workers moving into employment.
The moving averages for flows, with a longer time frame also show strong trends. Net flows from unemployment into employment are at cyclical peaks. And, net flows from not-in-labor-force into employment continue to look strong, mimicking the strong trends in the 2005-2007 time period. Net flows from unemployment to not-in-labor-force continue to be slightly inflated, however. I believe this UtoN movement reflects the remaining VLTUE workers who are marginally attached to the labor force. There is some evidence that in previous cycles, these workers would have seen similar outcomes, but would have tended to report as not-in-labor-force. The level of unemployment among "Re-entrants" tracks very closely with the level of flows between Unemployment and Not-in-Labor-Force. Re-entrant unemployment is about 0.4% above long term lows, and it should continue to slowly move down over the next year or two. This probably largely relates to my VLTUE measure, representing about half of them.
Looking at the last chart, most cyclical movement in unemployment comes from job losers. The recovery among job losers has been surprisingly linear for the entire recovery. This certainly establishes a reasonable trend, although there is no reason to expect the trend to continue indefinitely.
Before this report, I was beginning to question the sustainability of the strong trends downward in long term unemployment. But, the continued strong trends in unemployment insurance together with the strong trends in flows this month suggest that the recent stagnation in long duration unemployment is probably the aberration. Unemployment durations over 26 weeks were reported this month at 2.9 million. This is where most of the remaining drops in unemployment will come from. I think there is still reason to be confident that this will move below 2.5 million in the next 2 to 3 months as VLTUE continues to fall apace, regular flows from unemployment to employment remain strong, and some additional mean reversion from statistical variations all push the number down.
At that point, I expect the linear decline to finally kink, and to see further reductions in unemployment to come at a pace of closer to 0.5% per year. If regulatory relaxations in mortgage credit lead to acceleration of construction employment, a faster paced decline might continue. I am hoping for that outcome, although a lot of confusion over asset prices and inflation will lead to push back against that sort of progress.